Notes to Consolidated Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business—
Ebix, Inc., and its subsidiaries, (“Ebix” or the “Company”) is a leading international supplier of on-demand infrastructure Exchanges to the insurance, financial, and healthcare industries. In the Insurance sector, the Company’s main focus is to develop and deploy a wide variety of insurance and reinsurance exchanges on an on-demand basis, while also providing SaaS enterprise solutions in the area of CRM, front-end & back-end systems, outsourced administrative and risk compliance. The Company's products feature fully customizable and scalable on-demand software designed to streamline the way insurance professionals manage distribution, marketing, sales, customer service, and accounting activities. With a "Phygital” strategy that combines physical distribution outlets in many ASEAN countries to a Omni-channel online digital platform, the Company’s EbixCash Financial exchange portfolio encompasses leadership in areas of domestic & international money remittance, travel, pre-paid & gift cards, utility payments, etc., in an emerging country like India. EbixCash through its travel portal Via.com is also one of South East Asia’s leading travel exchanges with distribution outlets and corporate clients processing millions of transactions every year. The Company has its headquarters in Johns Creek, Georgia and also conducts operating activities in Australia, Canada, India, New Zealand, Singapore, United Kingdom, Brazil, Philippines, Indonesia, and United Arab Emirates. International revenue accounted for
41.8%
,
28.4%
, and
22.7%
of the Company’s total revenue in
2017
,
2016
, and
2015
, respectively.
The Company’s revenues are derived from
four
product/service groups. Presented in the table below is the breakout of our revenue streams for each of those product/service groups for the years ended
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
(dollar amounts in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Exchanges
|
|
$
|
259,470
|
|
|
$
|
206,427
|
|
|
$
|
190,746
|
|
Broker P&C Systems
|
|
14,674
|
|
|
14,105
|
|
|
14,481
|
|
RCS
|
|
86,832
|
|
|
74,196
|
|
|
55,917
|
|
Carrier P&C Systems
|
|
2,995
|
|
|
3,566
|
|
|
4,338
|
|
Totals
|
|
$
|
363,971
|
|
|
$
|
298,294
|
|
|
$
|
265,482
|
|
The Company is continuing to evaluate the classification of the 2017 acquisitions that collectively make up the EbixCash Financial Exchanges, refer to Part I, Item I Business. Currently they are reported under Exchange channel, but is subject to change based on the conclusions of our evaluations.
Summary of Significant Accounting Policies
Basis of Presentation
— The consolidated financial statements include the accounts of Ebix and its wholly owned subsidiaries. The effect of inter-company balances and transactions has been eliminated.
Use of Estimates
—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenue and expenses during those reporting periods. Management has made material estimates primarily with respect to revenue recognition and deferred revenue, accounts receivable, acquired intangible assets, annual impairment reviews of goodwill, indefinite-lived intangible assets, investments, contingent earnout liabilities in connection with business acquisitions, and the provision for income taxes. Actual results may be materially different from those estimates.
Reclassification
—As part of the Wdev acquisition
$2.9 million
of the upfront cash consideration is being held in an escrow account for the thirty-eight month period following the effective date of the acquisition to ensure that the acquired business achieves the minimum specified annual net revenue threshold, which if not achieved will result in said funds being returned to Ebix. This amount which was previously reported in "Restricted Cash" on our December 31, 2016 condensed consolidated balance sheets, is now being reported in "Other Assets" line in the long term asset section of the condensed consolidated balance sheets. Additionally, as of December 31, 2016 there was
$14.4 million
of restricted fiduciary funds associated with the EbixHealth JV that pertain to un-remitted insurance premiums and claim funds established for the benefit of various carriers which are held in a fiduciary capacity until disbursed. This amount which was previously reported in "Restricted Cash" on our December 31, 2016
condensed consolidated balance sheets, is now being reported in "Fiduciary funds restricted" line in the short term asset section of the condensed consolidated balance sheets
Segment Reporting
—Since the Company, from the perspective of its chief operating decision maker, allocates resources and evaluates business performance as a single entity that provides software and related services to various industries on a worldwide basis, the Company reports as a single segment. The applicable enterprise-wide disclosures are included in Note 14.
Cash and Cash Equivalents
—The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Such investments are stated at cost, which approximates fair value. The Company does maintain cash balances in banking institutions in excess of federally insured amounts and therefore is exposed to the related potential credit risk associated with such cash deposits.
Short-term Investments
—The Company’s primary short-term investments consist of certificates of deposits with established commercial banking institutions in India that have readily determinable fair values. Ebix accounts for such investments that are reasonably expected to be realized in cash, sold or consumed during the year as short-term investments that are available-for-sale. The carrying amount of investments in marketable securities approximates their fair value. The carrying value of our short-term investments was
$25.59 million
and
$3.11 million
at
December 31, 2017
and
2016
, respectively.
Restricted Cash
—As part of Ebix entering into a joint venture with India-based Essel Group, while acquiring an
80%
stake in ItzCash
$4.0 million
of the possible future contingent earn-out payments is being held in escrow accounts for the twelve month period following the effective date of the acquisition to ensure that the acquired business achieves the minimum specified annual gross revenue threshold, which if not achieved will result in said funds being returned to Ebix. The carrying value of our restricted cash was
$4.0 million
and
zero
at December 31, 2017 and 2016 respectively.
Fiduciary Funds - Restricted
—Due to the EbixHealth JV being a third party administrator (“TPA”), the Company collects premiums from insureds and, after deducting its fees, remits these premiums to insurance companies. Unremitted insurance premiums and/or claim funds established for the benefit of various carriers are held in a fiduciary capacity until disbursed by the Company. The use of premiums collected from insureds but not yet remitted to insurance companies is restricted by law in certain states. The total assets held on behalf of others,
$8.0 million
, are recorded as an asset and offsetting fiduciary funds - restricted liability.
Fair Value Measurements
—The Company follows the relevant GAAP guidance regarding the determination and measurement of the fair value of assets/liabilities in which 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 valuation hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The guidance describes the following three levels of inputs that may be used in the methodology to measure fair value:
|
|
•
|
Level 1
— Quoted prices available in active markets for identical investments as of the reporting date;
|
|
|
•
|
Level 2
— Inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date; and,
|
|
|
•
|
Level 3
— Unobservable inputs, which are to be 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
December 31, 2017
and
2016
the Company has the following financial instruments to which it had to consider fair values and had to make fair assessments:
|
|
•
|
Short-term investments (commercial bank certificates of deposits and mutual funds), 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 periodically 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 or 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 consolidated balance sheets at
December 31, 2017
and
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 debt under the credit facility with Regions Bank. The estimated fair value of such instruments at
December 31, 2017
and
2016
reasonably approximates their carrying value as reported on the consolidated balance sheets.
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 at December 31, 2017
|
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
|
|
|
|
|
|
Commercial bank certificates of deposits ($2.19 million is recorded in the long
term asset section of the consolidated
balance sheets in "Other Assets")
|
|
$
|
22,293
|
|
$
|
22,293
|
|
$
|
—
|
|
$
|
—
|
|
Mutual Funds ($785 thousand recorded in the long term asset section of the consolidated balance sheets in "Other Assets")
|
|
6,278
|
|
6,278
|
|
—
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
28,571
|
|
$
|
28,571
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Contingent accrued earn-out acquisition consideration (a)
|
|
37,096
|
|
—
|
|
—
|
|
37,096
|
|
Total liabilities measured at fair value
|
|
$
|
37,096
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37,096
|
|
|
|
|
|
|
|
(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 year ended December 31, 2017 there were no transfers between fair value Levels 1, 2 or 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values at Reporting Date Using*
|
Descriptions
|
|
Balance at December 31, 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
|
|
|
|
|
|
Commercial bank certificates of deposits ($925 thousand is recorded in the long
term asset section of the consolidated
balance sheets in "Other Assets")
|
|
$
|
4,030
|
|
4,030
|
|
—
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
4,030
|
|
$
|
4,030
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Contingent accrued earn-out acquisition consideration (a)
|
|
8,510
|
|
—
|
|
—
|
|
8,510
|
|
Total liabilities measured at fair value
|
|
$
|
8,510
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,510
|
|
|
|
|
|
|
|
(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 year ended December 31, 2016 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 year.
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
Contingent Liability for Accrued Earn-out Acquisition Consideration
|
|
Balance at December 31, 2017
|
|
Balance at December 31, 2016
|
|
|
(in thousands)
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,510
|
|
|
4,277
|
|
|
|
|
|
|
Total remeasurement adjustments:
|
|
|
|
|
(Gains) or losses included in earnings **
|
|
(164
|
)
|
|
(1,344
|
)
|
Reductions recorded against goodwill
|
|
(4,007
|
)
|
|
(664
|
)
|
Foreign currency translation adjustments ***
|
|
522
|
|
|
(208
|
)
|
|
|
|
|
|
Acquisitions and settlements
|
|
|
|
|
Business acquisitions
|
|
34,156
|
|
|
6,449
|
|
Settlements
|
|
(1,921
|
)
|
|
—
|
|
|
|
|
|
|
Ending balance
|
|
$
|
37,096
|
|
|
$
|
8,510
|
|
|
|
|
|
|
The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at year-end.
|
|
$
|
—
|
|
|
$
|
(624
|
)
|
|
|
|
|
|
** recorded as a component of 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 December 31, 2017
|
|
Valuation Technique
|
|
Significant Unobservable
Input
|
Contingent acquisition consideration:
(Wdev acquisition and ItzCash)
|
|
$37,096
|
|
Discounted cash flow
|
|
Expected future annual revenue streams and probability of achievement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value at December 31, 2016
|
|
Valuation Technique
|
|
Significant Unobservable
Input
|
Contingent acquisition consideration:
(Qatarlyst and Wdev acquisition)
|
|
$8,510
|
|
Discounted cash flow
|
|
Expected future annual revenue streams 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 forecasts of expected future annual revenues as developed by the Company's management and the probability of achievement of those revenue forecasts. The discount rate used in these calculations is
13.5%
. Significant increases (decreases) in these unobservable inputs in isolation would likely result in a significantly (lower) higher fair value measurement.
Revenue Recognition and Deferred Revenue
—The Company derives its revenues primarily from professional and support services, which includes revenue generated from subscription and transaction fees pertaining to services delivered over our exchanges or from our application service provider (“ASP”) platforms, software development projects and associated fees for consulting, implementation, training, and project management provided to customers using our systems, and risk compliance solutions ("RCS"). 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.
The Company follows the relevant technical accounting guidance regarding revenue recognition as issued by the Financial Accounting Standards Board ("FASB") and the Securities and Exchange Commission ("SEC"). The Company considers revenue earned and realizable when: (a) persuasive evidence of the sales arrangement exists, (b) the arrangement fee is fixed or determinable, (c) service delivery or performance has occurred, (d) customer acceptance has been received or is reasonably assured, if contractually required, and (e) collectability of the arrangement fee is probable. The Company typically uses signed contractual agreements, purchase orders, or statements of work as persuasive evidence of a sales arrangement. We apply the provisions of the relevant FASB accounting pronouncements 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 appropriate authoritative 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. Deliverables are accounted for separately if they meet all of the following criteria: a) the delivered item has value to the customer on a stand-alone basis; b) there is objective and reliable evidence of the fair value for all arrangement deliverables; and c) if the arrangement includes a general right of return relative to the delivered items, the delivery or performance of the undelivered items is probable and substantially controlled by the Company. Under the relevant accounting guidance, when multiple-deliverables included in an arrangement are to be separated into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative fair values. We determine the relative selling price for a deliverable based on vendor-specific objective evidence of selling price (“VSOE”), if available, or third-party evidence ("TPE") in the alternative if available, or finally our best estimate of selling price (“BESP”), if VSOE or TPE is not available.
The Company begins to recognize revenue from license fees for its exchange (SAAS) and ASP products upon granting customer access to the respective processing platform. Transaction services fee revenue for this use of our exchanges or ASP platforms is recognized as the transactions occur and is generally billed in arrears. Revenues from RCS arrangements, which include data entry and call center services, and insurance certificate creation and tracking services, are recognized as the services are performed. Revenues from RCS consulting arrangements are recognized as the services are delivered on a time and materials basis. Service fees for hosting arrangements are recognized over the requisite service period. Revenue derived from the licensing of third party software products in connection with sales of the Company’s software licenses is recognized upon delivery together with the Company’s licensed software products. Fees for training, data conversion, installation, and consulting services fees are recognized as revenue when the services are performed. Revenues for maintenance and support services are recognized ratably over the term of the support agreement.
