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EBIX INC - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
As used herein, the terms "Ebix," "the Company," "we," "our" and "us" refer to
Ebix, Inc., a Delaware corporation, and its consolidated subsidiaries as a
combined entity, except where it is clear that the terms mean only Ebix, Inc.
Safe Harbor for Forward-Looking Statements-This Form 10-Q and certain
information incorporated herein by reference contains forward-looking statements
and information within the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. This information includes
assumptions made by, and information currently available to management,
including statements regarding future economic performance and financial
condition, liquidity and capital resources, acceptance of the Company's products
by the market, and management's plans and objectives. In addition, certain
statements included in this and our future filings with the Securities and
Exchange Commission ("SEC"), in press releases, and in oral and written
statements made by us or with our approval, which are not statements of
historical fact, are forward-looking statements. Words such as "may," "could,"
"should," "would," "believe," "expect," "anticipate," "estimate," "intend,"
"seeks," "plan," "project," "continue," "predict," "will," "should," and other
words or expressions of similar meaning are intended by the Company to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements are found at various
places throughout this report and in the documents incorporated herein by
reference. These statements are based on our current expectations about future
events or results and information that is currently available to us, involve
assumptions, risks, and uncertainties, and speak only as of the date on which
such statements are made.
Our actual results may differ materially from those expressed or implied in
these forward-looking statements. Factors that may cause such a difference,
include, but are not limited to those discussed and identified in Part I,
Item 1A, "Risk Factors" in our 2011 Form 10-K which is incorporated by reference
herein, as well as: the willingness of independent insurance agencies to
outsource their computer and other processing needs to third parties; pricing
and other competitive pressures and the Company's ability to gain or maintain
share of sales as a result of actions by competitors and others; changes in
estimates in critical accounting judgments; changes in or failure to comply with
laws and regulations, including accounting standards, taxation requirements
(including tax rate changes, new tax laws and revised tax interpretations) in
domestic or foreign jurisdictions; exchange rate fluctuations and other risks
associated with investments and operations in foreign countries (particularly in
Australia, Singapore, and India wherein we have significant operations); equity
markets, including market disruptions and significant interest rate
fluctuations, which may impede our access to, or increase the cost of, external
financing; and international conflict, including terrorist acts. Except as
expressly required by the federal securities laws, the Company undertakes no
obligation to update any such factors, or to publicly announce the results of,
or changes to any of the forward-looking statements contained herein to reflect
future events, developments, changed circumstances, or for any other reason.
The important risk factors that could cause actual results to differ materially
from those in our specific forward-looking statements included in this Form 10-Q
include, but are not limited to, the following:
• Regarding Note 4 of the Notes to the Condensed Consolidated Financial
Statements, and our future liquidity needs discussed under "Liquidity and
Financial Condition," as pertaining to our ability to generate cash from
operating activities and any declines in our credit ratings or financial
condition which could restrict our access to the capital markets or
materially increase our financing costs;
• With respect to Note 5 of the Notes to the Condensed Consolidated Financial Statements, "Commitments and Contingencies", and "Contractual
Obligations and Commercial Commitments" in MD&A, as regarding changes in
the market value of our assets or the ultimate actual cost of our
commitments and contingencies;
• With respect to Note 3 of the Condensed Notes to the Condensed
Consolidated Financial Statements as pertaining to the business acquisitions we have made and our ability to efficiently and effectively
integrate acquired business operations, and our ability to accurately
estimate the fair value of tangible and intangible assets;
• With respect this Management Discussion & Analysis of Financial Condition
and Results of Operation and the analysis of the three and nine month
revenue trends including the actual realized level of demand for our
products during the immediately foreseeable future.
Readers should carefully review the disclosures and the risk factors described
in this and other documents we file from time to time with the SEC, including
future reports on Forms 10-Q and 8-K, and any amendments thereto. You may obtain
our SEC filings at our website, www.ebix.com under the "Investor Information"
section, or over the Internet at the SEC's website, www.sec.gov.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Part 1. Item 1 of this Quarterly Report, and the audited consolidated financial
statements and
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notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 2011.
Company Overview
Ebix, Inc. is a leading international supplier of software and e-commerce
solutions to the insurance industry. Ebix provides a variety of application
software products for the insurance industry ranging from carrier systems,
agency systems and data exchanges to custom software development for all
entities involved in insurance and financial services. Our goal is to be the
leading powerhouse of back-end insurance transactions in the world. The
Company's vision is to focus on the convergence of technology platforms for all
insurance channels, processes and entities in a manner such that data can
seamlessly flow once a data entry has been made. Our customers include many of
the top insurance and financial sector companies in the world.
The insurance industry has undergone significant consolidation over the past
several years driven by the need for, and benefits from, economies of scale and
scope in providing insurance services in a competitive environment. The
insurance markets have particularly experienced a steady increase in the desire
to reduce paper-based processes and improve efficiency both at the back-end side
and consumer end side. Such consolidation has involved both insurance carriers
and insurance brokers and is directly impacting the manner in which insurance
products are distributed. Management believes the insurance industry will
continue to experience significant change and increased efficiencies through
online exchanges, as the transition from paper-based processes are increasingly
becoming the norm across world insurance markets. Changes in the insurance
industry are likely to create new opportunities for the Company.
