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  • 10-Q (Oct 30, 2017)
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  • 10-Q (Jul 22, 2016)
  • 10-Q (Apr 27, 2016)

 
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Manhattan Associates 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
manh-10q_20170630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10‑Q

 

[Mark One]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number:  0-23999

 

MANHATTAN ASSOCIATES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Georgia

 

 

58-2373424

(State or Other Jurisdiction of

Incorporation or Organization)

 

 

(I.R.S. Employer

Identification No.)

 

2300 Windy Ridge Parkway, Tenth Floor

 

 

 

Atlanta, Georgia

 

 

30339

(Address of Principal Executive Offices)

 

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code:  (770) 955-7070

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes     No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No  

 

The number of shares of the Registrant’s class of capital stock outstanding as of July 19, 2017, the latest practicable date, is as follows: 68,926,681 shares of common stock, $0.01 par value per share.

 

 

 

 


MANHATTAN ASSOCIATES, INC.

FORM 10-Q

Quarter Ended June 30, 2017

TABLE OF CONTENTS

PART I

 

 

Financial Information

 

 

 

 

Item 1.

Financial Statements.

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

3

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016 (unaudited)

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016 (unaudited)

5

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (unaudited)

6

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2017 (unaudited) and for the twelve months ended December 31, 2016

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

27

 

 

 

Item 4.

Controls and Procedures.

27

 

 

 

 

PART II

 

 

 

 

 

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

28

 

 

 

Item 1A.

Risk Factors.

28

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

29

 

 

 

Item 3.

Defaults Upon Senior Securities.

29

 

 

 

Item 4.

Mine Safety Disclosures.

29

 

 

 

Item 5.

Other Information.

29

 

 

 

Item 6.

Exhibits.

30

 

 

 

Signatures.

31

 

 

 

 

2


PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

76,704

 

 

$

95,615

 

Short-term investments

 

 

9,898

 

 

 

-

 

Accounts receivable, net of allowance of $3,394 and $3,595, respectively

 

 

96,295

 

 

 

100,285

 

Prepaid expenses and other current assets

 

 

13,935

 

 

 

11,118

 

Total current assets

 

 

196,832

 

 

 

207,018

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

16,177

 

 

 

17,424

 

Goodwill, net

 

 

62,240

 

 

 

62,228

 

Deferred income taxes

 

 

1,464

 

 

 

2,867

 

Other assets

 

 

8,022

 

 

 

7,603

 

Total assets

 

$

284,735

 

 

$

297,140

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,201

 

 

$

12,052

 

Accrued compensation and benefits

 

 

20,102

 

 

 

20,700

 

Accrued and other liabilities

 

 

11,561

 

 

 

12,510

 

Deferred revenue

 

 

73,001

 

 

 

63,457

 

Income taxes payable

 

 

-

 

 

 

8,924

 

Total current liabilities

 

 

117,865

 

 

 

117,643

 

 

 

 

 

 

 

 

 

 

Other non-current liabilities

 

 

9,184

 

 

 

10,131

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, no par value; 20,000,000 shares authorized, no shares issued or outstanding in 2017 and 2016

 

 

-

 

 

 

-

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 68,926,397 and 70,233,955 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

689

 

 

 

702

 

Retained earnings

 

 

170,119

 

 

 

184,558

 

Accumulated other comprehensive loss

 

 

(13,122

)

 

 

(15,894

)

Total shareholders' equity

 

 

157,686

 

 

 

169,366

 

Total liabilities and shareholders' equity

 

$

284,735

 

 

$

297,140

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

3


Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software license

 

$

22,442

 

 

$

20,631

 

 

$

45,215

 

 

$

41,238

 

Services

 

 

116,828

 

 

 

119,833

 

 

 

225,661

 

 

 

236,096

 

Hardware and other

 

 

14,871

 

 

 

14,428

 

 

 

26,754

 

 

 

27,418

 

Total revenue

 

 

154,141

 