Software development arrangements involving significant customization, modification or production are accounted for in accordance with the appropriate technical accounting guidance issued by the 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.
Financial exchange revenue consists largely of transaction-based fees and fees from corporate and retail gift vouchers. The transaction-based fees are primarily based on a percentage of payment value processed for solutions such as retail and corporate payments, domestic money transfers, and general purpose reloadable cards. Transaction-based fees are recognized at the completion of the transaction. Gift voucher revenue is recognized at full purchase value at time of sale with the corresponding cost of vouchers recorded under direct expenses.
Deferred revenue includes payments or billings that have been received or made prior to performance and, in certain cases, cash collections and primarily pertain to maintenance and support fees, initial setup or registration fees under hosting agreements, software license fees received in advance of delivery and acceptance, and software development fees paid in advance of completion and delivery. Approximately
$5.2 million
and
$6.0 million
of deferred revenue were included in billed accounts receivable at
December 31, 2017
and
2016
, respectively.
Accounts Receivable and the Allowance for Doubtful Accounts Receivable
—Reported accounts receivable as of
December 31, 2017
include
$94.5 million
of trade receivables stated at invoice billed amounts and
$23.3 million
of unbilled receivables (net of a
$4.1 million
estimated allowance for doubtful accounts receivable). Reported accounts receivable at
December 31, 2016
include
$51.8 million
of trade receivables stated at invoice billed amounts and
$10.9 million
of unbilled receivables (net of a
$2.8 million
estimated allowance for doubtful accounts receivable). The unbilled receivables pertain to certain professional service engagements and system development projects for which the timing of billing is tied to contractual milestones
.
The Company is continuing to evaluate the 2017 acquisitions that collectively make up the EbixCash Financial Exchanges, refer to Part I, Item I Business, and their impact on our condensed consolidated balance sheets. The Company adheres to suc
h contractually stated performance milestones and accordingly issues invoices to customers as per contract billing schedules. Accounts receivable are written off against the allowance for doubtful accounts receivable when the Company has exhausted all reasonable co
llection efforts. Management specifically analyzes the aging of accounts receivable and historical bad debts, write-offs, customer concentrations, customer credit-worthiness, current economic trends, and changes in our customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable. Bad debt expense was
$1.7 million
,
$1.5 million
, and
$3.1 million
for the year ended
December 31, 2017
,
2016
, and
2015
, respectively.
Costs of Services Provided
—Costs of services provided consist of data processing costs, customer support costs including personnel costs to maintain our proprietary databases, costs to provide customer call center support, hardware and software expense associated with transaction processing systems and exchanges, telecommunication and computer network expense, and occupancy costs associated with facilities where these functions are performed. Depreciation expense is not included in costs of services provided.
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, is expensed in the period they are incurred. The periodic expense for the amortization of previously capitalized software development costs is included in costs of services provided.
Goodwill and Indefinite-Lived Intangible Assets
—Goodwill represents the cost in excess of the fair value of the identifiable net assets from the businesses that we acquire. In accordance with the relevant FASB accounting guidance, goodwill is tested for impairment at the reporting unit level on an annual basis or on an interim basis if an event occurred or circumstances change that would indicate that fair value of a reporting unit decreased below its carrying value. Potential impairment indicators include a significant change in the business climate, legal factors, operating performance indicators, competition, customer retention and the sale or disposition of a significant portion of the business. The Company applies the technical accounting guidance
concerning goodwill impairment evaluation whereby the Company first assesses 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 and circumstances, we were to determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would 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. We perform our annual goodwill impairment evaluation and testing as of September 30 each year. In 2017 the goodwill residing in the Broker Systems reporting unit, was evaluated for impairment based on an assessment of certain qualitative
factors, and was determined not to have been impaired. In 2017 the goodwill residing in the Exchange reporting unit, the RCS reporting unit, and the Carrier 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
$158.0 million
which was
$42.4 million
or
36.7%
in excess of its
$115.6 million
carrying value. Key assumptions used in the fair value determination were annual revenue growth rates of
7.5%
to
12.5%
and discount rate of
16%
. As of September 30, 2017 there was
$78.2 million
of goodwill assigned to the RCS reporting unit. A significant reduction in future revenues for the RCS reporting unit would negatively affect the fair value determination for this unit and may result in an impairment to goodwill and a corresponding charge against earnings. During the years ended December 31, 2017, 2016, and 2015, we had
no
impairment of any our reporting unit goodwill balances.
Projections of cash flows are based on our views of revenue growth rates, operating costs, anticipated future economic conditions, the appropriate discount rates relative to risk, and estimates of residual values and terminal 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., revenue 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. As a practice, the Company closely monitors any reporting units that do not have a significantly higher fair value in excess of their carrying value.
The following table summarizes the adjustments to goodwill, recorded in connection with the acquisitions, that occurred during
2017
and
2016
:
|
|
|
|
|
|
|
|
Company acquired
|
|
Date acquired
|
|
(in thousands)
|
Oakstone; final purchase allocation adjustments
|
|
December 2014
|
|
$
|
948
|
|
EbixHealth JV; final purchase allocation adjustments
|
|
July 2016
|
|
(7,500
|
)
|
Hope Health; final purchase allocation adjustments
|
|
November 2016
|
|
(289
|
)
|
Wdev; final purchase allocation adjustments
|
|
November 2016
|
|
(5,317
|
)
|
ItzCash
|
|
April 2017
|
|
119,766
|
|
beBetter
|
|
June 2017
|
|
447
|
|
YouFirst
|
|
September 2017
|
|
7,395
|
|
Wall Street
|
|
October 2017
|
|
6,113
|
|
Paul Merchants
|
|
November 2017
|
|
38,589
|
|
Via
|
|
November 2017
|
|
60,785
|
|
Total changes to goodwill during 2017
|
|
|
|
$
|
220,937
|
|
|
|
|
|
|
PB Systems; final purchase allocation adjustments
|
|
June 2015
|
|
$
|
4,298
|
|
EbixHealth JV
|
|
July 2016
|
|
20,839
|
|
Hope Health
|
|
November 2016
|
|
1,333
|
|
Wdev
|
|
November 2016
|
|
13,615
|
|
Total changes to goodwill during 2016
|
|
|
|
$
|
40,085
|
|
Changes in the carrying amount of goodwill for the years ended
December 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Beginning Balance
|
$
|
441,404
|
|
|
$
|
402,259
|
|
Additions for current year acquisitions
|
233,095
|
|
|
35,787
|
|
Purchase accounting adjustments for prior year acquisitions
|
(12,158
|
)
|
|
4,298
|
|
Foreign currency translation adjustments
|
4,522
|
|
|
(940
|
)
|
Ending Balance
|
$
|
666,863
|
|
|
$
|
441,404
|
|
The Company’s indefinite-lived assets are associated with the estimated fair value of the contractual customer relationships existing with the property and casualty insurance carriers in Australia using our property and casualty ("P&C") data exchange and with certain large corporate customers using our client relationship management (“CRM”) platform in the United States. Prior to these underlying business acquisitions Ebix had pre-existing contractual relationships with these carriers and corporate clients. The contracts are renewable at little or no cost, and Ebix intends to continue to renew these contracts indefinitely and has the ability to do so. The proprietary technology supporting the P&C data exchange and CRM platform that is used to deliver services to these carriers and corporate clients, cannot feasibly be effectively replaced in the foreseeable future, and accordingly the cash flows forthcoming from these customers are expected to continue indefinitely. With respect to the determination of the indefinite life, the Company considered the expected use of these intangible assets, historical experience in renewing or extending similar arrangements, and the effects of competition, and concluded that there were no indications from these factors to suggest that the expected useful life of these customer relationships would be finite. The Company concluded that no legal, regulatory, contractual, or competitive factors limited the useful life of these intangible assets and therefore their life was considered to be indefinite, and accordingly the Company expects these customer relationships to remain the same for the foreseeable future.
Additionally based on the final purchase price allocation valuation report of the EbixHealth JV, See Note 3 and 17 for further explanations, it was concluded that the value of the indefinite-lived intangibles identified as indefinite-lived customer relationships to be
$11.2 million
. The EbixHealth JV is a full-service third-party administrator (“TPA”) that specializes in the management, administration, and distribution of health benefit plans. Services include marketing support, underwriting, billing, claims processing, and cost containment such as utilization review and medical case management for fully-insured, self-funded and partially self-funded benefit plans, as well as international groups and individuals. As a TPA, the Company collects premiums from insureds and, after deducting its fees, remits these premiums to insurance companies. Unremitted insurance premiums and/or claim funds established for the benefit of various carriers are held in a fiduciary capacity until disbursed by the Company. The Company administers and collects the insurance premiums for the products of three affiliated insurance carriers which is part of the consolidated company IHC Health Holdings Corporation ("IHC") a
49%
shareholder of the EbixHealth JV. The administrative agreements with the three affiliates accounted for approximately
83%
of revenues for the year ended December 31, 2017. IHC is therefore considered a major customer of the EbixHealth JV and therefore considered indefinite-lived. The churn expected for indefinite-lived customers is assumed at
0%
. The fair values of these indefinite-lived intangible assets were based on the analysis of discounted cash flow (“DCF”) models extended out fifteen years with a terminal value. In that indefinite-lived does not imply an infinite life, but rather means that the subject customer relationships are expected to extend beyond the foreseeable time horizon, we utilized fifteen year DCF projections with a terminal value, as the valuation models that were applied consider this time frame to be an indefinite period. Indefinite-lived intangible assets are not amortized, but rather are tested for impairment annually. We perform our annual impairment testing of indefinite-lived intangible assets as of September 30th of each year. During the years ended
December 31, 2017
,
2016
and
2015
, we had
no
impairments to the recorded balances of our indefinite-lived intangible assets. We perform the impairment test for our indefinite-lived intangible assets by comparing the asset’s fair value to its carrying value. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value.
Purchased Intangible Assets
—Purchased intangible assets represent the estimated fair value of acquired intangible assets from the businesses that we acquire in the U.S. and foreign countries in which we operate. These purchased intangible assets include customer relationships, developed technology, informational databases, and trademarks. We amortize these intangible assets on a straight-line basis over their estimated useful lives, as follows:
|
|
|
|
|
Life
|
Category
|
(yrs)
|
Customer relationships
|
7-20
|
|
Developed technology
|
3-12
|
|
Dealer networks
|
15-20
|
|
Trademarks
|
3-15
|
|
Non-compete agreements
|
5
|
|
Database
|
10
|
|
Intangible assets as of
December 31, 2017
and
December 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Finite-lived intangible assets:
|
|
|
|
Customer relationships
|
$
|
73,725
|
|
|
$
|
71,338
|
|
Developed technology
|
15,076
|
|
|
16,011
|
|
Dealer networks
|
10,581
|
|
|
—
|
|
Trademarks
|
2,698
|
|
|
2,666
|
|
Non-compete agreements
|
764
|
|
|
764
|
|
Backlog
|
140
|
|
|
140
|
|
Database
|
212
|
|
|
212
|
|
Total intangibles
|
103,196
|
|
|
91,131
|
|
Accumulated amortization
|
(57,485
|
)
|
|
(49,795
|
)
|
Finite-lived intangibles, net
|
$
|
45,711
|
|
|
$
|
41,336
|
|
|
|
|
|
Indefinite-lived intangibles:
|
|
|
|
Customer/territorial relationships
|
$
|
42,055
|
|
|
$
|
30,887
|
|
Income Taxes
— The Company follows the asset and liability method of accounting for income taxes pursuant to the pertinent guidance issued by the FASB. Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities, and operating loss and tax credit carry forwards, and their financial reporting amounts at each period end using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded, if necessary, 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 follows the provisions of FASB accounting guidance on accounting for uncertain income tax positions. The guidance utilizes a two-step approach for evaluating tax positions. Recognition (“Step 1”) occurs when an enterprise concludes that a tax position, based solely on its technical merits is more likely than not to be sustained upon examination. Measurement (“Step 2”) is only addressed if Step 1 has been satisfied. Under Step 2, the tax benefit is measured at the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon final settlement. As used in this context, the term “more likely than not” is interpreted to mean that the likelihood of occurrence is greater than
50%
.