Ebix strives to work collaboratively with clients to develop innovative
technology strategies and solutions that address specific business challenges.
Ebix combines the newest technologies with its capabilities in consulting,
systems design and integration, IT and business process outsourcing,
applications software, and Web and application hosting to meet the individual
needs of insurance and financial service organizations. We intend to expand both
organically and through strategic business acquisitions.
Offices and Geographic Information
The Company has its worldwide headquarters in Atlanta, Georgia with its
international operations being managed from its Singapore offices. The Company
has operations across the United States with offices in Walnut Creek, San Diego,
Pasadena, Fresno, Santa Barbara and Hemet, California; Miami, Florida;
Pittsburgh, Pennsylvania; Park City, Utah; Herndon and Lynchburg, Virginia;
Dallas and Houston, Texas; Norwalk, Connecticut; and Columbus, Ohio, as well as
an additional operating facility in Atlanta, Georgia. The Company also has
offices in Australia, Brazil, China, Japan, New Zealand, United Kingdom, Canada
and India. In these offices, Ebix employs insurance and technology professionals
who provide products, services, support and consultancy to thousands of
customers across six continents. The Company's product development unit in India
has been awarded Level 5 status of the Carnegie Mellon Software Engineering
Institute's Capability Maturity Model Integrated (CMMI), ISO 9001:2000
certification, and ISO 2700 security certification.
Results of Operations - Three Months Ended September 30, 2012 and 2011
Operating Revenue
The Company derives its revenues primarily from subscription and transaction
fees pertaining to services delivered over our exchanges or from our ASP
platforms, fees for business process outsourcing services, and fees for software
development projects including associated fees for consulting, implementation,
training, and project management provided to customers with installed systems.
Ebix's revenue streams come from four product channels. Presented in the table
below is the breakout of our revenues for each of those product channels for the
three and nine months ended September 30, 2012 and 2011, respectively.
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Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 2012 2011 2012 2011
Exchanges $ 43,592 $ 33,021 $ 116,420 $ 96,308
Broker Systems 4,537 4,731 13,713 13,397Business Process Outsourcing ("BPO") 4,252 3,576 11,713
10,948
Carrier Systems 1,423 1,274 3,501 4,266
Totals $ 53,804 $ 42,602 $ 145,347 $ 124,919
During the three months ended September 30, 2012 our total operating revenues
increased $11.2 million or 26%, to $53.8 million as compared to $42.6 million
during the third quarter of 2011. This increase is the result of growth in our
Exchange channel and recent business acquisitions. $6.3 million of operating
revenue pertaining to ADAM, acquired on February 7, 2011, were included in the
Company's revenues reported in its condensed and consolidated statement of
income for the three months ended September 30, 2011. Correspondingly included
in the Company's revenues as reported in its condensed and consolidated
statement of income for the three months ended September 30, 2012 is $5.7
million of ADAM's operating revenue. The Company continues to effectively
leverage product cross-selling opportunities across all channels, as facilitated
by our business acquisitions. With respect to the business acquisitions
completed during fiscal year 2011 through the third fiscal quarter of 2012 on a
pro forma basis, as disclosed in the table in Note 3 "Business Combinations" to
the condensed consolidated financial statements, combined revenues increased
3.5% for the three month period ending September 30, 2012 as compared to the
same three month in 2011, whereas there was a 26.3% increase in reported
revenues for the same comparative periods. The 3.5% increase in pro forma
revenue is associated with a 4.9% increase in the revenues for three month
period ending September 30, 2012 versus 2011 pertaining to the businesses
acquired within these periods (i.e. ADAM, HealthConnect, BSI, Taimma,
PlanetSoft, Fintechnix, and TriSystems) which includes increases in revenues for
these businesses that was generated since Ebix acquired them as facilitated by
product cross selling initiatives with the Company's pre-existing divisions and
customer base, partially offset by a 1.4% decrease in revenues associated with
Ebix's legacy operations preceding these business acquisitions. The cause for
the difference between the 26.3% increase in reported revenue for the three
month period ending September 30, 2012 as compared to the same period in 2011,
versus the 3.5% increase in pro forma revenue for the three month ending
September 30, 2012 as compared to the same period in 2011 is due to the effect
of combining the additional revenue derived from those businesses acquired
during these periods with the Company's pre-existing operations. Also partially
effecting reported revenues was the impact from fluctuations in the exchange
rates of the foreign currencies in the countries in which we conduct operations.
During the three months ended September 30, 2012 and 2011 the change in foreign
currency exchange rates (decreased)/increased reported consolidated operating
revenues by approximately $(0.7) million and $1.5 million, respectfully.
Cost of Services Provided
Costs of services provided, which includes costs associated with maintenance,
support, call center, consulting, implementation and training services,
increased $790 thousand or 9%, from $8.7 million in the third quarter of 2011 to
$9.5 million in the third quarter of 2012. This increase is due to additional
personnel costs and professional service expenses in support of expanded revenue
streams associated with recent business acquisitions completed during 2012 and
2011.