 

 

154,892

 

 

 

297,630

 

 

 

304,752

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of license

 

 

2,355

 

 

 

2,283

 

 

 

4,595

 

 

 

5,435

 

Cost of services

 

 

47,751

 

 

 

48,393

 

 

 

97,494

 

 

 

100,297

 

Cost of hardware and other

 

 

12,207

 

 

 

11,841

 

 

 

21,845

 

 

 

21,598

 

Research and development

 

 

14,102

 

 

 

13,458

 

 

 

28,327

 

 

 

28,164

 

Sales and marketing

 

 

11,732

 

 

 

12,015

 

 

 

23,521

 

 

 

24,603

 

General and administrative

 

 

11,387

 

 

 

12,368

 

 

 

23,259

 

 

 

24,816

 

Depreciation and amortization

 

 

2,326

 

 

 

2,266

 

 

 

4,588

 

 

 

4,472

 

Restructuring charge

 

 

3,022

 

 

 

-

 

 

 

3,022

 

 

 

-

 

Total costs and expenses

 

 

104,882

 

 

 

102,624

 

 

 

206,651

 

 

 

209,385

 

Operating income

 

 

49,259

 

 

 

52,268

 

 

 

90,979

 

 

 

95,367

 

Other (loss) income, net

 

 

(68

)

 

 

654

 

 

 

(439

)

 

 

1,174

 

Income before income taxes

 

 

49,191

 

 

 

52,922

 

 

 

90,540

 

 

 

96,541

 

Income tax provision

 

 

18,047

 

 

 

19,581

 

 

 

31,172

 

 

 

35,720

 

Net income

 

$

31,144

 

 

$

33,341

 

 

$

59,368

 

 

$

60,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.45

 

 

$

0.46

 

 

$

0.85

 

 

$

0.84

 

Diluted earnings per share

 

$

0.45

 

 

$

0.46

 

 

$

0.85

 

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,227

 

 

 

71,880

 

 

 

69,610

 

 

 

72,264

 

Diluted

 

 

69,421

 

 

 

72,228

 

 

 

69,844

 

 

 

72,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

4


Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Net income

 

$

31,144

 

 

$

33,341

 

 

$

59,368

 

 

$

60,821

 

Foreign currency translation adjustment

 

 

878

 

 

 

(1,845

)

 

 

2,772

 

 

 

(1,790

)

Comprehensive income

 

$

32,022

 

 

$

31,496

 

 

$

62,140

 

 

$

59,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

5


 

Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

59,368

 

 

$

60,821

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,588

 

 

 

4,472

 

Equity-based compensation

 

 

7,268

 

 

 

8,183

 

Loss on disposal of equipment

 

 

9

 

 

 

14

 

Tax benefit of stock awards exercised/vested

 

 

-

 

 

 

5,069

 

Excess tax benefits from equity-based compensation

 

 

-

 

 

 

(5,074

)

Deferred income taxes

 

 

1,966

 

 

 

950

 

Unrealized foreign currency loss (gain)

 

 

42

 

 

 

(403

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5,243

 

 

 

4,113

 

Other assets

 

 

(2,985

)

 

 

(1,124

)

Accounts payable, accrued and other liabilities

 

 

(2,117

)

 

 

(10,624

)

Income taxes

 

 

(9,336

)

 

 

(2,313

)

Deferred revenue

 

 

8,549

 

 

 

(4,577

)

Net cash provided by operating activities

 

 

72,595

 

 

 

59,507

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,703

)

 

 

(4,107

)

Net (purchases) maturities of investments

 

 

(9,457

)

 

 

8,113

 

Net cash (used in) provided by investing activities

 

 

(12,160

)

 

 

4,006

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Purchase of common stock

 

 

(81,620

)

 

 

(92,812

)

Proceeds from issuance of common stock from options exercised

 

 

-

 

 

 

18

 

Excess tax benefits from equity-based compensation

 

 

-

 

 