While the changes from the TCJA are generally effective beginning in 2018, U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of the TCJA, the SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”) allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. Where reasonable estimates can be made, the provisional accounting should be based on such estimates. When no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. The Company is required to complete its tax accounting for the TCJA within a one-year period when it has obtained, prepared, and analyzed the information to complete the income tax accounting. Due to insufficient guidance, as well as the availability of information to accurately analyze the impact of the TCJA, we have made a reasonable estimate of the effects, as described in Note 8, and in other cases we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under FASB ASC Topic 740, Income Taxes and the provisions of the tax laws that were in effect immediately prior to enactment.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to
21%
effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017,
the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company is required to complete its tax accounting for the TCJA within a one-year period when it has obtained, prepared, and analyzed the information to complete the income tax accounting. Due to insufficient guidance, as well as the availability of information to accurately analyze the impact of the TCJA, we have made a reasonable estimate of the effects, as described in Note 8, and in other cases we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under FASB ASC Topic 740, Income Taxes and the provisions of the tax laws that were in effect immediately prior to enactment.
Foreign Currency Translation
—The functional currency for the Company's main foreign subsidiaries in India, Singapore and Dubai is the U.S. dollar because the intellectual property research and development activities provided by its Singapore and Dubai 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 loss in the accompanying consolidated balance sheets. Foreign exchange transaction gains and losses that are derived from transactions denominated in a currency other than the subsidiary's functional currency are included in the determination of net income.
Advertising
—With the exception of certain direct-response costs in connection with our business services of providing medical continuing education to physicians, dentists and healthcare professionals, advertising costs are expensed as incurred. Advertising costs amounted to
$6.1 million
,
$6.2 million
, and
$4.0 million
in
2017
,
2016
and
2015
, respectively, and are included in sales and marketing expenses in the accompanying Consolidated Statements of Income. In 2017 and 2016 reported sales and marketing expenses included
$3.9 million
and
$4.1 million
, respectively, of amortization of certain direct-response advertising costs associated with our medical education services, which have been capitalized in accordance with Accounting Standards Codification ("ASC") Topic 340. These costs are being amortized to advertising expense over periods ranging from
twelve
to
twenty-four
months based on the type of product the customer purchased. Deferred advertising costs amounted to
$1.9 million
and
$2.8 million
at December 31, 2017 and 2016, respectively, and are included in other current assets and other assets on the consolidated balance sheet.
Sales Commissions
—Certain sales commission paid with respect to subscription-based revenues are deferred and subsequently amortized into operating expenses ratably over the term of the related customer subscription contracts. As of
December 31, 2017
and
2016
,
$574 thousand
and
$612 thousand
, respectively, of sales commissions were deferred and included in other current assets on the accompanying Consolidated Balance Sheets. During the years ended
December 31, 2017
and
2016
the Company amortized
$1.1 million
and
$1.3 million
, respectively, of previously deferred sales commissions and included this expense in sales and marketing costs on the accompanying Consolidated Statements of Income.
Property and Equipment
—Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the assets estimated useful lives. Leasehold improvements are amortized over the shorter of the expected life of the improvements or the remaining lease term. Repairs and maintenance are charged to expense as incurred and major improvements that extend the life of the asset are capitalized and depreciated over the expected remaining life of the related asset. Gains and losses resulting from sales or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the Company’s accounts. Fixed assets acquired in acquisitions are recorded at fair value. The estimated useful lives applied by the Company for property and equipment are as follows:
|
|
|
|
Life
|
Asset Category
|
(yrs)
|
Buildings
|
39
|
Building Improvements
|
15
|
Computer equipment
|
5
|
Furniture, fixtures and other
|
7
|
Software
|
3
|
Land Improvements
|
20
|
Land
|
Unlimited life
|
Leasehold improvements
|
Life of the lease
|
Recent Relevant Accounting Pronouncements
—The following is a brief discussion of recently released accounting pronouncements that are pertinent to the Company's business:
In January 2017 the FASB issued Accounting Standards Update ("ASU") 2017-04,
Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment".
To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities). Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A public business entity filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has yet to assess the impact that the adoption of this ASU will have on Ebix's consolidated income statement and balance sheet.
In January 2017 the FASB issued ASU 2017-01,
"Business Combinations (Topic 805) Clarifying the Definition of a Business"
which amended the existing FASB Accounting Standards Codification. The standard provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for fiscal 2019 with early adoption permitted. The Company has yet to assess the impact that the adoption of this ASU will have on Ebix's consolidated income statement and balance sheet
In November 2016 the FASB issued ASU 2016-18, "Statement of Cash Flow (Topic 230) Restricted Cash" amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments in this Update should be applied using a retrospective transition method to each period presented.
In October 2016 the FASB issued ASU 2016-16,
"Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory"
. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendments specified by ASU 2016-16 require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of the amendments are intellectual property, and property, plant and equipment. The amendments do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The amendments align the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards. IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs. The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities in the first interim period if an entity issues interim financial statements. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has yet to assess the impact that the adoption of this ASU will have on Ebix's consolidated income statement and balance sheet.
In August 2016 the FASB issued 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 has yet to assess the impact that the adoption of this ASU will have on Ebix's consolidated income statement and balance sheet.
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 adoption of this ASU in the first quarter of 2017 did not impact our consolidated financial position, results of operations or cash flows.
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 adoption of this ASU in the first quarter of 2017 did not impact our consolidated financial position, cash flows or resulting tax expense.
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 6 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 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:
|
|
•
|
For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
|
|
|
•
|
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.
The effective date and transition of these amendments (the "New Revenue Standard") 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). While the Company is finalizing its evaluation of the full impact of the New Revenue
Standard and related amendments on its consolidated financial statements and related disclosures, the Company has assessed certain changes as a result of adopting the standard:
•
The incremental costs to obtain contracts with customers, such as sales commissions, will be deferred and recognized over the expected period of benefit, rather than expensed as incurred. Additionally, that change will increase the Company's prepaid expense assets as compared to its current policy. However, that change could increase or decrease the Company's sales and marketing expenses as compared to the Company's current policy depending on the relative amounts of amortization of deferred commissions as compared to actual commission obligations arising in that period.
•
Revenue from certain services associated with programming, setup, and implementation activities related to our SaaS offerings, that previously had standalone value and was recognized as work is performed, will need to be deferred and recognized over the expected useful life of the services. This change will increase the company’s deferred revenue liability as compared to its current policy. However, this change could increase or decrease the Company’s revenue as compared to the Company’s current policy depending on the relative amounts, in a period, of amortization of deferred revenue as compared to the amount now being deferred.
•
Certain costs associated with providing services associated with programming, setup, and implementation will be deferred and recognized over the expected useful life of the services, rather than expensed as incurred. Additionally, that change will increase the Company's prepaid expense assets as compared to its current policy. However, that change could increase or decrease the Company's product development expenses as compared to the Company's current policy depending on the relative amounts of amortization of deferred development expenses as compared to the amount now being deferred.
The Company is adopting this New Revenue Standard, as well as other clarifications and technical guidance issued by the FASB related to this New Revenue Standard, on January 1, 2018, and the Company will apply the modified retrospective transition method. This will result in an adjustment to retained earnings for the cumulative effect, if any, of applying this New Revenue Standard to contracts in process as of the adoption date. Under this method, the Company would not restate the prior consolidated financial statements presented. However, the Company will include additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
In March 2016 the FASB issued 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 this amendment 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). We are continuing to evaluate the potential impact of ASU 2016-08; however, the Company does not expect it to have any material effect on the consolidated financial statements.
Under legacy US GAAP 340-20, direct response advertising was eligible for capitalization if certain conditions were met. Effective January 1, 2018 Subtopic 340-40 replaces that guidance to require the costs of direct-response advertising to be expensed as they are incurred or the first time the advertising takes place. An entity shall recognize a cumulative effective change to opening retained earnings in the year of adoption of the standard. The Company will be making a one time $1.9M adjustment to retained earnings on January 1, 2018 and expensing all future costs from this date forward.
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.
Note 2. Earnings per Share
The basic and diluted earnings per share (“EPS”), and the basic and diluted weighted average shares outstanding for all periods as presented in the accompanying Consolidated Statements of Income are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
(In thousands, except per share amounts)
|
Earnings per share:
|
|
2017
|
|
2016
|
|
2015
|
Basic earnings per common share
|
|
$
|
3.19
|
|
|
$
|
2.88
|
|
|
$
|
2.29
|
|
Diluted earnings per common share
|
|
$
|
3.17
|
|
|
$
|
2.86
|
|
|
$
|
2.28
|
|
Basic weighted average shares outstanding
|
|
31,552
|
|
|
32,603
|
|
|
34,668
|
|
Diluted weighted average shares outstanding
|
|
31,719
|
|
|
32,863
|
|
|
34,901
|
|
Basic EPS is equal to net income attributable to Ebix, Inc divided by the weighted average number of shares of common stock outstanding for the period. Diluted EPS takes into consideration common stock equivalents which for the Company consist of stock options and restricted stock. With respect to stock options, diluted EPS is calculated as if the Company had additional common stock outstanding from the beginning of the year or the date of grant or issuance, net of assumed repurchased shares using the treasury stock method. Diluted EPS is equal to net income attributable to Ebix, Inc divided by the combined sum of the weighted average number of shares outstanding and common stock equivalents. At
December 31, 2017
,
2016
, and
2015
there were no potentially issuable shares with respect to stock options which could dilute EPS in the future but which were excluded from the diluted EPS calculation because presently their effect is anti-dilutive. Diluted shares outstanding are determined as follows for each year ending
December 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
(in thousands)
|
|
|
2017
|
|
2016
|
|
2015
|
Basic weighted average shares outstanding
|
|
31,552
|
|
|
32,603
|
|
|
34,668
|
|
Incremental shares for common stock equivalents
|
|
167
|
|
|
260
|
|
|
233
|
|
Diluted shares outstanding
|
|
31,719
|
|
|
32,863
|
|
|
34,901
|
|
Note 3. Business Acquisitions
The Company’s business acquisitions are accounted for under the purchase method of accounting in accordance with the FASB’s accounting guidance on the accounting for business combinations. Accordingly, the consideration paid by the Company for the businesses it purchases is allocated to the tangible and intangible 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 in part 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. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record significant adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations.
The Company's practice is to immediately tightly integrate all functions including infrastructure, sales and marketing, administration, product development after a business acquisition is consummated, so as to ensure that synergistic efficiencies are maximized and redundancies eliminated, and to rapidly leverage cross-selling opportunities. Furthermore the Company centralizes certain key functions such as information technology, marketing, sales, human resources, finance, and other general administrative functions after an acquisition, in order and to quickly realize cost efficiencies. By executing this integration strategy it becomes
neither practical nor feasible to accurately and separately track and disclose the earnings from the business combinations we have executed after they have been acquired.
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential future cash earnout based on reaching certain specified future revenue targets. The 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 as reported on its 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 each of the years ending December 31,
2017
,
2016
and
2015
, respectively, these aggregate contingent accrued earn-out business acquisition consideration liabilities, were reduced by
$164 thousand
,
$1.3 million
and
$1.5 million
, respectively, due to remeasurements as based on the then assessed fair value and changes in the amount and timing of anticipated future revenue levels. These reductions to the contingent accrued earn-out liabilities resulted in corresponding reduction to general and administrative expenses as reported on the Consolidated Statements of Income. As of
December 31, 2017
, the total of these contingent liabilities was
$37.1 million
, of which
$33.1 million
is reported in long-term liabilities, and
$4.0 million
is included in current liabilities in the Company's Consolidated Balance Sheet. As of
December 31, 2016
the total of these contingent liabilities was
$8.5 million
of which
$6.6 million
was reported in long-term liabilities, and
$1.9 million
was included in current liabilities in the Company's Consolidated Balance Sheet.