Product Development Expenses
The Company's product development efforts are focused on the development of new
operating technologies and services for use by insurance carriers, brokers and
agents, and the development of new data exchanges for use in both the domestic
and international insurance and financial service industries. Product
development expenses increased $2.1 million or 43% from $5.0 million during the
third quarter of 2011 to $7.1 million during the third quarter of 2012. This
increase is attributable to additional personnel and staffing costs associated
with increased software and system development activities in our India operating
unit in support of our Exchange channel and recent business acquisitions.
Sales and Marketing Expenses
Sales and marketing expenses increased $906 thousand or 26%, from $3.4 million
in the third quarter of 2011 to $4.3 million in the third quarter of 2012. This
increase is attributable to personnel and staffing costs associated with
additional sales personnel added in support of our Exchange channel.
General and Administrative Expenses
General and administrative expenses increased by $3.9 million or 67% from $5.8
million in the third quarter of 2011 to $9.7
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million in the third quarter of 2012. This increase is partially due to the fact
that in Q3 of 2011 the Company recognized a $1.2 million net reduction to
previously recorded contingency based earn-out accruals pertaining to business
acquisitions made during 2009 and 2010. Also contributing to the increase of
general and administrative expenses were $1.4 million of additional personnel
related costs associated with recent business acquisitions made over the last
twelve months, $0.3 million increase in legal fees, and a $0.3 million increase
in insurance costs.
Amortization and Depreciation Expenses
Amortization and depreciation expenses increased $720 thousand or 41%, from $1.7
million in the third quarter of 2011 to $2.5 million in the third quarter of
2012. This increase due to $545 thousand of additional amortization costs
associated with the customer relationship and developed technology intangible
assets that were acquired in connection with recent business combinations
completed over the last twelve months, and $204 thousand of additional
depreciation expense associated with capital expenditures made to expand our
operations and facilities.
Interest Expense
Interest expense increased $222 thousand or 102%, from $218 thousand in the
third quarter of 2011 to $440 thousand in the third quarter of 2012. Interest
expense increased due to the fact that the outstanding balance on the Company's
revolving credit facility increased from $10.2 million at September 30, 2011 to
$37.8 million at September 30, 2012.
Other Non-Operating Income
Other non-operating income for the three months ended September 30, 2012 in the
amount of $414 thousand pertains to the gain recognized in regards to the
decrease in the fair value of the put option that was issued to the former
stockholders of PlanetSoft, acquired by Ebix in June 2012, who received shares
of Ebix common stock as part of the acquisition consideration paid by the
Company.
Income Taxes
The Company recognized income tax expense of $2.2 million for the three months
ended September 30, 2012, as compared to $1.1 million for third quarter of 2011.
Comparatively the income tax expense increased from a year earlier due to an
increase in the effective tax rate, the provision recorded this quarter to
increase our reserves for unrecognized tax benefits, and the fact that during
the third quarter of 2011 the Company recorded a tax benefit in the amount of
$403 thousand as a result of recognizing enhanced research and development tax
deductions applicable to our Singapore operations retroactive back to the year
2010. The Company's effective tax rate used in the determination of its interim
period tax provision for the quarter was 10.35% as compared to the 8.94%
effective tax rate for the same period a year earlier. The effective rate
increased due to a greater proportion of our taxable income being generated from
jurisdictions with higher tax rates. The Company's interim period income tax
provisions are based on our estimate of the effective income tax rate for the
full current year, after eliminating discrete items uniquely related to the
respective interim reporting period. During the third quarter the Company
recognized a discrete income tax expense in the amount of $634 thousand with
respect to an increase to our liability reserves for unrecognized tax benefits.
Results of Operations - Nine Months Ended September 30, 2012 and 2011
Operating Revenue
During the nine months ended September 30, 2012 our total operating revenues
increased $20.4 million or 16%, to $145.3 million as compared to $124.9 million
during the same period in 2011. This increase is the result of growth in our
Exchange channel primarily due to recent business acquisitions. $16.9 million of
operating revenue pertaining to ADAM, acquired on February 7, 2011, were
included in the Company's revenues reported in its condensed and consolidated
statement of income for the nine months ended September 30, 2011.
Correspondingly included in the Company's revenues as reported in its condensed
and consolidated statement of income for the nine months ended September 30,
2012 is $18.0 million of ADAM's operating revenue. With respect to the business
acquisitions completed during fiscal year 2011 through the third fiscal quarter
of 2012 on a pro forma basis, as disclosed in the table in Note 3 "Business
Combinations" to the condensed consolidated financial statements, combined
revenues increased 1.3% for the nine month period through the third fiscal
quarter of 2012 as compared to the nine month period through the third fiscal
quarter of 2011, whereas there was a 16.4% increase in reported revenues for the
same comparative periods. The 1.3% increase in pro forma revenue is associated
with a 2.4% increase in the revenues for nine month period through the third
quarter 2012 versus 2011 pertaining to the businesses acquired during these
periods (i.e. ADAM, HealthConnect, BSI, Taimma, PlanetSoft, Fintechnix, and
TriSystems) which includes increases in revenues for these businesses that was
generated since Ebix acquired them as facilitated by product cross selling
initiatives with the Company's pre-existing divisions and customer base,
partially offset by a 1.1% decrease in revenues associated with Ebix's legacy
operations preceding
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these business acquisitions. The cause for the difference between the 16.4%
increase in reported revenue for the nine month period through the third quarter
2012 revenue as compared to the same period in 2011, versus the 1.3% increase in
pro forma revenue for the nine month period through the third quarter of 2012 as
compared to the same period in 2011 is due to the effect of combining the
additional revenue derived from those businesses acquired during these periods
with the Company's pre-existing operations. Also partially effecting reported
revenues was the impact from fluctuations in the exchange rates of the foreign
currencies in the countries in which we conduct operations. During the nine
months ended September 30, 2012 and 2011 the change in foreign currency exchange
rates (decreased)/increased reported consolidated operating revenues by
approximately $(1.3) million and $4.3 million, respectfully.