 

5,074

 

Net cash used in financing activities

 

 

(81,620

)

 

 

(87,720

)

 

 

 

 

 

 

 

 

 

Foreign currency impact on cash

 

 

2,274

 

 

 

(1,074

)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(18,911

)

 

 

(25,281

)

Cash and cash equivalents at beginning of period

 

 

95,615

 

 

 

118,416

 

Cash and cash equivalents at end of period

 

$

76,704

 

 

$

93,135

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

6


Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

(Loss) Income

 

 

Equity

 

Balance, December 31, 2015 (audited)

 

 

72,766,383

 

 

$

728

 

 

$

-

 

 

$

207,070

 

 

$

(12,306

)

 

$

195,492

 

Repurchase of common stock

 

 

(2,988,627

)

 

 

(30

)

 

 

(21,157

)

 

 

(146,746

)

 

 

-

 

 

 

(167,933

)

Stock option exercises

 

 

3,610

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Restricted stock units issuance

 

 

452,589

 

 

 

4

 

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

-

 

Equity-based compensation

 

 

-

 

 

 

-

 

 

 

15,934

 

 

 

-

 

 

 

-

 

 

 

15,934

 

Tax effects of equity-based compensation

 

 

-

 

 

 

-

 

 

 

5,209

 

 

 

-

 

 

 

-

 

 

 

5,209

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,588

)

 

 

(3,588

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

124,234

 

 

 

-

 

 

 

124,234

 

Balance, December 31, 2016 (audited)

 

 

70,233,955

 

 

 

702

 

 

 

-

 

 

 

184,558

 

 

 

(15,894

)

 

 

169,366

 

Repurchase of common stock

 

 

(1,670,797

)

 

 

(17

)

 

 

(9,089

)

 

 

(72,514

)

 

 

-

 

 

 

(81,620

)

Restricted stock units issuance

 

 

363,239

 

 

 

4

 

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

-

 

Equity-based compensation

 

 

-

 

 

 

-

 

 

 

7,268

 

 

 

-

 

 

 

-

 

 

 

7,268

 

Adjustment due to adoption of ASC 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting

 

 

-

 

 

 

-

 

 

 

1,825

 

 

 

(1,293

)

 

 

-

 

 

 

532

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,772

 

 

 

2,772

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

59,368

 

 

 

-

 

 

 

59,368

 

Balance, June 30, 2017 (unaudited)

 

 

68,926,397

 

 

$

689

 

 

$

-

 

 

$

170,119

 

 

$

(13,122

)

 

$

157,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

7


Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

Basis of Presentation and Principles of Consolidation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Manhattan Associates, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these condensed consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position at June 30, 2017, the results of operations for the three and six months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and management’s discussion and analysis included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the Company’s accounts and the accounts of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

New Accounting Pronouncements Adopted in Fiscal Year 2017

Stock Compensation

During the three months ended March 31, 2017, we adopted Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, to improve the accounting for employee share-based payments. Under the new guidance, all excess tax benefits and certain tax deficiencies are recorded as income tax expense or benefit in the income statement rather than recorded in additional paid-in capital. The additional paid-in capital pools are eliminated. This new guidance must be applied on a prospective basis. As a result, the excess tax benefits of $1.9 million for the six months ended June 30, 2017 are recorded in our provision for income taxes rather than additional paid-in capital. As required by the ASU, excess tax benefits recognized on share-based compensation expense are classified as an operating activity on the statement of cash flows rather than as a financing activity, and we have applied this provision on a prospective basis.

