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EBIX INC - 10-Q/A - : 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 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; and,
• With respect this Management Discussion & Analysis of Financial Condition and Results of Operation and the analysis of the three and six 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 web site, www.sec.gov.
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The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Part 1. Item 1 of this Quarterly Report, and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2011.
Company Overview
Ebix, Inc. is a leading international supplier of software and e-commerce
solutions to the insurance and financial industries. Ebix provides a variety of
application software products for the insurance and financial industries 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 backend 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 and financial service industries have undergone significant
consolidation over the past several years driven by the need for, and benefits
from, economies of scale and scope in providing insurance and financial 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 continue to expand
both organically and through strategic business acquisitions.
Offices and Geographic Information
The Company has its worldwide headquarters in Atlanta, Georgia with its
international operations being managed from its Singapore offices. The Company
has operations across the United States with offices in Walnut Creek, San Diego,
Pasadena, and Hemet, California; Miami, Florida; Pittsburgh, Pennsylvania; Park
City, Utah; Herndon and Lynchburg, Virginia; Dallas and Houston, Texas; and
Columbus, Ohio, as well as an additional operating facilities 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 June 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.
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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 six months ended June 30, 2012 and 2011, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2012 2011 2012 2011
Exchanges $ 38,182 $ 32,222 $ 72,828 $ 63,287
Broker Systems 4,422 4,824 9,176 8,666
Business Process Outsourcing ("BPO") 3,890 3,753 7,461 7,372
Carrier Systems 1,222 1,468 2,078 2,992
Totals $ 47,716 $ 42,267 $ 91,543 $ 82,317
During the three months ended June 30, 2012 our total operating revenues
increased $5.4 million or 13%, to $47.7 million as compared to $42.3 million
during the second quarter of 2011. This increase is the result of growth in our
Exchange channel and recent business acquisitions. $6.4 million of operating
revenues pertaining to our acquisition of ADAM in 2011 were recognized since its
acquisition on February 7, 2011were included in the Company's revenues reported
in its condensed and consolidated statement of income for the three months ended
June 30, 2011. Correspondingly included in the Company's revenues as reported in
its condensed and consolidated statement of income for the three months ended
June 30, 2012 is $6.0 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. 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 June 30, 2012 and 2011 the change in foreign currency exchange
rates (decreased)/increased reported consolidated operating revenues by
approximately $(1.0) million and $1.7 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 $243 thousand or 3%, from $8.9 million in the second quarter of 2011
to $9.2 million in the second quarter of 2012. This increase is due to
additional personnel costs and professional service expenses in support of new
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 services industries. Product
development expenses increased $1.0 million or 21% from $4.8 million during the
second quarter of 2011 to $5.8 million during the second quarter of 2012. This
increase is attributable to increased software and system development activities
in our India and Singapore operating units in support of our Exchanges and
recent business acquisitions.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.0 million or 32%, from $3.3 million in
the second quarter of 2011 to $4.3 million in the second quarter of 2012. This
increase is attributable to personnel costs and trade show expenses associated
with additional sales personnel and related marketing activities in support of
our Exchange and Carrier System channels.
General and Administrative Expenses
General and administrative expenses increased by $3.9 million or 83% from $4.7
million in the second quarter of 2011 to $8.6 million in the second quarter of
2012. This increase is partially due to the fact that in Q2 of 2011 the Company
recognized a $1.9 million net reduction to previously recorded contingency based
earn-out accruals pertaining to business acquisitions made during 2010. Also
causing the increase to general and administrative expenses is $1.0 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 $170 thousand or 9%, from $2.0
million in the second quarter of 2011 to $2.2 million in the second quarter of
2012. This increase is essentially due to $228 thousand of additional
amortization costs associated with the customer relationship and developed
technology intangible assets that were recognized in connection with recent
business combinations completed over the last nine months.
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Income Taxes
The Company recognized an income tax expense of $2.3 million for the three
months ended June 30, 2012. The Company's effective tax rate used in the
determination of its interim period tax provision for the quarter was 10.46% as
compared to the 8.83% 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
rates applicable to related annual twelve month period, after eliminating
discrete items uniquely related to the respective interim reporting period.
During the second quarter the Company recognized a discrete income tax expense
in the amount of $578 thousand with respect to an increase to our recorded
liability reserves for unrecognized tax benefits.