Costs of Services Provided
Costs of services provided, increased $2.8 million or 11% during the nine months
ended September 30, 2012 to $27.7 million as compared to $24.9 million incurred
during the same period in 2011. This increase is due to additional personnel
costs and professional services expenses in support of our increased revenue
streams from the growth in our Exchange channel and from recent business
acquisitions completed during last twelve months.
Product Development Expenses
Product development expenses increased $2.8 million or 19% during the nine
months ended September 30, 2012 to $17.2 million as compared to $14.4 million of
costs incurred during the same period in 2011. This increase is attributable to
additional personnel and staffing costs associated with increased software and
system development activities in our India operating unit in support of our
Exchange channel and recent business acquisitions.
Sales and Marketing Expenses
Sales and marketing expenses increased $2.9 million or 30% during the nine
months ended September 30, 2012 to $12.5 million as compared to $9.6 million
recognized during the same period in 2011. This increase is attributable to
additional personnel, advertising, and trade show costs in support of our
Exchange channel and recent business acquisitions.
General and Administrative Expenses
General and administrative ("G&A") expenses increased $6.5 million or 35% for
the nine months ended September 30, 2012 to $24.7 million from $18.2 million for
same period in 2011. Included in G&A costs for the current nine month interim
period is the net benefit in the approximate amount of $971 thousand related to
a termination fee received by the Company in connection with a failed business
acquisition (net of directly related internal operating costs incurred by the
Company and a portion of the fee that had to be paid to our investment banker).
Offsetting this benefit is a $3.2 million adverse year over year variance caused
by the fact that in second and third quarters of 2011 the Company recognized a
reduction to previously recorded contingency based earn-out accruals pertaining
to business acquisitions made during 2010/2009, and $2.8 million of additional
personnel related costs associated with recent business acquisitions made over
the last nine months.
Amortization and Depreciation Expenses
Amortization and depreciation expenses increased by $954 thousand or 17% during
the nine months ended September 30, 2012 to $6.6 million as compared to $5.6
million recorded during the same period in 2011. This increase is due to $672
thousand of additional amortization costs associated with the customer
relationship and developed technology intangible assets that were acquired in
connection with recent business combinations completed over the last twelve
months, and $282 thousand of additional depreciation expense associated with
capital expenditures made to expand our operations and facilities.
Interest Expense
Interest expense increased $413 thousand or 70%, from $592 thousand during the
nine months ended September 30, 2011 to $1.0 million for the nine months ended
September 30, 2012. Interest expense increased due to the fact that the average
outstanding balance on the Company's revolving credit facility increased from
$19.5 million for the prior year nine-month period in 2011 as compared to the
$30.6 million for the current nine month period in 2012.
Other Non-Operating Income
Other non-operating income for the nine months ended September 30, 2012 in the
amount of $676 thousand pertains to the cumulative gain recognized in regards to
the decrease in the fair value of the put option that was issued to the former
stockholders
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of PlanetSoft, acquired by Ebix in June 2012, whom received shares of Ebix
common stock as part of the acquisition consideration paid by the Company.
Income Taxes
The Company recognized income tax expense in the amount of $6.7 million for the
nine months ended September 30, 2012 as compared to a net tax benefit in the
amount of $168 thousand recognized for the nine months ending September 30,
2011. Compared to the same nine month period from a year earlier income tax
expense increased due to an increase in the effective tax rate, the provisions
recorded this year to increase our reserves for unrecognized tax benefits, the
fact that in the third quarter of 2011 the Company recognized a net tax benefit
in the amount of $4.6 million in connection with the release of the remaining
valuation allowances that had been held against deferred tax assets associated
with tax net operating losses carry forwards obtained from prior business
acquisition, and during the third quarter of 2011 the Company recorded a tax
benefit in the amount of $403 thousand as a result of recognizing enhanced
research and development tax deductions applicable to our Singapore operations
retroactive back to the year 2010. The Company's effective tax rate used in the
determination of the interim period tax provision for the nine months ending
September 30, 2012 was 10.35% as compared to the 8.94% effective tax rate for
the same period a year earlier. The effective rate increased due to a greater
proportion of our taxable income being generated from jurisdictions with higher
tax rates. The Company's interim period income tax provisions are based on our
estimate of the effective income tax rate for the full current year, after
eliminating discrete items uniquely related to the respective interim reporting
period. During the nine months ended September 30, 2012 the Company recognized
total discrete income tax expense in the amount of $1.2 million with respect to
an increase in our liability reserves for unrecognized tax benefits.