2017 Acquisitions
Via -
Effective November 1, 2017 Ebix acquired Via, a recognized leader in the travel space in India and an Omni-channel online travel and assisted e-commerce exchange. Ebix acquired Via for upfront cash consideration in the amount
$78.8 million
plus possible future contingent payments of up to
$2.3 million
based on any potential claims made by tax authorities over the subsequent
twelve
month period following the effective date of the acquisition and
$2.0 million
based on the receipt of refunds pertaining to certain advance tax payments and withholding taxes, both of which are included in Other current liabilities in the Company's Consolidated Balance Sheet. The valuation and purchase price allocation for the Via acquisition remains preliminary and will be finalized as soon as practicable but in no event longer than one year from the effective date of this transaction.
Paul Merchants -
Effective November 1, 2017 Ebix acquired the MTSS Business of Paul Merchants, the largest international remittance service provider in India, for upfront cash consideration in the amount
$37.4 million
. The valuation and purchase price allocation for the Paul Merchants acquisition remains preliminary and will be finalized as soon as practicable but in no event longer than one year from the effective date of this transaction.
Wall Street -
Effective October 1, 2017 Ebix acquired the MTSS Business of Wall Street, an inward international remittance service provider in India, along with the acquisition of its subsidiary company Goldman Securities Limited for upfront cash consideration in the amount
$7.4 million
. The valuation and purchase price allocation for the Wall Street acquisition remains preliminary and will be finalized as soon as practicable but in no event longer than one year from the effective date of this transaction.
YouFirst -
Effective September 1, 2017 Ebix acquired the MTSS Business of YouFirst , an inward international remittance service provider in India, for upfront cash consideration in the amount
$10.2 million
. The valuation and purchase price allocation for the YouFirst acquisition remains preliminary and will be finalized as soon as practicable but in no event longer than one year from the effective date of this transaction.
beBetter -
Effective June 1, 2017 Ebix acquired the assets of beBetter a technology enabled corporate wellness provider that provides end-to-end wellness solutions offering a variety of tools and programs, including interactive platforms, health screening, coaching, tobacco cessation, weight and stress management, health information, and numerous other products and services. Ebix acquired the assets and intellectual property of beBetter for
$1.0 million
plus possible future contingent earn-out payments of up to
$2.0 million
based on earned revenues over the subsequent
twenty-four
month period following the effective date of the acquisition.
ItzCash -
Effective April 1, 2017 Ebix entered into a joint venture with India-based Essel Group, while acquiring an
80%
stake in ItzCash, India’s leading payment solutions exchange. ItzCash is recognized as a leader in the prepaid cards and bill payments space in India. Under the terms of the agreement, ItzCash was valued at a total enterprise value of approximately
$150
million
. Accordingly, Ebix acquired an
80%
stake in ItzCash for
$120 million
including upfront cash of
$76.3 million
plus possible future contingent earn-out payments of up to
$44.0 million
based on earned revenues over the subsequent
thirty-six
month period following the effective date of the acquisition.
$4.0 million
of the possible future contingent earn-out payments is being held in escrow accounts for the
twelve
month period following the effective date of the acquisition to ensure that the acquired business achieves the minimum specified annual gross revenue threshold, which if not achieved will result in said funds being returned to Ebix. The Company has determined that the fair value of the contingent earn-out consideration is
$34.6 million
as of December 31, 2017. The valuation and purchase price allocation for the ItzCash acquisition remains preliminary and will be finalized as soon as practicable but in no event longer than one year from the effective date of this transaction.
2016 Acquisitions
Wdev
- Effective November 1, 2016 Ebix acquired Wdev, a Brazilian company that provides IT services and software development for the Latin American insurance industry. Ebix acquired Wdev for upfront cash consideration in the amount of
$10.5 million
, plus possible future contingent earn-out payments of up to
$15.7 million
based on earned revenues over the subsequent
thirty-eight
month period following the effective date of the acquisition.
$2.9 million
of the upfront cash consideration is being held in an escrow account for the
thirty-eight
month period following the effective date of the acquisition to ensure that the acquired business achieves the minimum specified annual net revenue threshold, which if not achieved will result in said funds being returned to Ebix. The Company has determined that the fair value of the contingent earn-out consideration is
$2.5 million
as of December 31, 2017.
EbixHealth JV -
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. Previously, effective September 1, 2015 Ebix and IHC formed a joint venture named 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.
Hope Health -
Effective November 1, 2016 Ebix acquired the assets of Hope Health, a Michigan corporation and publisher of health and wellness continuing education products. Ebix acquired the assets and intellectual property of Hope Health for
$1.72 million
.
2015 Acquisitions
Via Media Health -
The Company acquired 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 accounted for this acquisition by recording
$2.0 million
of goodwill,
$383 thousand
of intangible assets pertaining to customer relationships, and
$101 thousand
of intangible assets pertaining to acquired technology. The Company has determined that the fair value of the contingent earn-out consideration was
zero
as of December 31, 2017.
PB Systems -
The Company acquired PB System, 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 initially accounted for this acquisition by recording
$6.8 million
of goodwill, and
$10.3 million
of intangible assets pertaining to customer relationships. In the Company's Form 10-K for the year ended December 31, 2015, 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 based on this the final goodwill and intangible assets pertaining to customer relationships recorded were
$11.2 million
and
$2.1 million
, respectively. The changes that resulted were 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 has determined that the fair value of the contingent earn-out consideration is
zero
as of December 31, 2017.
The following table summarizes the fair value of the consideration transferred, net assets acquired and liabilities assumed, as a result of the acquisitions, that were recorded during
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Fair value of total consideration transferred
|
|
|
|
|
Cash
|
|
$
|
211,143
|
|
|
$
|
10,992
|
|
Equity instruments
|
|
—
|
|
|
2,763
|
|
Contingent earn-out consideration arrangement (net)
|
|
30,149
|
|
|
5,785
|
|
Upfront cash consideration being held in an escrow account
|
|
4,040
|
|
|
—
|
|
Previous cash and other consideration in investment of EbixHealth JV
|
|
—
|
|
|
8,000
|
|
Total consideration transferred
|
|
245,332
|
|
|
27,540
|
|
|
|
|
|
|
Fair value of equity components recorded (not part of consideration)
|
|
|
|
|
Gain on previously carried 40% equity interest in the EbixHealth JV
|
|
—
|
|
|
1,162
|
|
Recognition of noncontrolling interest of joint ventures
|
|
27,625
|
|
|
11,223
|
|
Total equity components recorded
|
|
27,625
|
|
|
12,385
|
|
|
|
|
|
|
Total consideration transferred and equity components recorded
|
|
$
|
272,957
|
|
|
$
|
39,925
|
|
|
|
|
|
|
Fair value of assets acquired and liabilities assumed
|
|
|
|
|
Cash
|
|
$
|
18,982
|
|
|
$
|
2,333
|
|
Short term investments
|
|
24,206
|
|
|
—
|
|
Restricted cash
|
|
4,040
|
|
|
8,175
|
|
Other current assets
|
|
39,680
|
|
|
6,282
|
|
Property, plant, and equipment
|
|
1,018
|
|
|
842
|
|
Other long term assets
|
|
1,683
|
|
|
7
|
|
Intangible assets, definite lived
|
|
11,267
|
|
|
(3,184
|
)
|
Intangible assets, indefinite lived
|
|
11,168
|
|
|
—
|
|
Capitalized software development costs
|
|
1,705
|
|
|
—
|
|
Deferred tax liability
|
|
(3,405
|
)
|
|
1,972
|
|
Current and other liabilities
|
|
(58,324
|
)
|
|
(16,587
|
)
|
Net assets acquired, excludes goodwill
|
|
52,020
|
|
|
(160
|
)
|
|
|
|
|
|
Goodwill
|
|
220,937
|
|
|
40,085
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
272,957
|
|
|
$
|
39,925
|
|
The following table summarizes the separately identified intangible assets acquired as a result of the acquisitions that occurred during
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
Weighted
Average
|
|
|
|
Weighted
Average
|
Intangible asset category
|
|
Fair Value
|
|
Useful Life
|
|
Fair Value
|
|
Useful Life
|
|
|
(in thousands)
|
|
(in years)
|
|
(in thousands)
|
|
(in years)
|
Customer relationships
|
|
$
|
518
|
|
|
10.0
|
|
$
|
3,929
|
|
|
9.7
|
Developed technology
|
|
—
|
|
|
0.0
|
|
1,056
|
|
|
5.0
|
Dealer's network
|
|
10,499
|
|
|
17.9
|
|
—
|
|
|
0.0
|
Purchase accounting adjustments for prior year acquisitions
|
|
250
|
|
|
0.0
|
|
(8,169
|
)
|
|
0.0
|
Total acquired intangible assets
|
|
$
|
11,267
|
|
|
17.6
|
|
$
|
(3,184
|
)
|
|
8.7
|
Estimated aggregate future amortization expense for the intangible assets recorded as part of the business acquisitions described above and all other prior acquisitions is as follows:
|
|
|
|
|
Estimated Amortization Expenses (in thousands):
|
|
For the year ending December 31, 2018
|
$
|
6,860
|
|
For the year ending December 31, 2019
|
6,634
|
|
For the year ending December 31, 2020
|
6,208
|
|
For the year ending December 31, 2021
|
5,608
|
|
For the year ending December 31, 2022
|
5,248
|
|
Thereafter
|
15,153
|
|
|
|
|
|
$
|
45,711
|
|
The Company recorded
$7.3 million
,
$6.8 million
, and
$7.2 million
of amortization expense related to acquired intangible assets for the years ended December 31,
2017
,
2016
, and
2015
, respectively.
Note 4. Pro Forma Financial Information (re:
2017
and
2016
acquisitions)
This unaudited pro forma financial information is provided for informational purposes only and does not project the Company’s results of operations for any future period.
The aggregated unaudited pro forma financial information pertains to all of the Company's acquisitions made during 2017 and 2016, which includes the acquisitions of the ItzCash, YouFirst, Wall Street, Paul Merchants,Via, the acquisition of assets of beBetter in 2017, and the acquisition of Wdev, the acquisition of assets of Hope Health
,
taking a controlling position in the EbixHealth JV with IHC in 2016 as presented in the table below, and is provided for informational purposes only and does not project 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 2017 and 2016 pro forma financial information below assumes that all such business acquisitions were made on January 1, 2016, whereas the Company's reported financial statements for 2017 only includes the operating results from the businesses since the effective date that they were acquired by Ebix, and thusly includes only nine months of ItzCash, seven months of beBetter, four months of YouFirst, three months of Wall Street, two months of Paul Merchants, and two months of Via. Similarly, the 2016 pro forma financial information below includes a full year of results for Wdev, Hope Health, and EbixHealth JV as if they had been acquired on January 1, 2016, whereas the Company's reported financial statements for the 2016 includes only two months of Wdev, two months of Hope Health, and six months of the EbixHealth JV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
2017
|
|
Pro Forma
2017
|
|
As Reported
2016
|
|
Pro Forma
2016
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
|
(In thousands, except per share amounts)
|
Revenue
|
|
$
|
363,971
|
|
|
$
|
440,512
|
|
|
$
|
298,294
|
|
|
$
|
434,152
|
|
Net income attributable to Ebix, Inc.
|
|
$
|
100,618
|
|
|
$
|
104,851
|
|
|
$
|
93,847
|
|
|
$
|
96,147
|
|
Basic EPS
|
|
$
|
3.19
|
|
|
$
|
3.32
|
|
|
$
|
2.88
|
|
|
$
|
2.95
|
|
Diluted EPS
|
|
$
|
3.17
|
|
|
$
|
3.31
|
|
|
$
|
2.86
|
|
|
$
|
2.93
|
|
In the above table, the unaudited pro forma revenue for the year ended
December 31, 2017
increased by
$6.4 million
from the unaudited pro forma revenue for
2016
of
$434.2 million
to
$440.5 million
, representing a
1.5%
increase, with the change in exchange rates postively affecting reported revenues by
$2.1 million
. The reported revenue in the amount of
$364.0 million
for the year ended
December 31, 2017
increased by
$65.7 million
or
22.0%
from the
$298.3 million
of reported revenue for the year ended
December 31, 2016
. The cause for the difference between the
22.0%
increase in reported 2017 revenue versus 2016 revenue, as compared to the
1.5%
increase in 2017 pro forma versus 2016 pro forma revenue is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2017 and 2016, specifically ItzCash, YouFirst, Wall Street, Paul Merchants,Via, beBetter, Wdev, Hope Health, and the EbixHealth JV with the Company's pre-existing operations. The 2017 and 2016 pro forma financial information assumes that all such business acquisitions were made on January 1, 2016, whereas the Company's reported financial statements for 2017 only includes the operating results from the businesses since the effective date that they were acquired by Ebix, and thus includes only nine months of ItzCash, seven months of beBetter, four months of YouFirst, three months of Wall Street, two months of Paul Merchants, and two months of Via.