The ASU also allows the Company to repurchase more of an employee’s shares than it previously could for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the course of a vesting period. As a result, the net cumulative-effect of this election was recognized as a $1.8 million increase to additional paid-in capital, a $0.5 million increase to deferred tax assets and a $1.3 million decrease to retained earnings as of January 1, 2017.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities should apply the modification accounting guidance if the fair value, vesting conditions or classification of the award changes. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 on a prospective basis to an award modified on or after the adoption date. Early adoption is permitted. We early adopted this guidance during the three months ended June 2017, and the adoption did not impact our financial statements.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) that simplifies the test for goodwill impairment, which eliminates step two from the goodwill impairment test. Under the new guidance, an entity should recognize an impairment charge for the amount based on the excess of a reporting unit’s carrying amount over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. For public companies, the guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 on a prospective basis, and earlier adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this guidance during the three months ended March 2017, and the adoption did not impact our financial statements.

Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230) that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash

 

8


flows. Prior to the issuance, there were certain issues where diversity in practice in how certain cash receipts and cash payments were presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. For public companies, the guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We early adopted this guidance during the three months ended June 30, 2017, and the adoption did not impact our financial statements.

 

New Accounting Pronouncements Not Yet Adopted

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue Recognition – Revenue from Contracts with Customers (Topic 606), which will replace substantially all current revenue recognition guidance once it becomes effective. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other standards. The new standard is less prescriptive and may require software entities to use more judgment and estimates in the revenue recognition process than are required under existing revenue guidance.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, which clarifies the following aspects in ASU 2014-09: collectability, presentation of sales taxes and other similar taxes collected from customers, noncash considerations, contract modifications at transition, completed contracts at transition, and technical correction. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which provides thirteen technical corrections and improvements to the new revenue standard. We must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20 with ASU 2014-09, which is effective for annual and interim periods beginning after December 15, 2017.

The new revenue standard may be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures).

We will adopt the standard in the first quarter of 2018 and expect to use the modified retrospective method.  Currently, we are in the process of reviewing our historical contracts to quantify the impact that the adoption of the standard will have on specific performance obligations.  We expect to recognize our hardware revenue net of related cost under the new standard which will reduce both hardware revenue and cost of sales as compared to our current accounting. We are also continuing to evaluate the impact of the standard on our recognition of costs related to obtaining customer contracts.  Currently, sales commissions are expensed in sales and marketing expense when earned.  We believe these commissions represent direct incremental costs of obtaining our contracts with customers.  Under the standard, these costs must be expensed on a systematic basis that is consistent with the transfer of the related goods and services to the customer.   Based on expected renewals of customer support and software enhancements and sales of optional implementation services, we believe a portion of our commissions expense should be deferred and amortized over time as the corresponding services are transferred to the customer under the new standard.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For public companies, this guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, but may be adopted earlier. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.

 

9


 

2.

Revenue Recognition

The Company’s revenue consists of fees from the licensing and hosting of software (collectively included in “Software license” revenue in the Condensed Consolidated Statements of Income), fees from implementation and training services (collectively, “professional services”) and customer support services and software enhancements (collectively with professional services revenue included in “Services” revenue in the Condensed Consolidated Statements of Income), and sales of hardware and other revenue, which consists of reimbursements of out-of-pocket expenses incurred in connection with our professional services (collectively included in “Hardware and other” revenue in the Condensed Consolidated Statements of Income).  All revenue is recognized net of any related sales taxes.

The Company recognizes license revenue when the following criteria are met: (1) a signed contract is obtained covering all elements of the arrangement, (2) delivery of the product has occurred, (3) the license fee is fixed or determinable, and (4) collection is probable.  Revenue recognition for software with multiple-element arrangements requires recognition of revenue using the “residual method” when (a) there is vendor-specific objective evidence (VSOE) of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting, (b) VSOE of fair value does not exist for one or more of the delivered elements in the arrangement, and (c) all other applicable revenue-recognition criteria for software revenue recognition are satisfied. For those contracts that contain significant customization or modifications, license revenue is recognized using contract accounting.