Dividends, Liquidity and Capital Resources
The Company's ability to generate significant cash flows from its ongoing
operating activities is one of our fundamental financial strengths. Our
principal sources of liquidity are the cash flows provided by the Company's
operating activities, our commercial banking credit facility, and cash and cash
equivalents on hand. Due to the effect of temporary or timing differences
resulting from the differing treatment of items for tax and accounting purposes
(including the treatment of net operating loss carryforwards and minimum
alternative tax obligations in the U.S. and India), future cash outlays for
income taxes are expected to exceed income tax expense. We intend to utilize
cash flows generated by our operations, in combination with our bank credit
facility, and the possible issuance of additional equity or debt securities, to
fund capital expenditures and organic growth initiatives, to make strategic
business acquisitions in the insurance and financial services sector, and to
repurchase shares of our common stock as market conditions warrant.
In the 4th quarter of 2011 the Company paid its first quarterly dividend in the
amount of $0.04 per common share. This same quarterly dividend per share was
paid again in February 2012. The dividend rate was increased to $0.05 effective
with the dividend payment made in May 2012, and the same dividend payment was
made in August 2012 and will again be made in November 2012. On November 7, 2012
Ebix's Board of Directors increased the regular quarterly dividend by 50% to 7.5
cents per outstanding share of the Company's common stock to be paid in February
2013 and is expected to continue on a quarterly basis thereafter. The Company
intends to use a portion of its operating cash flows to continue issuing similar
quarterly dividends to its shareholders in the foreseeable future, while
remaining dedicated to using most of its cash to generate improvement in future
earnings by funding organic growth initiatives and accretive business
acquisitions.
We believe that anticipated cash flows provided by our operating activities,
together with current cash and cash equivalent balances, access to our credit
facilities, and access to the capital markets, if required and available, will
be sufficient to meet our projected cash requirements for the next twelve
months, and the foreseeable future thereafter, although any projections of
future cash needs, cash flows, and the condition of the capital markets in
general, as to the availability of debt and equity financing, are subject to
substantial uncertainty. In the event additional liquidity needs arise, we may
raise funds from a combination of sources, including the potential issuance of
debt or equity securities.
We continue to strategically evaluate our ability to issue additional equity or
debt securities, to expand existing or obtain new credit facilities from lenders
in order to strengthen our financial position. We regularly evaluate our
liquidity requirements, including the need for additional debt or equity
offerings, when considering potential business acquisitions and repurchases of
our common stock.
Our cash and cash equivalents were $29.5 million and $23.7 million at
September 30, 2012 and December 31, 2011, respectively. Our cash and cash
equivalents balance has increased by $5.8 million since year end 2011, as a
result of both cash generated by our ongoing operating activities and funds
provided by our new financing facility with Citi Bank. The Company holds
material cash and cash equivalent balances overseas in foreign jurisdictions.
The free flow of cash from certain countries where we hold such balances may be
subject to repatriation tax effects and other restrictions. Furthermore, the
repatriation of earnings from some of our foreign subsidiaries would result in
the application of withholding taxes at source as well as a tax at
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the U.S. parent level upon receipt of the repatriated amounts. The approximate
cash, cash equivalents, and short-term investments balances held in our domestic
U.S. operations and each of our foreign subsidiaries as of November 5, 2012 is
presented in the table below (figures denominated in thousands):
United
States Canada Latin America Australia Singapore New Zealand India Europe Sweden Total
Cash and ST
investments $ 14,009 $ 2,609 $ 1,603 $ 6,673 $ 1,579 $ 1,655 $ 1,316 $ 1,936 $ 15 $ 31,395
Our current ratio decreased modestly to 1.26 at September 30, 2012 from 1.28 at
December 31, 2011 although our working capital position increased to $15.8
million at September 30, 2012 from $14.0 million at the end of the 2011. The
Company's accounts receivable DSO stood at 61 days at September 30, 2012 and
reflects a continuing favorable trend being down 3 days from December 31, 2011
and 6 days from the third quarter of 2011. We continue to believe that our
ability to generate sustainable and robust cash flows from operations will
enable the Company to continue to fund its current liabilities from current
assets including available cash balances for the foreseeable future.
Business Combinations
The Company executes accretive business acquisitions in combination with organic
growth initiatives as part of its comprehensive business growth and expansion
strategy. The Company looks to acquire businesses that are complementary to
Ebix's existing products and services. During the nine months ended
September 30, 2012 the Company executed and completed five business acquisitions
including PlanetSoft, Inc. which is discussed further below; the other
acquisitions were not material individually or in the aggregate.
A significant component of the purchase price consideration for many of the
Company's business acquisitions is a potential future cash earnout based on
reaching certain specified future revenue targets. The Company recognizes these
potential obligations as contingent liabilities. These contingent consideration
liabilities are recorded at fair value on the acquisition date and are
re-measured quarterly based on the then assessed fair value and adjusted if
necessary. As of September 30, 2012, the total of these contingent liabilities
was $30.0 million, of which $23.7 million is reported in long-term liabilities,
and $6.2 million is included current liabilities in the Company's Condensed
Consolidated Balance Sheet. As of December 31, 2011 the total of these
contingent liabilities was $7.6 million which were included accounts payable and
accrued liabilities in the Company's Consolidated Balance Sheet.