The above pro forma analysis is based on the following premises:
|
|
•
|
2017 and 2016 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. Growth in revenues of the acquired entities after acquisition date is only reflected for the period after their acquisition.
|
|
|
•
|
Revenue billed to existing clients from the cross selling of acquired products has been assigned to the acquired section of our business.
|
|
|
•
|
Any existing products sold to new customers acquired through the acquisition customer base, has also been assigned to the acquired section of our business.
|
|
|
•
|
The impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations also partially affected reported revenues. During each of the years
2017
and
2016
the change in foreign currency exchange rates increased (decreased) reported consolidated operating revenues by
$2.1 million
and
$(3.3) million
, respectively.
|
Note 5. Commercial Bank Financing Facility
On November 3, 2017 the Company and certain of its subsidiaries entered into the Fifth Amendment (the “Fifth Amendment”) to the Regions Secured Credit Facility, dated August 5, 2014, among the Company, Regions Bank as Administrative and Collateral Agent ("Regions") and certain other lenders party thereto (as amended, the "Credit Agreement") to exercise
$50 million
of its aggregate
$100 million
accordion option, increasing the total Term Loan Commitment to
$175 million
.
$20 million
of the increase was funded on November 3, 2017 and the remaining
$30 million
shall be disbursed upon the satisfaction of certain closing requirements set forth in the Fifth Amendment. Both such disbursements are tied to permitted acquisitions as set forth in the Fifth Amendment.
On November 3, 2017, the Company and certain of its subsidiaries entered into the Fourth Amendment and Waiver (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment waives certain technical defaults related to the failure to give required notice with respect to i) the existence of a subsidiary having intellectual property with an aggregate value above a stipulated amount and ii) the additional investment in a joint venture entity resulting in that entity becoming a subsidiary of the Company for the purpose of the Credit Agreement. In addition to such waiver, the Fourth Amendment also loosened the leverage ratios the Company is required to satisfy in connection with permitted acquisitions and for compliance generally.
On October 19, 2017, the Company and certain of its subsidiaries entered into the Third Amendment and Waiver (the “Third Amendment”) to the Credit Agreement. The Third Amendment waives certain technical defaults related to the Company’s making certain restricted payments in excess of those permitted under the Credit Agreement. In addition to such waiver, the Third Amendment also loosened the limitations on the restricted payment covenant under the Credit Agreement.
On June 17, 2016, the Company and certain of its subsidiaries entered into the Second Amendment (the “Second Amendment”) Credit Agreement. 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
4.125%
.
Effective October 14, 2015 the Company, in coordination with Regions as administrative agent and a joint lender, exercised the
$50 million
accordion feature in the Credit agreement thereby expanding the total credit facility to
$240 million
. As part of this credit facility expansion, TD Bank, NA ("TD") was added to the syndication group expanding the syndicated group to five bank participants, which include Regions, MUFG Union Bank N.A., Fifth Third Bank, and Silicon Valley Bank as joint lenders. TD commitment level is
$25 million
. The expanded credit facility will continue to be used to fund the Company's future growth and share repurchase initiatives.
On February 3, 2015, Ebix, Inc. and certain of its subsidiaries entered into the First Amendment (the “First Amendment”) to the Credit Agreement. The First Amendment amends the Regions Credit Facility by increasing the maximum amount by which the Aggregate Revolving Commitments may be increased by
$90 million
from the pre-existing limit of
$50 million
, increased the amount of base facility to
$190 million
from the pre-existing amount of
$150 million
, which together with the
$50 million
accordion feature increased the total Credit Agreement capacity amount to
$240 million
from the prior amount of
$200 million
, and added Fifth Third Bank to the syndicated group, which now includes four participants, which include Regions, MUFG Union Bank N.A., and Silicon Valley Bank as joint lenders.
At
December 31, 2017
, the outstanding balance on the revolving line of credit with Regions was
$274.5 million
and the facility carried an interest rate of
4.125%
. This balance is included in the long-term liabilities section of the Consolidated Balance Sheets. During
2017
, the average and maximum outstanding balances on the revolving line of credit were
$209.8 million
and
$274.5 million
, respectively, and the weighted average interest rate was
3.69%
. At
December 31, 2016
the outstanding balance on the revolving line of credit was
$154.0 million
and the facility carried an interest rate of
2.88%
.
At December 31, 2017, the outstanding balance on the term loan was
$125.8 million
of which
$14.5 million
is due within the next twelve months. This term loan also carried an interest rate of
4.125%
. 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
$14.5 million
and
$111.3 million
, respectively, at December 31, 2017.
Note 6. Commitments and Contingencies
Contingencies
-
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 named 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, Plaintiffs Desert States Employers & UFCW Union Pension Plan and Gilbert C. Spagnola (collectively, “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. On October 25, 2016, the Court entered an Order permitting Lead Plaintiffs to file a Verified Third Amended and Supplemented Class Action and Derivative Complaint, which made additional claims and added two directors as defendants. The Verified Third Amended and Supplemented Class Action and Derivative Complaint was then filed on October 26, 2016. On October 31. 2016, Lead Plaintiffs filed a Motion for Class Certification. On November 1, 2016, Lead Plaintiffs moved for partial summary judgment on Claims (ii), (iii), and (vi) as described below. The directors added as defendants in the Third Amended and Supplemented Class Action and Derivative Complaint moved to dismiss all Claims against them. The remaining Defendants moved to dismiss certain Claims, and filed answers to the other claims in the Verified Third Amended and Supplemented Complaint. On December 12, 2017, the Court postponed the pending hearing on the Plaintiffs’ Motion for Class Certification and the Defendants’ motions to dismiss and, instead, granted the Plaintiffs leave to file a Verified Fourth Amended and Supplemented Class Action and Derivative Complaint, which pleading was filed on January 19, 2018. The claims in the fourth amended complaint are as follows: (i) a purported class and derivative claim for breach of fiduciary duty for improperly maintaining the ABA as an unreasonable anti-takeover device; (ii) a purported class claim 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 for breach of fiduciary duty to the Company in causing incentive compensation to be awarded under the 2010 Stock Incentive Plan; (iv) a purported class and derivative claim for breach of fiduciary duty in adopting certain bylaw amendments on December 19, 2014; (v) a purported class and derivative claim seeking invalidation of the December 19, 2014 bylaw amendments under Delaware law; (vi) a purported claim for breach of fiduciary duty for not duly adopting the ABA at the July 15, 2009 Board meeting, and seeking declaratory relief invalidating the ABA; (vii) a purported claim for breach of the fiduciary duty of disclosure to the stockholders with respect to the ABA, and seeking declaratory relief invalidating the ABA; (viii) a purported claim seeking invalidation of the 2008 Stockholder Meeting, 2008 Certificate Amendment, 2008 Stock Split and subsequent corporate actions; (ix) a purported class claim for breach of fiduciary duty, and seeking declaratory relief invalidating the 2016 CEO Bonus Plan because of incomplete disclosures with respect to the ABA; and (x) for breach of fiduciary duty and declaratory judgment relating to the interpretation of the ABA. Lead Plaintiffs seek declaratory relief with respect to the ABA, the 2010 Stock Incentive Plan, the 2010 Proxy Statement, the bylaw amendments, the 2008 Stockholder Meeting, the 2008 Certificate Amendment, the 2008 Stock Split, and the 2016 CEO Bonus Plan. Lead Plaintiffs also seek compensatory damages, interest, and attorneys’ fees and costs, all in unspecified amounts. A trial is scheduled for August 2018. 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 adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Lease Commitments—
The Company leases office space under non-cancelable operating leases with expiration dates ranging through 2029, 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
December 31, 2017
and
2016
.
Commitments for minimum rentals under non-cancellable leases, debt obligations, and future purchase obligations as of
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Debt
|
|
Capital Leases
|
|
Operating Leases
|
|
Future Purchase Obligations
|
|
|
(in thousands)
|
|
|
2018
|
|
$
|
14,500
|
|
|
$
|
20
|
|
|
$
|
6,937
|
|
|
$
|
541
|
|
2019
|
|
14,500
|
|
|
20
|
|
|
4,835
|
|
|
406
|
|
2020
|
|
14,500
|
|
|
8
|
|
|
3,015
|
|
|
—
|
|
2021
|
|
356,779
|
|
|
—
|
|
|
1,847
|
|
|
—
|
|
2022
|
|
—
|
|
|
—
|
|
|
1,209
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
1,828
|
|
|
—
|
|
Total
|
|
$
|
400,279
|
|
|
$
|
48
|
|
|
$
|
19,671
|
|
|
$
|
947
|
|
Less: sublease income
|
|
|
|
|
|
(2,215
|
)
|
|
|
Net lease payments
|
|
|
|
|
|
$
|
17,456
|
|
|
|
|
Less: amount representing interest
|
|
|
|
(5
|
)
|
|
|
|
|
Present value of obligations under capital leases
|
|
|
|
$
|
43
|
|
|
|
|
|
Less: current portion
|
|
(14,500
|
)
|
|
(17
|
)
|
|
|
|
|
Long-term obligations
|
|
$
|
385,779
|
|
|
$
|
26
|
|
|
|
|
|
Rental expense for office facilities and certain equipment subject to operating leases for
2017
,
2016
, and
2015
was
$6.6 million
,
$6.4 million
and
$6.5 million
, respectively.
Sublease income for
2017
,
2016
and
2015
was
$1.1 million
,
$977 thousand
, and
$580 thousand
, respectively.
Business Acquisition Earn-out Contingencies—
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential future cash earnout based on reaching certain specified future revenue targets. The 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. As of
December 31, 2017
, the total of these contingent liabilities was
$37.1 million
, of which
$33.1 million
is reported in long-term liabilities, and
$4.0 million
is included in current liabilities in the Company's Consolidated Balance Sheet. As of
December 31, 2016
the total of these contingent liabilities was
$8.5 million
of which
$6.6 million
was reported in long-term liabilities, and
$1.9 million
was included in current liabilities in the Company's Consolidated Balance Sheet.
Self -Insurance—
For some of the Company’s U.S. employees the Company is currently 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
December 31, 2017
and
2016
, the amount accrued on the Company’s consolidated balance sheet for the self-insured component of the Company’s employee health insurance was
$332 thousand
and
$346 thousand
, respectively. The maximum potential estimated cumulative liability for the annual contract period, which ends in September 2018, is
$2.8 million
.
Note 7. Share-Based Compensation
Stock Options
—The Company accounts for compensation expense associated with stock options issued to employees, Directors, and non-employees based on their fair value, which is calculated using an option pricing model, and is recognized over the service period, which is usually the vesting period. At
December 31, 2017
, the Company had
one
equity based compensation plan.
No
stock options were granted to employees or non-employees during
2017
,
2016
and
2015
; however, options were granted to Directors in
2017
and 2015. Stock compensation expense of
$433 thousand
,
$340 thousand
and
$294 thousand
was recognized during the years ending December 31,
2017
,
2016
and
2015
, respectively, on outstanding and unvested options.