The Company allocates revenue to customer support services and software enhancements and any other undelivered elements of the arrangement based on VSOE of fair value of each element, and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria have been met.  The balance of the revenue, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered.  If the Company cannot objectively determine the fair value of each undelivered element based on the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined.  The Company must apply judgment in determining all elements of the arrangement and in determining the VSOE of fair value for each element, considering the price charged for each product on a stand-alone basis or applicable renewal rates.  For arrangements that include future software functionality deliverables, the Company accounts for these deliverables as a separate element of the arrangement.  Because the Company does not sell these deliverables on a standalone basis, the Company is not able to establish VSOE of fair value of these deliverables.  As a result, the Company defers all revenue under the arrangement until the future functionality has been delivered to the customer.

Payment terms for the Company’s software licenses vary.  Each contract is evaluated individually to determine whether the fees in the contract are fixed or determinable and whether collectability is probable.  Judgment is required in assessing the probability of collection, which is generally based on evaluation of customer-specific information, historical collection experience, and economic market conditions.  If market conditions decline, or if the financial conditions of customers deteriorate, the Company may be unable to determine that collectability is probable, and the Company could be required to defer the recognition of revenue until the Company receives customer payments.  The Company has an established history of collecting under the terms of its software license contracts without providing refunds or concessions to its customers.  Therefore, the Company has determined that the presence of payment terms that extend beyond contract execution in a particular contract do not preclude the conclusion that the fees in the contract are fixed or determinable.  Although infrequent, when payment terms in a contract extend beyond twelve months, the Company has determined that such fees are not fixed or determinable and recognizes revenue as payments become due provided that all other conditions for revenue recognition have been met.

The Company’s services revenue consists of fees generated from professional services and customer support and software enhancements related to the Company’s software products.  Professional services include system planning, design, configuration, testing, and other software implementation support, and are not typically essential to the functionality of the software.  Fees from professional services performed by the Company are separately priced and are generally billed on an hourly basis, and revenue is recognized as the services are performed.  In certain situations, professional services are rendered under agreements in which billings are limited to contractual maximums or based upon a fixed fee for portions of or all of the engagement.  Revenue related to fixed-fee-based contracts is recognized on a proportional performance basis based on the hours incurred on discrete projects within an overall services arrangement.  The Company has determined that output measures, or services delivered, approximate the input measures associated with fixed-fee services arrangements.  Project losses are provided for in their entirety in the period in which they become known.  Revenue related to customer support services and software enhancements is generally paid in advance and recognized ratably over the term of the agreement, typically twelve months.

Hardware and other revenue is generated from the resale of a variety of hardware products, developed and manufactured by third parties, that are integrated with and complementary to the Company’s software solutions. As part of a complete solution, the Company’s customers periodically purchase hardware from the Company for use with the software licenses purchased from the Company. These products include computer hardware, radio frequency terminal networks, radio frequency identification (RFID) chip

 

10


readers, bar code printers and scanners, and other peripherals. Hardware revenue is recognized upon shipment to the customer when title passes. The Company generally purchases hardware from the Company’s vendors only after receiving an order from a customer. As a result, the Company generally does not maintain hardware inventory.

In accordance with the other presentation matters within the Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC), the Company recognizes amounts associated with reimbursements from customers for out-of-pocket expenses as revenue. Such amounts have been included in “Hardware and other” revenue in the Condensed Consolidated Statements of Income. The total amount of expense reimbursement recorded to revenue was $4.5 million and $4.9 million for the three months ended June 30, 2017 and 2016, respectively, and $8.8 million and $9.1 million for the six months ended June 30, 2017 and 2016, respectively.

 

 

3.

Fair Value Measurement

The Company measures its investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value.  Market price observability is affected by a number of factors, including the type of asset or liability and its characteristics.  This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1–Quoted prices in active markets for identical instruments.

 

Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Investments with maturities of 90 days or less from the date of purchase are classified as cash equivalents; investments with maturities of greater than 90 days from the date of purchase but less than one year are generally classified as short-term investments; and investments with maturities of one year or greater from the date of purchase are generally classified as long-term investments.  Unrealized holding gains and losses are reflected as a net amount in a separate component of shareholders’ equity until realized.  For the purposes of computing realized gains and losses, cost is determined on a specific identification basis.