Operating Activities
Net cash provided by our operating activities was $54.0 million for the nine
months ended September 30, 2012. The primary components of the cash provided by
operations during this nine months interim period consisted of net income of
$51.8 million, net of $(280) thousand of net non-cash gains recognized on
derivative instruments and foreign currency exchange, $6.6 million of
depreciation and amortization, $(5.7) million of working capital requirements
primarily associated with increased accounts outstanding trade accounts
receivable and reductions to trade payables and accrued liabilities, and $1.6
million of non-cash share-based compensation.
Net cash provided by our operating activities was $22.1 million for the
three-month period ended September 30, 2011. The primary components of the cash
provided by operations during that nine month period consisted of net income of
$54.0 million, net of $(2.2) million of net non-cash gains recognized on
derivative instruments and foreign currency exchange, $5.6 million of
depreciation and amortization, $(7.2) million of working capital requirements
primarily associated with reductions to trade payables and accrued liabilities,
and increased receivables from customers, and $1.7 million of non-cash
share-based compensation.
Investing Activities
Net cash used for investing activities during the nine months ended
September 30, 2012 was $58.9 million, of which $54.1 million in the aggregate
was used to complete business acquisitions closed during the year, $2.0 million
was used for the investment in CurePet, $1.5 million was used in payment of an
earnout obligation in connection with our 2010 acquisition of MCN in Brazil,
$1.5 million was used for capital expenditures pertaining to the enhancement of
our technology platforms and the purchases of operating equipment to support our
expanding operations. Partially offsetting these investment cash outflows was
$146 thousand of net cash in-flow from maturities of marketable securities
(specifically bank certificates of deposit), net of purchases.
Net cash provided from investing activities during the nine months ended
September 30, 2011 totaled $5.7 million which
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consisted of $4.6 million from maturities of marketable securities (specifically
bank certificates of deposit), net of purchases, and $3.5 million of net cash
obtained in connection with the acquisition of ADAM in February 2011. Partially
offsetting these investing cash inflows were $1.9 million used for capital
expenditures and $577 thousand used to settle earn out obligations in connection
with a prior business acquisition.
Financing Activities
During the nine months ended September 30, 2012 net cash provided by financing
activities was $13.7 million which consisted of $27.9 million provided from the
Company's term loan with Citibank (net of the repayment of the remaining balance
from the then pre-existing term loan with BOA), $6.1 million provided from our
commercial bank revolving credit facility with Citibank (net of repayments), and
$739 thousand of proceeds from the exercise of common stock options. Partially
offsetting these aggregate cash proceeds was $15.2 million used to repurchase
shares of our common stock, $5.2 million used to pay quarterly dividends to our
common stockholders, and $829 thousand used to make principal payments on
long-term debt and capital lease obligations.
During the nine months ended September 30, 2011 net cash used in financing
activities was $66.8 million. This net financing cash outflow consisted of $56.5
million used to complete open market repurchases of our common stock, $14.8
million was used to reduce the balance of our commercial bank revolving credit
facility, $4.7 million used to make scheduled principal payments on our term
loan facility, $6.8 million used to fully settle convertible debt obligations,
and $253 thousand was used towards principal repayments on existing capital
lease obligations, all being partially offset by $16.3 million of proceeds from
our expanded commercial banking financing facility, net of repayments.
Commercial Bank Financing Facility
On April 26, 2012 Ebix entered into a credit agreement providing for a $100
million secured syndicated credit facility (the "Secured Syndicated Credit
Facility") with Citi Bank, N.A. as administrative agent and Citibank, N.A.,
Wells Fargo Capital Finance, LLC, and RBS Citizens, N.A. as joint lenders. The
financing is comprised of a four-year, $45 million secured revolving credit
facility, a $45 million secured term loan which amortizes over a four year
period with quarterly principal and interest payments that commenced on June 30,
2012 and a final payment of all remaining outstanding principal and accrued
interest due on April 26, 2016, and an accordion feature that provides for the
expansion of the credit facility by an additional $10 million. This new $100
million credit facility with Citibank, N.A., as administrative agent, replaced
the former $55 million facility that the Company had in place with Bank of
America, N.A. The interest rate applicable to the Secured Syndicated Credit
Facility is LIBOR plus 1.50% or currently 1.74%. Under the Secured Syndicated
Credit Facility the maximum interest rate that could be charged depending upon
the Company's leverage ratio is LIBOR plus 2.00%. The credit facility is and
will be used by the Company to fund working capital requirements primarily in
support of current operations, organic growth, and accretive business
acquisitions. The underlying financing agreement contains financial covenants
regarding the Company's annualized EBITDA, fixed charge coverage ratio, and
leverage ratio, as well as certain restrictive covenants pertaining to such
matters as the incurrence of new debt, the aggregate amount of repurchases of
the Company's equity shares, and the consummation of new business acquisitions.
The Company currently is in compliance with all such financial and restrictive
covenants.
On April 26, 2012, Ebix fully paid all of its obligations and related fees then
outstanding to Bank of America N.A. ("BOA") and as pertaining to the related
Credit Agreement dated February 12, 2010 (as amended). The aggregate amount of
the payment was $45.1 million and was funded from a portion of the proceeds of
the Citibank led Secured Syndicated Credit Facility discussed immediately above.