The fair value of options granted during
2017
is estimated on the date of grant using the Black-Scholes option pricing model. The following table includes the weighted- average assumptions used in estimating the fair values and the resulting weighted-average fair value of stock options granted in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
Weighted average fair values of stock options granted
|
$
|
15.38
|
|
|
$
|
19.50
|
|
|
$
|
7.90
|
|
Expected volatility
|
37.9
|
%
|
|
55.5
|
%
|
|
55.4
|
%
|
Expected dividends
|
.56
|
%
|
|
.61
|
%
|
|
1.42
|
%
|
Weighted average risk-free interest rate
|
1.64
|
%
|
|
1.40
|
%
|
|
1.03
|
%
|
Expected life of stock options (in years)
|
3.5
|
|
|
3.5
|
|
|
3.5
|
|
A summary of stock option activity for the years ended December 31,
2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
(in thousands)
|
Outstanding at January 1, 2015
|
207,000
|
|
|
$
|
16.41
|
|
|
1.88
|
|
$
|
121
|
|
Granted
|
42,000
|
|
|
$
|
22.25
|
|
|
|
|
|
Exercised
|
(109,122
|
)
|
|
$
|
20.25
|
|
|
|
|
|
Canceled
|
—
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
139,878
|
|
|
$
|
15.17
|
|
|
2.32
|
|
$
|
2,465
|
|
Granted
|
42,000
|
|
|
$
|
49.22
|
|
|
|
|
|
Exercised
|
(72,379
|
)
|
|
$
|
11.38
|
|
|
|
|
|
Canceled
|
—
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
109,499
|
|
|
$
|
30.73
|
|
|
3.28
|
|
$
|
2,882
|
|
Granted
|
42,000
|
|
|
$
|
53.90
|
|
|
|
|
|
Exercised
|
(3,500
|
)
|
|
$
|
14.90
|
|
|
|
|
|
Canceled
|
—
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
147,999
|
|
|
$
|
37.68
|
|
|
2.94
|
|
$
|
6,152
|
|
Exercisable at December 31, 2017
|
71,499
|
|
|
$
|
26.65
|
|
|
2.02
|
|
$
|
3,761
|
|
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s stock as of the end of the period and the exercise price of the stock options. The total intrinsic value of stock options exercised during
2017
,
2016
and
2015
was
$169 thousand
,
$3.2 million
, and
$1.3 million
, respectively.
Cash received or the value of stocks canceled from option exercises under all share-based payment arrangements for the years ended December 31,
2017
,
2016
and
2015
, was
$52 thousand
,
$824 thousand
and
$2.2 million
, respectively.
A summary of non-vested options and changes for the years ended December 31,
2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
Non-Vested Number of Shares
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
Non-vested balance at January 1, 2015
|
67,500
|
|
|
$
|
16.52
|
|
Granted
|
42,000
|
|
|
$
|
22.25
|
|
Vested
|
(33,750
|
)
|
|
$
|
17.47
|
|
Canceled
|
—
|
|
|
$
|
—
|
|
Non-vested balance at December 31, 2015
|
75,750
|
|
|
$
|
19.27
|
|
Granted
|
42,000
|
|
|
$
|
49.22
|
|
Vested
|
(43,125
|
)
|
|
$
|
18.89
|
|
Canceled
|
—
|
|
|
$
|
—
|
|
Non-vested balance at December 31, 2016
|
74,625
|
|
|
$
|
36.35
|
|
Granted
|
42,000
|
|
|
$
|
53.90
|
|
Vested
|
(40,125
|
)
|
|
$
|
32.54
|
|
Canceled
|
—
|
|
|
$
|
—
|
|
Non-vested balance at December 31, 2017
|
76,500
|
|
|
$
|
47.99
|
|
The following table summarizes information about stock options outstanding by price range as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Prices
|
|
Number Outstanding
|
|
Weighted-Average Remaining Contractual Life (Years)
|
|
Weighted-Average Exercise Price
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
$14.89
|
|
24,624
|
|
|
0.17
|
|
$
|
2.48
|
|
|
24,624
|
|
|
$
|
5.13
|
|
$21.19
|
|
33,375
|
|
|
0.46
|
|
$
|
4.78
|
|
|
24,375
|
|
|
$
|
7.22
|
|
$28.59
|
|
6,000
|
|
|
0.09
|
|
$
|
1.16
|
|
|
4,125
|
|
|
$
|
1.65
|
|
$49.22
|
|
42,000
|
|
|
0.95
|
|
$
|
13.97
|
|
|
18,375
|
|
|
$
|
12.65
|
|
$53.90
|
|
42,000
|
|
|
1.28
|
|
$
|
15.29
|
|
|
—
|
|
|
$
|
—
|
|
|
|
147,999
|
|
|
2.94
|
|
$
|
37.68
|
|
|
71,499
|
|
|
$
|
26.65
|
|
Restricted Stock
—Pursuant to the Company’s restricted stock agreements, the restricted stock granted generally vests as follows:
one third
after one year, and the remaining in
eight
equal quarterly installments. The restricted stock also vests with respect to any unvested shares upon the applicable employee’s death, disability or retirement, the Company’s termination of the employee other than for cause, or for a change in control of the Company. A summary of the status of the Company’s non-vested restricted stock grant shares is presented in the following table:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant Date
Fair Value
|
Non vested at January 1, 2015
|
188,522
|
|
|
$
|
17.13
|
|
Granted
|
132,069
|
|
|
$
|
30.29
|
|
Vested
|
(108,798
|
)
|
|
$
|
17.35
|
|
Forfeited
|
(8,479
|
)
|
|
$
|
17.20
|
|
Non vested at December 31, 2015
|
203,314
|
|
|
$
|
25.56
|
|
Granted
|
26,119
|
|
|
$
|
44.79
|
|
Vested
|
(101,441
|
)
|
|
$
|
23.25
|
|
Forfeited
|
(4,338
|
)
|
|
$
|
35.54
|
|
Non vested at December 31, 2016
|
123,654
|
|
|
$
|
31.17
|
|
Granted
|
56,251
|
|
|
$
|
56.75
|
|
Vested
|
(72,810
|
)
|
|
$
|
29.50
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
Non vested at December 31, 2017
|
107,095
|
|
|
$
|
45.74
|
|
As of
December 31, 2017
there was
$4.2 million
of total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the 2006 and 2010 Incentive Compensation Program. That cost is expected to be recognized over a weighted-average period of
2.00
years. The total fair value of shares vested during the years ended December 31,
2017
,
2016
and
2015
was
$2.1 million
,
$2.4 million
, and
$1.9 million
, respectively.
In the aggregate the total compensation expense recognized in connection with the restricted grants was
$2.4 million
,
$2.5 million
and
$1.5 million
during each of the years ending December 31,
2017
,
2016
and
2015
, respectively.
As of
December 31, 2017
the Company has
5.4 million
shares of common stock reserved for possible future stock option and restricted stock grants.
Note 8. Income Taxes
The income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
(In thousands)
|
Current:
|
|
|
|
|
|
US federal
|
$
|
2,390
|
|
|
$
|
1,259
|
|
|
$
|
1,267
|
|
US state
|
1,153
|
|
|
310
|
|
|
191
|
|
Non US
|
8,266
|
|
|
3,266
|
|
|
4,789
|
|
|
11,809
|
|
|
4,835
|
|
|
6,247
|
|
Deferred:
|
|
|
|
|
|
US federal
|
(5,558
|
)
|
|
78
|
|
|
808
|
|
US state
|
(976
|
)
|
|
295
|
|
|
720
|
|
Non US
|
(4,498
|
)
|
|
(3,571
|
)
|
|
(669
|
)
|
|
(11,032
|
)
|
|
(3,198
|
)
|
|
859
|
|
|
|
|
|
|
|
Total
|
$
|
777
|
|
|
$
|
1,637
|
|
|
$
|
7,106
|
|
Income before income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
(In thousands)
|
US
|
$
|
(13,355
|
)
|
|
$
|
(80
|
)
|
|
$
|
1,384
|
|
Non US
|
116,715
|
|
|
96,011
|
|
|
85,255
|
|
Total
|
$
|
103,360
|
|
|
$
|
95,931
|
|
|
$
|
86,639
|
|
A reconciliation of the statutory federal income tax rate to the effective income tax rate consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
Statutory US federal income tax rate
|
34.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
US state income taxes, net of federal benefit
|
(0.8
|
)%
|
|
0.4
|
%
|
|
1.0
|
%
|
Non-US tax rate differential
|
(28.7
|
)%
|
|
(22.8
|
)%
|
|
(2.6
|
)%
|
Tax holidays
|
(3.5
|
)%
|
|
(14.0
|
)%
|
|
(23.5
|
)%
|
Tax Credits
|
(1.4
|
)%
|
|
—
|
%
|
|
—
|
%
|
Passive income exemption
|
(2.1
|
)%
|
|
(1.4
|
)%
|
|
(2.9
|
)%
|
Acquisition contingent earnout liability adjustments
|
—
|
%
|
|
(0.9
|
)%
|
|
(0.6
|
)%
|
Foreign enhanced R&D deductions
|
—
|
%
|
|
(0.9
|
)%
|
|
(1.0
|
)%
|
Nondeductible items
|
2.5
|
%
|
|
9.1
|
%
|
|
0.8
|
%
|
Effect of valuation allowance
|
(3.6
|
)%
|
|
(2.3
|
)%
|
|
(2.2
|
)%
|
Release of deferred tax liability on intangibles transferred
|
—
|
%
|
|
(3.5
|
)%
|
|
—
|
%
|
Prior year true-ups
|
1.1
|
%
|
|
2.8
|
%
|
|
3.2
|
%
|
Uncertain tax positions
|
5.8
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
Rate change on deferred taxes primarily due to tax reform
|
(2.4
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
(0.1
|
)%
|
|
0.1
|
%
|
|
0.8
|
%
|
Effective income tax rate
|
0.8
|
%
|
|
1.7
|
%
|
|
8.1
|
%
|
Our effective tax rate decreased to
0.8%
in 2017, compared with
1.7%
in 2016, largely due to the remeasurement of US deferred taxes under tax reform, release of valuation allowance on foreign loss carryforwards, recording tax credits based on filed tax returns, partially offset by an increase in uncertain tax position accrual.
Beginning in 2009, we were granted a
100%
tax holiday for certain of our Indian operations, which was in effect until March 31, 2014 and March 31, 2015 for some of our locations and continues until March 31, 2020 for other locations. When these tax holidays expire, these locations become
50%
taxable for an additional
five
years. The impact of this tax holiday decreased our non-US income tax expense by
$2.9 million
and
$13.7 million
for 2017 and 2016, respectively.
The Company’s consolidated worldwide effective tax rate is relatively low because of the effect of conducting significant operations in certain foreign jurisdictions, specifically India, Dubai, and Singapore, where we have tax holidays or tax concessions.
Deferred tax assets and liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Deferred
|
|
Deferred
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
(In thousands)
|
Depreciation and amortization
|
$
|
683
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
—
|
|
Share-based compensation
|
590
|
|
|
|
|
1,612
|
|
|
|
Accruals and prepaids
|
2,700
|
|
|
|
|
|
842
|
|
|
|
Bad debts
|
1,076
|
|
|
|
|
859
|
|
|
|
Acquired intangible assets
|
—
|
|
|
19,421
|
|
|
—
|
|
|
22,508
|
|
Net operating loss carryforwards
|
15,233
|
|
|
|
|
19,019
|
|
|
|
Tax credit carryforwards (primarily MAT in India)
|
43,044
|
|
|
|
|
35,514
|
|
|
|
|
63,326
|
|
|
19,421
|
|
|
57,941
|
|
|
22,508
|
|
Valuation allowance
|
(35
|
)
|
|
—
|
|
|
(3,747
|
)
|
|
—
|
|
Total deferred taxes
|
$
|
63,291
|
|
|
$
|
19,421
|
|
|
$
|
54,194
|
|
|
$
|
22,508
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(In thousands)
|
Non-current deferred tax assets
|
43,870
|
|
|
31,686
|
|
ASU 2013-11 reclass, described below
|
(341
|
)
|
|
(341
|
)
|
Net deferred tax assets
|
43,529
|
|
|
31,345
|
|
The valuation allowance changed by
($3.7) million
and
$(2.2) million
during the years ended December 31, 2017 and 2016, respectively. The presentation above has been modified to correctly show the valuation allowances that should have been recorded and to gross up the Company’s deferred tax assets for implied valuation allowances that were inherited through acquisitions.