Results of Operations - Six Months Ended June 30, 2012 and 2011
Operating Revenue
During the six months ended June 30, 2012 our total operating revenues increased
$9.2 million or 11%, to $91.5 million as compared to $82.3 million during the
same period in 2011. During this period $12.2 million of operating revenue was
recognized in connection with our 2011 acquisition of ADAM and included in the
Company's revenues reported in its condensed and consolidated statement of
income. Correspondingly included in the Company's revenues as reported in its
condensed and consolidated statement of income for the six months ended June 30,
2011 was $10.6 million of ADAM's operating revenue since the February 7, 2011
effective date of its acquisition. With respect to the acquisitions of ADAM
completed in February 2011 and PlanetSoft completed in June 2012 presented on a
pro forma basis, as disclosed in the table in Note 3 "Business Combinations" to
the enclosed consolidated financial statements, combined revenues increased 6.3%
for the six months ending June 30, 2012 versus the six months ending June 30,
2011, whereas there was a 11.2% increase in reported revenues for the same
comparative periods. The 6.3% increase in pro forma revenues is primarily
associated with a 3.5% increase in revenues for the six months ending June 30,
2012 as compared to the same six-month period in 2011 pertaining to the
businesses acquired during these periods, 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, combined with a 2.8% increase in revenues associated with
Ebix's legacy operations preceding these business acquisitions. The cause for
the difference between the 11.2% increase in reported revenue for the six months
ending June 30, 2012 versus the same period in 2011 revenue, as compared to the
6.3% increase in pro forma revenue for the six months ending June 30, 2012
versus the same six-month 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 six
months ended June 30, 2012 and 2011 the change in foreign currency exchange
rates (decreased)/increased reported consolidated operating revenues by
approximately $(633) thousand and $2.8 million, respectfully.
Cost of Services Provided
Costs of services provided, increased $2.0 million or 12% during the six months
ended June 30, 2012 to $18.2 million as compared to $16.2 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 of our Exchange channel and from recent business
acquisitions completed during last nine months.
Product Development Expenses
Product development expenses increased $665 thousand or 7% during the six months
ended June 30, 2012 to $10.1 million as compared to $9.4 million of costs
incurred during the same period in 2011. This increase is attributable to
increased software and system development activities in our India operating unit
in support of our Exchanges and recent business acquisitions.
Sales and Marketing Expenses
Sales and marketing expenses increased $2.0 million or 33% during the six months
ended June 30, 2012 to $8.1 million as compared to $6.1 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.
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General and Administrative Expenses
General and administrative ("G&A") expenses increased $2.6 million or 21% for
the six months ended June 30, 2012 to $15.0 million from $12.5 million for same
period in 2011. Included in G&A costs for this six month period ended June 30,
2012 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 $1.9 million adverse year over year variance caused
by the fact that in Q2 of 2011 the Company recognized a reduction to previously
recorded contingency based earn-out accruals pertaining to business acquisitions
made during 2010 and $1.3 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 $234 thousand or 6% during
the six months ended June 30, 2012 to $4.1 million as compared to $3.9 million
recorded during the same period in 2011. This increase is due to $275 thousand
of additional amortization costs associated with the customer relationship and
developed technology intangible assets that were recognized in connection with
recent business combinations completed over the last nine months.
Income Taxes
The Company recognized an income tax expense of $4.6 million for the six months
ended June 30, 2012. The Company's effective tax rate used in the determination
the interim period tax provision for the six months ending June 30, 2012 was
10.46% as compared to the 8.83% 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 rates applicable to related annual twelve month period, after
eliminating discrete items uniquely related to the respective interim reporting
period. During the six months ended June 30, 2012 the Company recognized a
discrete income tax expense in the amount of $578 thousand with respect to an
increase in our recorded 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, paying $1.5 million in the aggregate in
regards to this dividend issuance. This same quarterly dividend per share was
paid 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 to be made
in August 2012. The Company intends to use a portion of its operating cash flows
to continue issuing 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 and access to our credit
facilities and 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. However, there are no assurances that such financing
facilities or the equity capital markets will be available in amounts or on
terms acceptable to us, if at all.
We continue to strategically evaluate our ability to sell 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.
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Our cash and cash equivalents were $25.3 million and $23.7 million at June 30,
2012 and December 31, 2011, respectively. Our cash and cash equivalents balance
has increased by $1.6 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 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 August 6, 2012 is
presented in table below (figures denominated in thousands):
United Latin New
States Canada America Australia Singapore Zealand India Sweden Total
Cash and ST investments $ 8,450 $ 979 $ 1,905 $ 3,855 $ 1,508 $ 585 $ 4,511 $ 15 $ 21,808
Our current ratio decreased modestly to 1.19 at June 30, 2012 from 1.28 at
December 31, 2011 and our working capital position decreased to $11.2 million at
June 30, 2012 as compared to $14.0 million at the end of the 2011. The Company's
accounts receivable DSO stood at 57 days at June 30, 2012 and reflects a
continuing favorable trend being down 4 days from December 31, 2011 and 14 days
from Q2 2011. Overall the decrease in the current ratio and our short-term
liquidity position is the result of increased trade payables associated with the
timing of payments to certain vendors and service providers, and the increased
current portion of new term loan with Citi Bank, N.A. 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 six months ended June 30, 2012
the Company executed and completed a number of business acquisitions, none of
which were material individually or in the aggregate.
Operating Activities
Net cash provided by our operating activities was $34.7 million for the six
months ended June 30, 2012. The primary components of the cash provided by
operations during this six months interim period consisted of net income of
$33.8 million, net of $(856) thousand of net non-cash gains recognized on
derivative instruments and foreign currency exchange, $4.1 million of
depreciation and amortization, $(3.3) million of working capital requirements
primarily associated with reductions to trade payables and accrued liabilities,
and $1.1 million of non-cash share-based compensation.