Upon the effective date this payoff, BOA's commitment to extend further credit
to the Company terminated.
At September 30, 2012, the outstanding balance on the Company's revolving line
of credit with Citibank was $37.8 million and the facility carried an interest
rate of 1.74%. This balance is included in the long-term liabilities section of
the Condensed Consolidated Balance Sheets. Regarding the Company's revolving
line of credit during the nine months ended September 30, 2012, the average
outstanding balance was $30.6 million and the maximum outstanding balance was
$37.8 million.
At September 30, 2012, the outstanding balance on the Company's term loan with
Citibank was $42.9 million of which $11.0 million is due within the next twelve
months. This term loan also carried an interest rate of 1.74%. During the nine
months ended September 30, 2012, $2.1 million of scheduled payments were against
the existing term loan with Citibank, and $1.7 million of scheduled payments
were made against the term loan previously with BOA. 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.
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Off-Balance Sheet Arrangements
We do not engage in off -balance sheet financing arrangements.
Contractual Obligations and Commercial Commitments
The following table summarizes our significant contractual purchase obligations
and other long-term commercial commitments as of September 30, 2012. The table
excludes obligations or commitments that are contingent based on events or
factors uncertain at this time.
Payment Due by Period
Less Than More than
Total 1 Year 1-3 Years 3-5 Years 5 years
(in thousands)
Revolving line of credit $ 37,840 $ - $ 37,840 $ - $ -
Long-term debt $ 45,338 $ 11,600 $ 33,738 $ - $ -
Operating leases $ 16,105 $ 5,045 $ 6,007 $ 3,071 $ 1,982
Capital leases $ 640 $ 333 $ 307 $ - $ -
Total $ 99,923 $ 16,978 $ 77,892 $ 3,071 $ 1,982
Recent Accounting Pronouncements
For information about new accounting pronouncements and the potential impact on
our Consolidated Financial Statements, see Note 1 of the condensed notes to the
condensed consolidated financial statements in this Form 10-Q and Note 1 of the
notes to consolidated financial statements in our 2011 Form 10-K.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP"), as promulgated in the United States, requires
our management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities in our Condensed Consolidated Financial
Statements and accompanying notes. We believe the most complex and sensitive
judgments, because of their significance to the Condensed Consolidated Financial
Statements, result primarily from the need to make estimates and assumptions
about the effects of matters that are inherently uncertain. The following
accounting policies involve the use of "critical accounting estimates" because
they are particularly dependent on estimates and assumptions made by management
about matters that are uncertain at the time the accounting estimates are made.
In addition, while we have used our best estimates based on facts and
circumstances available to us at the time, different estimates reasonably could
have been used in the current period, and changes in the accounting estimates
that we used are reasonably likely to occur from period to period which may have
a material impact on our financial condition and results of operations. For
additional information about these policies, see Note 1 of the Condensed Notes
to the Condensed Consolidated Financial Statements in this Form 10-Q. Although
we believe that our estimates, assumptions and judgments are reasonable, they
are limited based upon information presently available. Actual results may
differ significantly from these estimates under different assumptions, judgments
or conditions.
Revenue Recognition
The Company derives its revenues primarily from subscription and transaction
fees pertaining to services delivered over our exchanges or from our ASP
platforms, fees for business process outsourcing services, and fees for software
development projects including associated fees for consulting, implementation,
training, and project management provided to customers with installed systems.
In accordance with FASB and Securities and Exchange Commission Staff Accounting
(the "SEC") accounting guidance on revenue recognition the Company considers
revenue earned and realizable when: (a) persuasive evidence of the sales
arrangement exists, provided that the arrangement fee is fixed or determinable,
(b) delivery or performance has occurred, (c) customer acceptance has been
received, if contractually required, and (d) collectability of the arrangement
fee is probable. The Company generally uses signed contractual agreements as
persuasive evidence of a sales arrangement. We apply the provisions of the
relevant generally accepted accounting principles related to all transactions
involving the license of software where the software deliverables are considered
more than inconsequential to the other elements in the arrangement.
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For contracts that contain multiple deliverables, we analyze the revenue
arrangements in accordance with the relevant technical accounting guidance,
which provides criteria governing how to determine whether goods or services
that are delivered separately in a bundled sales arrangement should be
considered as separate units of accounting for the purpose of revenue
recognition. Generally these types of arrangements include deliverables
pertaining to software licenses, system set-up, and professional services
associated with product customization or modification. Delivery of the various
contractual elements typically occurs over periods of less than eighteen months.
These arrangements generally do not have refund provisions or have very limited
refund terms.
Software development arrangements involving significant customization,
modification or production are accounted for in accordance with the appropriate
technical accounting guidance issued by FASB using the percentage-of-completion
method. The Company recognizes revenue using periodic reported actual hours
worked as a percentage of total expected hours required to complete the project
arrangement and applies the percentage to the total arrangement fee.
Allowance for Doubtful Accounts Receivable
Management specifically analyzes accounts receivable and historical bad debts,
write-offs, customer concentrations, customer credit-worthiness, current
economic trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts.