We have US Federal, state and foreign operating losses and credit carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
|
(In thousands)
|
US Federal loss carryforwards
|
|
$
|
42,981
|
|
|
$
|
47,796
|
|
US state loss carryforwards
|
|
25,186
|
|
|
15,535
|
|
Foreign loss carryforwards
|
|
29,852
|
|
|
25,849
|
|
|
|
|
|
|
US Federal credit carryforwards
|
|
4,679
|
|
|
1,235
|
|
Foreign credit carryforwards
|
|
38,364
|
|
|
34,278
|
|
The US federal and state operating loss carryforwards expire at varying dates through 2038. The federal credits begin to expire in 2018. We also have non-US loss carryforwards of approximately
$29.9 million
as of
December 31, 2017
, the majority of which may be carried forward indefinitely. We released the valuation allowance on our UK entity in the current year due to recent and projected profitability.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted, substantially changing the U.S. tax system and affecting the Company in a number of ways. Notably, the TCJA: establishes a flat corporate income tax rate of
21.0%
on U.S. earnings; imposes a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”);imposes a new minimum tax on certain non-U.S. earnings, irrespective of the territorial system of taxation, and generally allows for the repatriation of future earnings of foreign subsidiaries without incurring additional U.S. taxes by transitioning to a territorial system of taxation; subjects certain payments made by a U.S. company to a related foreign company to certain minimum taxes (Base Erosion Anti-Abuse Tax); eliminates certain prior tax incentives for manufacturing in the United States and creates an incentive for U.S. companies to sell, lease or license goods and services abroad by allowing for a reduction in taxes owed on earnings related to such sales; allows the cost of investments in certain depreciable assets acquired and placed in service after September 27, 2017 to be immediately expensed; and reduces deductions with respect to certain compensation paid to specified executive officers.
While the changes from the TCJA are generally effective beginning in 2018, U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of the TCJA, the SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”) allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. Where reasonable estimates can be made, the provisional accounting should be based on such estimates. When no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. The Company is required to complete its tax accounting for the TCJA within a one-year period when it has obtained, prepared, and analyzed the information to complete the income tax accounting.
Due to insufficient guidance, as well as the availability of information to accurately analyze the impact of the TCJA, we have made a reasonable estimate of the effects, as described below, and in other cases we have not been able to make a reasonable
estimate and continue to account for those items based on our existing accounting under FASB ASC Topic 740, Income Taxes and the provisions of the tax laws that were in effect immediately prior to enactment.
U.S. deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, which is generally
21.0%
, resulting in an income tax benefit of approximately
$2.5 million
. As we complete our analysis, collect and prepare necessary data, and interpret any additional regulatory or accounting guidance, the Company may make adjustments to the provisional amounts we have recorded during a measurement period of up to one year from the enactment of the TCJA that could impact our provision for income taxes in the reporting period in which we make such adjustments.
The Transition Tax is based on the Company’s total post-1986 earnings and profits that were previously deferred from U.S. income taxes. The Company has not recorded an amount for the Transition Tax expense, as they do not have the necessary information to determine a reasonable estimate to include as a provisional amount. The Company will work to gather the necessary information to calculate the transition tax and will record the impact of this in the reporting period when the analysis is complete.
The Company has not recognized a deferred U.S. tax liability and associated income tax expense for the undistributed earnings of its foreign subsidiaries which we consider indefinitely invested because those foreign earnings will remain permanently reinvested in those subsidiaries to fund ongoing operations and growth. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to income taxes and withholding taxes payable in various jurisdictions, which could potentially be partially offset by foreign tax credits. At December 31, 2017 the cumulative amount of the Company’s undistributed foreign earnings was approximately
$523.3 million
, inclusive of income previously taxed in the United States.
The following table summarizes the activity related to our unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Beginning Balance
|
$
|
3,265
|
|
|
$
|
3,115
|
|
|
$
|
3,020
|
|
Additions for tax positions related to current year
|
—
|
|
|
43
|
|
|
41
|
|
Additions for tax positions of prior years
|
5,879
|
|
|
107
|
|
|
131
|
|
Reductions for tax position of prior years
|
—
|
|
|
—
|
|
|
(77
|
)
|
Ending Balance
|
$
|
9,144
|
|
|
$
|
3,265
|
|
|
$
|
3,115
|
|
The Company recognizes interest accrued and penalties related to unrecognized tax benefits as part of income tax expense. Interest assessed upon settlement of a tax return position is classified as interest expense. The Company accrued as of
December 31, 2017
and 2016 approximately
$1.0 million
and
$771 thousand
, respectively, of estimated interest and penalties. These amounts are included in the December 31, 2017 and 2016 balances in the preceding table of
$9.1 million
and
$3.3 million
, respectively, which is included in other long term liabilities in the accompanying Consolidated Balance Sheet.
We file income tax returns in the US federal, many US state and local jurisdictions, and certain foreign jurisdictions. We have substantially resolved all US federal income tax matters for tax years prior to 2014. Our state and foreign tax matters may remain open from 2008 forward.
The Company has applied the new provisions under Accounting Standards Update 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists
, or ASU 2013-11. Under these provisions, an unrecognized tax benefit is to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. The Company has applied this provision and
$341 thousand
and
$341 thousand
of unrecognized tax benefits have been applied against the deferred tax assets for net operating loss carryforwards, as of December 31, 2017 and 2016 respectively.
Note 9. Stock Repurchases
Effective February 6, 2017 the Company's Board of Directors unanimously approved an additional authorized share repurchase plan of
$150.0 million
. The Board directed that the repurchases be funded with available cash balances and cash generated by the Company's operating activities. Under certain circumstances the aggregate amount of repurchases of the Company's equity shares may be limited by the terms and underlying financial covenants regarding the Company's commercial bank financing facility.
Effective August 19, 2015 the Company's Board of Directors unanimously approved an additional authorized share repurchase plan of
$100.0 million
. The Board directed that the repurchases be funded with available cash balances and cash generated by the Company's operating activities. Under certain circumstances the aggregate amount of repurchases of the Company's equity shares may be limited by the terms and underlying financial covenants regarding the Company's commercial bank financing facility.
The Company's share repurchase plan’s terms have been structured to comply with the SEC’s Rule 10b-18, and are subject to market conditions and applicable legal requirements. The program does not obligate the Company to acquire any specific number of shares and may be suspended or terminated at any time. All purchases are made in the open market. Treasury stock is recorded at its acquired cost. During
2017
the Company repurchased
687,048
shares of its common stock under these plans for total consideration of
$39.4 million
. During
2016
the Company repurchased
1,479,454
shares of its common stock under this plan for total consideration of
$65.3 million
. During
2015
the Company repurchased
2,924,306
shares of its common stock under this plan for total consideration of
$82.5 million
.
As of
December 31, 2017
the Company had
$133.9 million
remaining in its share repurchase authorization.
Note 10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at
December 31, 2017
and
December 31, 2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(In thousands)
|
Trade accounts payable
|
$
|
69,101
|
|
|
$
|
16,606
|
|
Accrued professional fees
|
420
|
|
|
500
|
|
Income taxes payable
|
1,598
|
|
|
2,448
|
|
Share repurchases accrued
|
—
|
|
|
6,352
|
|
Sales taxes payable
|
3,615
|
|
|
4,489
|
|
Other accrued liabilities
|
339
|
|
|
66
|
|
Total
|
$
|
75,073
|
|
|
$
|
30,461
|
|
The Company is continuing to evaluate the 2017 acquisitions that collectively make up the EbixCash Financial Exchanges, refer to Part I, Item I Business, and their impact on our condensed consolidated balance sheets. Trade accounts payable includes advances from customers, agents, and suppliers.
Note 11. Other Current Assets
Other current assets at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(In thousands)
|
Prepaid expenses
|
$
|
29,347
|
|
|
$
|
10,276
|
|
Sales taxes receivable from customers
|
2,218
|
|
|
—
|
|
Credit card merchant account balance receivable
|
1,008
|
|
|
—
|
|
Due from prior owners of acquired businesses for working capital settlements
|
284
|
|
|
916
|
|
Research and development tax credits receivable
|
—
|
|
|
375
|
|
Accrued interest receivable
|
515
|
|
|
372
|
|
Other
|
160
|
|
|
777
|
|
Total
|
$
|
33,532
|
|
|
$
|
12,716
|
|
Note 12. Property and Equipment
Property and equipment at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(In thousands)
|
Computer equipment
|
$
|
11,051
|
|
|
$
|
17,957
|
|
Buildings
|
23,749
|
|
|
22,607
|
|
Land
|
5,930
|
|
|
7,986
|
|
Land improvements
|
6,906
|
|
|
—
|
|
Leasehold improvements
|
1,435
|
|
|
1,465
|
|
Furniture, fixtures and other
|
8,451
|
|
|
7,654
|
|
|
57,522
|
|
|
57,669
|
|
Less accumulated depreciation and amortization
|
(15,818
|
)
|
|
(20,608
|
)
|
|
$
|
41,704
|
|
|
$
|
37,061
|
|
Depreciation expense was
$3.8 million
,
$4.0 million
and
$3.5 million
, for the years ended December 31,
2017
,
2016
and
2015
, respectively.
Note 13. Cash Option Profit Sharing Plan and Trust
The Company maintains a 401(k) Cash Option Profit Sharing Plan, which allows participants to contribute a percentage of their compensation to the Profit Sharing Plan and Trust up to the Federal maximum. The Company matches
100%
of an employee’s
1%
contributed and
50%
on the
2%
contributed by an employee. Accordingly, the Company’s contributions to the Plan were
$610 thousand
,
$688 thousand
and
$676 thousand
for the years ending December 31,
2017
,
2016
and
2015
, respectively.
Note 14. Geographic Information
The Company operates with
one
reportable segment whose results are regularly reviewed by the Company's CEO, its chief operating decision maker as to operating performance and the allocation of resources. External customer revenues in the tables below were 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.
During 2017 India's revenue increased
$47.7 million
of which
$5.3 million
is due to the various new e-governance contracts with a number of large clients and
$42.9 million
due to its 2017 acquisitions of ItzCash, YouFirst, Wall Street, Paul Merchants, and Via. Latin America's revenues increased
$12.9 million
due primarily to the November 2016 acquisition of Wdev and a
$1.4 million
increase due to changes in foreign currency exchange rates. Australia's revenues increased by
$3.2 million
due to a combination of increased professional services and transaction fees, and a
$1.1 million
increase due to changes in foreign currency exchange rates. Canada's revenues increased by
$1.2 million
due primarily to increased professional services. Increases in Singapore, Indonesia, Philippines and United Arab Emirates are due to the November 2017 acquisition of Via.
During 2016 the change in foreign currency exchange rates decreased reported Australian and Latin America operating revenues by
$(410) thousand
and
$(300) thousand
, respectively. India's 2016 operating revenues increased
$10.6 million
or
300%
due primarily to the various new e-governance contracts with a number of large clients. Europe's revenues increased
$8.8 million
, net of
$(2.2) million
decrease due to changes in foreign currency exchange rates, due primarily to the execution and commencement of certain significant contracts.
The following enterprise wide information relates to the Company's geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
|
External Revenues
|
|
Long-lived assets
|
|
External Revenues
|
|
Long-lived assets
|
|
External Revenues
|
|
Long-lived assets
|
|
|
in thousands
|
United States
|
|
$
|
211,895
|
|
|
$
|
394,112
|
|
|
$
|
213,516
|
|
|
$
|
385,723
|
|
|
$
|
205,210
|
|
|
$
|
374,432
|
|
Canada
|
|
7,522
|
|
|
6,601
|
|
|
6,328
|
|
|
6,411
|
|
|
4,490
|
|
|
6,632
|
|
Latin America
|
|
21,128
|
|
|
22,300
|
|
|
8,179
|
|
|
26,648
|
|
|
5,715
|
|
|
6,091
|
|
Australia
|
|
34,366
|
|
|
1,174
|
|
|
31,156
|
|
|
1,245
|
|
|
30,634
|
|
|
199
|
|
Singapore
|
|
6,330
|
|
|
17,475
|
|
|
5,848
|
|
|
17,467
|
|
|
5,317
|
|
|
68,852
|
|
New Zealand
|
|
1,933
|
|
|
247
|
|
|
1,903
|
|
|
215
|
|
|
2,153
|
|
|
221
|
|
India
|
|
61,857
|
|
|
338,130
|
|
|
14,153
|
|
|
83,082
|
|
|
3,538
|
|
|
74,693
|
|
Europe
|
|
17,062
|
|
|
25,687
|
|
|
17,211
|
|
|
21,766
|
|
|
8,425
|
|
|
28,039
|
|
Dubai
|
|
—
|
|
|
53,599
|
|
|
—
|
|
|
54,152
|
|
|
—
|
|
|
—
|
|
Indonesia
|
|
1,055
|
|
|
110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Philippines
|
|
623
|
|
|
616
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
United Arab Emirates
|
|
200
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
363,971
|
|
|
$
|
860,081
|
|
|
$
|
298,294
|
|
|
$
|
596,709
|
|
|
$
|
265,482
|
|
|
$
|
559,159
|
|
In the geographical information table above the significant changes to long-lived assets from December 31, 2016 to December 31, 2017 were comprised of an increase in India of
$255.0 million
primarily due to
$249.5 million
increase associated with the 2017 acquisitions of ItzCash, YouFirst, Wall Street, Paul Merchants, and Via, and an increase in deferred tax assets of
$4.1 million
associated with the payments and accruals of Minimum Alternative Tax. The Europe increase of
$3.9 million
is primarily due to a
9.3%
strengthening of the British Pound Sterling versus the U.S. Dollar which caused a
$2.0 million
increase in the translation of long-lived assets, an increase in deferred tax assets of
$3.2 million
due to the release of valuation allowances of operating loss carryforwards, partially offset by the amortization of intangible assets and capitalized software development costs.