Net cash provided by our operating activities was $29.7 million for the six
months ended June 30, 2011. The primary components of the cash provided by
operations during that six month interim period consisted of net income of
$37.5 million, net of $(1.1) million of net non-cash gains recognized on
derivative instruments and foreign currency exchange, $3.9 million of
depreciation and amortization, $(11.5) million of working capital requirements
primarily associated with reductions to trade payables and accrued liabilities,
and increased outstanding trade receivables, and $1.1 million of non-cash
share-based compensation.
Investing Activities
Net cash used for investing activities during the six months ended June 30, 2012
was $49.1 million, of which $44.7 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, $1.1 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 partially was
$194 thousand consisting from maturities of marketable securities (specifically
bank certificates of deposit), net of purchases.
Net cash provided from investing activities during the six months ended
June 30, 2011 totaled $6.1 million of which $4.5 million was provided from
maturities of marketable securities (net of purchases), and $3.5 million of net
cash proceeds from the acquisition of ADAM in February 2011. Partially
offsetting these investing cash inflows were $1.3 million used for capital
expenditures and $565 thousand used to settle earn out obligations in connection
with a prior business acquisition.
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Financing Activities
During the six months ended June 30, 2012 net cash provided by financing
activities was $18.4 million which consisted of $30.0 million provided by the
Company's new term loan facility with Citi Bank (net of the repayment of the
remaining balance from the prior term loan with BOA), $1.1 million was provided
from our commercial bank revolving credit facility (net of repayments), and $714
thousand of proceeds from the exercising of common stock options. Partially
offsetting these aggregate cash proceeds was $9.4 million used to repurchase
shares of our common stock, $3.3 million used to pay quarterly dividends to our
common stockholders, and $765 thousand used to make principal payments on
long-term debt and capital lease obligations.
During the six months ended June 30, 2011 net cash used in financing activities
was $36.1 million. This net financing cash outflow consisted of $26.2 million
used to complete open market repurchases of our common stock, $16.3 million used
to reduce the balance of our commercial bank revolving credit facility, $6.8
million was used to fully settle outstanding convertible debt obligations, and
$186 thousand was used towards principal repayments on existing capital lease
obligations, as partially offset by $13.2 million of proceeds from our
commercial bank term loan facility (net of $3.0 million of scheduled principal
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 commencing 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 initial interest rate applicable to the Secured Syndicated
Credit Facility is LIBOR plus 1.50% or currently 1.75%. 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 Credit
Agreement dated February 12, 2010 (as amended). The aggregate amount of the
payment was $45.14 million and was funded from a portion of the proceeds of the
Citi Bank 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 June 30, 2012, the outstanding balance on the Company's revolving line of
credit with Citi Bank was $32.8 million and the facility carried an interest
rate of 1.75%. 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 six months ended June 30, 2012, the average
outstanding balance was $28.2 million and the maximum outstanding balance was
$32.8 million.
At June 30, 2012, the outstanding balance on the Company's term loan with Citi
Bank was $45.0 million of which $10.7 million is due within the next twelve
months. This term loan also carried an interest rate of 1.75%. During the six
months ended June 30, 2012, $1.7 million of scheduled principal payments were
made against the Company outstanding commercial term loans. 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.
Off-Balance Sheet Arrangements
We do not engage in off -balance sheet financing arrangements.
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Contractual Obligations and Commercial Commitments
The following table summarizes our significant contractual purchase obligations
and other long-term commercial commitments as of June 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 1-3 3-5 More than
Total 1 Year Years Years 5 years
(in thousands)
Revolving line of credit $ 32,840 $ - $ 32,840 $ - $ -
Long-term debt $ 47,400 $ 11,256 $ 36,144 $ - $ -
Operating leases $ 16,728 $ 5,086 $ 6,138 $ 2,916 $ 2,588
Capital leases $ 730 $ 350 $ 380 $ - $ -
Total $ 97,698 $ 16,692 $ 75,502 $ 2,916 $ 2,588
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, or 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 Financial Accounting Standard Board ("FASB") and Securities
and Exchange Commission Staff Accounting (the "SEC") accounting guidance on
revenue recognition the Company considers revenue earned and realizable when:
(a) persuasive evidence of the sales arrangement exists, provided that the
arrangement fee is fixed or determinable, (b) delivery or performance has
occurred, (c) customer acceptance has been received, if contractually required,
and (d) collectability of the arrangement fee is probable. The Company 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 their 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. 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 to meet before being recognized in the financial
statements.
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Foreign Currency Matters
Our reporting currency is the U.S. dollar. The functional currency of the
Company's foreign subsidiaries is the local currency of the country in which the
subsidiary operates. The assets and liabilities of 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 consolidated financial statements. Foreign exchange transaction
gains and losses that are derived from transactions denominated in other than
the subsidiary's' functional currency is included in the determination of net
income.
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