Valuation of Goodwill
Goodwill represents the cost in excess of the fair value of the net assets of
acquired businesses. Indefinite-lived intangible assets represent the fair value
of acquired contractual customer relationships for which future cash flows are
expected to continue indefinitely. In accordance with the relevant FASB
accounting guidance, goodwill and indefinite-lived intangible assets are not
amortized but are tested for impairment at the reporting unit level on an annual
basis or on an interim basis if an event occurs or circumstances change that
would likely have reduced the fair value of a reporting unit below its carrying
value. Potential impairment indicators include a significant change in the
business climate, legal factors, operating performance indicators, competition,
and the sale or disposition of a significant portion of the business. The
impairment evaluation process involves an assessment of certain qualitative
factors to determine whether the existence of events or circumstances would
indicate that it is more likely than not that the fair value of any of our
reporting units was less than its carrying amount. If after assessing the
totality of events or circumstances, we were to determine that it is not more
likely than not that the fair value of a reporting unit is less than its
carrying amount, then we would not perform the two-step quantitative impairment
testing described further below.
The aforementioned two-step quantitative testing process involves comparing the
reporting unit carrying values to their respective fair values. We determine the
fair value of our reporting units by applying the discounted cash flow method
using the present value of future estimated net cash flows. If the fair value of
a reporting unit exceeds its carrying value, then no further testing is
required. However, if a reporting unit's fair value were to be less than its
carrying value, we would then determine the amount of the impairment charge, if
any, which would be the amount that the carrying value of the reporting unit's
goodwill exceeded its implied value. Projections of cash flows are based on our
views of growth rates, operating costs, anticipated future economic conditions
and the appropriate discount rates relative to risk and estimates of residual
values. We believe that our estimates are consistent with assumptions that
marketplace participants would use in their estimates of fair value. The use of
different estimates or assumptions for our projected discounted cash flows
(e.g., growth rates, future economic conditions, discount rates and estimates of
terminal values) when determining the fair value of our reporting units could
result in different values and may result in a goodwill impairment charge. We
perform our annual goodwill impairment evaluation and testing as of
September 30th of each year. This evaluation is done during the fourth quarter
each year. During the year ended December 31, 2011 we had no impairment of our
reporting unit goodwill balances.
Income Taxes
Deferred income taxes are recorded to reflect the estimated future tax effects
of differences between financial statement and tax basis of assets, liabilities,
operating losses, and tax credit carry forwards using the tax rates expected to
be in effect when the temporary differences reverse. Valuation allowances, if
any, are recorded to reduce deferred tax assets to the amount management
considers more likely than not to be realized. Such valuation allowances are
recorded for the portion of the deferred tax assets that are not expected to be
realized based on the levels of historical taxable income and projections for
future taxable income over the periods in which the temporary differences will
be deductible.
The Company also applies FASB accounting guidance on accounting for uncertainty
in income taxes positions. This guidance clarifies the accounting for
uncertainty in income taxes by prescribing the minimum recognition threshold a
tax position is required
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to meet before being recognized in the financial statements.
Foreign Currency Matters
Historically the functional currency for the Company's foreign subsidiaries in
India and Singapore had been the Indian rupee and Singapore dollar respectively.
As a result of the Company's rapid growth, including its recent acquisition of
PlanetSoft, and the expansion of its intellectual property research and
development activities in its Singapore subsidiary, and its product development
activities and information technology enabled services for the insurance
industry provided by its India subsidiary in support of Ebix's operating
divisions across the world (both of which are transacted in U.S. dollars),
management undertook a reconsideration of functional currency designations for
these two foreign subsidiaries in India and Singapore, and concluded that
effective July 1, 2012 the functional currency for these entities should be
changed to the U.S. dollar. Management believes that the acquisition of
PlanetSoft in combination with the other four business acquisitions completed
during the current year and the cumulative effect of business acquisitions made
over the last few years which in turn has necessitated the rapid growth of the
Company's operations in India and Singapore, were indicative of a significant
change in the economic facts and circumstances that justified the
reconsideration and ultimate change in the functional currency. Had the change
in the functional currency designation for our India and Singapore subsidiaries
not been made, the Company would have incurred and recognized approximately
$1.25 million of foreign currency exchange losses for the three months ended
September 30, 2012. Furthermore, a portion of the monetary assets and
liabilities for these two foreign subsidiaries that are denominated in foreign
currencies are re-measured into U.S. dollars at the exchange rates in effect at
each reporting date. These corresponding re-measurement gains and losses are
included as a component of foreign currency exchange gains and losses in the
accompanying Condensed Consolidated Statements of Income and amounted to a $422
thousand loss for the three months ended September 30, 2012.
The functional currency of the Company's other foreign subsidiaries is the local
currency of the country in which the subsidiary operates. The assets and
liabilities of these foreign subsidiaries are translated into U.S. dollars at
the rates of exchange at the balance sheet dates. Income and expense accounts
are translated at the average exchange rates in effect during the period. Gains
and losses resulting from translation adjustments are included as a component of
other comprehensive income in the accompanying Condensed Consolidated Balance
Sheets. Foreign exchange transaction gains and losses that are derived from
transactions denominated in a currency other than the subsidiary's functional
currency are included in the determination of net income.
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