In the geographical information table above the significant changes to long-lived assets from December 31, 2015 to December 31, 2016 are explained as follows: the U.S. increase of
$11.3 million
is primarily comprised of a
$14.6 million
net increase due to the consolidation of the EbixHealth JV commensurate with the step up in ownership to
51%
, partially offset by a
$(4.7) million
decrease of intangibles due to amortization; the Latin America increase of
$17.7 million
is due to the Wdev acquisition (for which the valuation and purchase accounting is preliminary); the Singapore decrease of
$51.4 million
and the Dubai increase of
$54.2 million
are due to the transfer of certain intangible assets between these locations (net of deferred taxes); the India increase of
$8.4 million
is primarily due an increase in deferred tax assets of
$4.8 million
associated with the payments and accruals of Minimum Alternative Tax, and
$3.5 million
of fixed assets additions associated with the continued build out of our product development facilities, and the growth of the Ebix-Vayam JV; the Europe decrease of
$6.3 million
is primarily due to a
16.6%
weakening of British Pound Sterling versus the U.S. Dollar which caused a
$4.3 million
decrease in the translation of long-lived assets, partially offset by the amortization of intangible assets and capitalized software development costs.
Note 15. Related Party Transactions
We consider Regions Bank ("Regions") to be a related party because Regions provides financing to the Company via a syndicated commercial banking facility (refer to Note 5 to these Consolidated Financial Statements), and because Regions is also a customer to whom the Company sells products and services. Revenues recognized from Regions were
$301 thousand
,
$280 thousand
, and
$300 thousand
for each of the years ending December 31, 2017, 2016, and 2015, respectively. Accounts receivable due from Regions were and
$60 thousand
and
$161 thousand
at December 31, 2017 and 2016, respectively.
Note 16. Quarterly Financial Information (unaudited)
The following is the unaudited quarterly financial information for
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
(in thousands, except share data)
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
79,103
|
|
|
$
|
87,387
|
|
|
$
|
92,800
|
|
|
$
|
104,681
|
|
Gross Profit
|
|
53,916
|
|
|
56,455
|
|
|
57,863
|
|
|
66,243
|
|
Operating income
|
|
25,690
|
|
|
26,539
|
|
|
27,911
|
|
|
33,081
|
|
Net income from continuing operations
|
|
$
|
26,427
|
|
|
$
|
23,434
|
|
|
$
|
24,184
|
|
|
$
|
26,573
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.83
|
|
|
$
|
0.74
|
|
|
$
|
0.77
|
|
|
$
|
0.84
|
|
Diluted
|
|
$
|
0.83
|
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
0.84
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
71,066
|
|
|
$
|
72,574
|
|
|
$
|
74,608
|
|
|
$
|
80,046
|
|
Gross Profit
|
|
51,464
|
|
|
51,995
|
|
|
52,183
|
|
|
57,524
|
|
Operating income
|
|
24,763
|
|
|
23,564
|
|
|
24,293
|
|
|
27,661
|
|
Net income from continuing operations
|
|
22,159
|
|
|
22,992
|
|
|
24,067
|
|
|
24,629
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.67
|
|
|
$
|
0.70
|
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
Diluted
|
|
$
|
0.67
|
|
|
$
|
0.70
|
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
63,753
|
|
|
$
|
64,712
|
|
|
$
|
66,813
|
|
|
$
|
70,204
|
|
Gross Profit
|
|
44,268
|
|
|
46,013
|
|
|
49,004
|
|
|
53,760
|
|
Operating income
|
|
20,499
|
|
|
20,423
|
|
|
21,968
|
|
|
25,824
|
|
Net income from continuing operations
|
|
18,336
|
|
|
19,036
|
|
|
20,232
|
|
|
21,929
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.54
|
|
|
$
|
0.59
|
|
|
$
|
0.65
|
|
Diluted
|
|
$
|
0.51
|
|
|
$
|
0.54
|
|
|
$
|
0.59
|
|
|
$
|
0.65
|
|
In some instances the sum of the quarterly basic and diluted net income per share amounts may not agree to the full year basic and diluted net income per share amounts reported on the Consolidated Statements of Income because of rounding.
Note 17. Investment in Joint Ventures
Effective April 1, 2017 Ebix entered into a joint venture with India-based Essel Group, while acquiring an
80%
equity interest in ItzCash, India’s leading payment solutions exchange. ItzCash is recognized as a leader in the prepaid cards and bill payments space in India. Under the terms of the agreement, ItzCash was valued at a total enterprise value of approximately
$150 million
. Accordingly, Ebix acquired an
80%
equity interest in ItzCash for
$120 million
including upfront cash of
$76.3 million
plus possible future contingent earn-out payments of up to
$44.0 million
based on earned revenues over the subsequent
thirty-six
month period following the effective date of the acquisition.
$4.0 million
of the possible future contingent earn-out payments is being held in escrow accounts for the
twelve
month period following the effective date of the acquisition to ensure that the acquired business achieves the minimum specified annual gross revenue threshold, which if not achieved will result in said funds being returned to Ebix. The valuation and purchase price allocation for the ItzCash acquisition remains preliminary and will be finalized as soon as practicable but in no event longer than one year from the effective date of the transaction.
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. Vayam is, also, a customer of the Ebix Vayam Limited JV, and during the twelve months ending December 31, 2017 and 2016 the Ebix Vayam Limited JV recognized
$16.9 million
and
$11.6 million
of revenue from Vayam, respectively, and as of December 31, 2017 Vayam had
$26.8 million
of accounts receivable with the Ebix Vayam Limited JV.
Effective September 1, 2015 Ebix and IHC formed a joint venture named EbixHealth JV. This joint venture was established to promote and market a best practices administration data exchange for health and pet insurance lines of business nationally. Ebix paid
$6.0 million
and contributed certain portions of its CurePet investment, valued by the EbixHealth JV at
$2.0 million
, for its
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
$12.0 million
for its
60%
membership interest in the EbixHealth JV and received a special distribution of
$6.0 million
. As per the joint venture agreement, any and all losses of the EbixHealth JV, (excluding certain severance payments to former employees of IHC Health Solutions, Inc.) through the period ending December 31, 2016 will be allocated to IHC, and IHC is obligated to fund any negative cash flow during this period as a loan to the EbixHealth JV, with any remaining balance of said loan as of December 31, 2016 being then converted to contributed capital. 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 Consolidated Statement of Income. 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. IHC is also a customer of the EbixHealth JV, and during the twelve months ending December 31, 2017 and 2016 the EbixHealth JV recognized
$13.0 million
and
$11.8 million
of revenue from IHC, respectively, and as of December 31, 2017 IHC had
$1.2 million
of accounts receivable with the EbixHealth JV. Furthermore, as a related party, IHC also has been and continues to be a customer of Ebix, and during the twelve months ending December 31, 2017 and 2016 the Company recognized
$228 thousand
and
$1.4 million
, respectively, of revenue from IHC, and as of December 31, 2017 IHC had
$224 thousand
of accounts receivable due to Ebix. During the twelve-month period ending December 31, 2017 the EbixHealth JV had a net income of
$456 thousand
, and as of December 31, 2017 the EbixHealth JV had net equity balance of
$24.5 million
.
Note 18. Capitalized Software Development Costs
In accordance with the relevant authoritative accounting literature the Company has capitalized certain software and product related development costs associated with both the Company’s continuing medical education service offerings, and the Company’s development of its property and casualty underwriting insurance data exchange platform servicing the London markets. During the year ended
December 31, 2017
and 2016 the Company capitalized
$2.8 million
and
$4.0 million
, respectively, of such development costs. As of
December 31, 2017
and 2016 a total of
$8.5 million
and
$6.0 million
, respectively, of remaining
unamortized development costs are reported on the Company’s consolidated balance sheet. During the year ended December 31, 2017 and 2016 the Company recognized
$2.2 million
and
$1.1 million
, respectively, 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 capitalized continuing medical education product costs are being amortized using a
three
-year to
five
-year straight-line methodology and certain continuing medical education products costs are immediately expensed. The capitalized software development costs for the property and casualty underwriting insurance data exchange platform are being amortized over a period of
five
years.
Note 19. Concentrations of Credit Risk
Credit Risk
The Company is potentially subject to concentrations of credit risk in its accounts receivable. Credit risk is the risk of an unexpected loss if a customer fails to meet its contractual obligations. Although the Company is directly affected by the financial condition of its customers and the loss of or a substantial reduction in orders or the ability to pay from the customer could have a material effect on the consolidated financial statements, management does not believe significant credit risks exist at December 31, 2017. The Company had one customer whose accounts receivable balances individually represented
10%
or more of the Company’s total accounts receivable.
Major Customer
As previously disclosed in Note 17, 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. Vayam is also a customer of the Ebix Vayam Limited JV, and during the twelve months ending December 31, 2017 and 2016 the Ebix Vayam Limited JV recognized
$16.9 million
and
$11.6 million
of revenue from Vayam, respectively, and as of December 31, 2017 Vayam had
$26.8 million
of accounts receivable with the Ebix Vayam Limited JV.
Note 20. Subsequent Events
Amendment to Syndicated Commercial Banking Credit Agreement
On February 21, 2018, Ebix, Inc. and certain of its subsidiaries entered into the Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement. The Sixth Amendment amends the Regions Credit Facility by increasing its existing credit facility from
$450 million
to
$650 million
, to assist in funding its growth. The increase in the bank line was the result of many members of the existing bank group expanding their share of the credit facility and the addition of BBVA Compass and Bank Of The West to the Banking Syndicate, which further diversifies Ebix’s lending group under the credit facility to
ten
participants.The syndicated bank group now comprises
ten
leading financial institutions that include Regions Bank, PNC Bank, BMO Harris Bank, BBVA Compass, Fifth Third Bank, KeyBank, Bank Of The West, Silicon Valley Bank, Cadence Bank and Trustmark National Bank. Regions Bank continued to lead the banking group while serving as the administrative and collateral agent. PNC Bank and BMO Harris Bank were added as co syndication agents, BBVA Compass and Fifth Third Bank as co documentation agent, while Regions Capital Markets, PNC Capital Markets and BMO Harris Bank acted as joint lead arrangers and joint bookrunners. The new credit facility has the following key components; A
five
-year term loan for
$250 million
and a
five
-year revolving credit facility for
$400 million
. The new credit facility, also, allows for up to
$150 million
of incremental facilities. As of closing, the facility interest rates will be based on a leveraged-based pricing grid.
Acquisitions
On February 14, 2018 Ebix acquired the MTSS Business of Transcorp International Limited (BSE:TRANSCOR.BO), for upfront cash consideration of approximately
$7.4 million
, through one of its Indian subsidiaries. Ebix plans on consolidating
this recent acquisition into Ebix's Financial Exchange operations which will bring significant synergies and the elimination of redundancies to the combined operation.
Joint Venture
Effective January 2, 2018 Paul Merchants acquired a
10%
equity interest in Ebix’s combined international remittance business in India (comprised of YouFirst, Wall Street and Paul Merchants) for cash consideration of
$5.0 million
. The consolidation of these acquisitions into Ebix's Financial Exchange operations will bring significant synergies and the elimination of redundancies to the combined operation. As part of this agreement Ebix retains an irrevocable option to reacquire
10%
of the equity interest after one year at a predetermined price.
Dividends
The Company plans to continue with its quarterly cash dividend to the holders of its common stock, whereby a dividend in the amount of
$0.075
per common share will be paid on March 15, 2018 to shareholders of record on February 28, 2018.