At June 30, 2017, the Company’s cash, cash equivalents, and short-term investments balances were $63.3 million, $13.4 million, and $9.9 million, respectively. The Company currently has no long-term investments. Cash equivalents consist of highly liquid money market funds and certificates of deposit. Short-term investments consist of certificates of deposit. For money market funds, the Company uses quoted prices from active markets that are classified at Level 1 as a highest level observable input in the disclosure hierarchy framework. At June 30, 2017 and December 31, 2016, the Company had $10.5 million and $30.3 million, respectively, in money market funds, which are classified as Level 1 and are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company has no investments classified as Level 2 or Level 3.

 

 

4.

Equity-Based Compensation

 

The Company granted 23,307 and 20,659 restricted stock units (“RSUs”) during the three months ended June 30, 2017 and 2016, respectively, and 360,991 and 349,231 RSUs during the six months ended June 30, 2017 and 2016, respectively. The Company recorded equity-based compensation expense related to RSUs of $2.8 million and $3.5 million during the three months ended June 30, 2017 and 2016, respectively, and $7.3 million and $8.2 million during the six months ended June 30, 2017 and 2016, respectively.

A summary of changes in unvested shares/units for the six months ended June 30, 2017 is as follows:

 

 

 

Number of shares/units

 

Outstanding at December 31, 2016

 

 

1,029,230

 

Granted

 

 

360,991

 

Vested

 

 

(387,884

)

Forfeited

 

 

(39,795

)

Outstanding at June 30, 2017

 

 

962,542

 

 

 

11


 

5.

Income Taxes

 

The Company’s effective tax rate was 36.7% and 37.0% for the three months ended June 30, 2017 and 2016, respectively, and 34.4% and 37.0% for the six months ended June 30, 2017 and 2016, respectively. The decrease in the effective tax rate for the six months ended June 30, 2017 was primarily due to the implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting on January 1, 2017. The income tax provision for the six months ended June 30, 2017 includes excess tax benefits of $1.9 million on vesting of restricted stock, which would have been recorded in additional paid-in-capital under the previous guidance.

The Company applies the provisions for income taxes related to, among other things, accounting for uncertain tax positions and disclosure requirements in accordance with the Income Taxes Topic of FASB ASC 740. For the three and six months ended June 30, 2017, there were no material changes to the Company’s uncertain tax positions. There has been no change to the Company’s policy that recognizes potential interest and penalties related to uncertain tax positions within its global operations in income tax expense.

 

The Company currently plans to permanently reinvest all of its remaining undistributed foreign earnings. Accordingly, no provision for U.S. federal and state income taxes has been provided thereon.  Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to adjustment for foreign tax credits) and withholding taxes payable to various foreign countries for such distributions.  It is impractical to calculate the tax impact until such repatriation occurs.

 

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business, the Company is subject to examination by taxing authorities throughout the world.  The Company is no longer subject to U.S. federal income tax examinations, substantially all state and local income tax examinations and substantially all non-U.S. income tax examinations for years before 2012.

 

 

6.

Net Earnings Per Share

Basic net earnings per share is computed using net income divided by the weighted average number of shares of common stock outstanding (“Weighted Shares”) for each period presented. Diluted net earnings per share is computed using net income divided by the sum of Weighted Shares and common equivalent shares (CESs) outstanding for each period presented using the treasury stock method.

The following is a reconciliation of the net income and share amounts used in the computation of basic and diluted net earnings per common share for the three and six months ended June 30, 2017 and 2016 (in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands, except per share data)

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

31,144

 

 

$

33,341

 

 

$

59,368

 

 

$

60,821

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

 

$

0.46

 

 

$

0.85

 

 

$

0.84

 

Effect of CESs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted

 

$

0.45

 

 

$

0.46

 

 

$

0.85

 

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares: