UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
o 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 000-22081
EPIQ SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri |
| 48-1056429 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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501 Kansas Avenue, Kansas City, Kansas |
| 66105-1300 |
(Address of principal executive offices) |
| (Zip Code) |
913-621-9500
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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 x No o
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 Regulation 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o |
| Accelerated filer x |
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| Non-accelerated filer | o (Do not check if a smaller reporting company) |
| Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at October 18, 2013 |
Common Stock, $0.01 par value per share |
| 34,761,564 shares |
EPIQ SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2013
PART I - FINANCIAL INFORMATION
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
REVENUE: |
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Operating revenue |
| $ | 109,837 |
| $ | 83,865 |
| $ | 317,721 |
| $ | 256,529 |
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Reimbursable expenses |
| 5,847 |
| 7,122 |
| 34,925 |
| 20,825 |
| ||||
Total Revenue |
| 115,684 |
| 90,987 |
| 352,646 |
| 277,354 |
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OPERATING EXPENSE: |
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Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
| 52,126 |
| 34,346 |
| 154,150 |
| 107,425 |
| ||||
Reimbursed direct costs |
| 5,565 |
| 6,891 |
| 33,179 |
| 20,179 |
| ||||
Selling, general and administrative expense |
| 35,162 |
| 26,988 |
| 104,521 |
| 87,252 |
| ||||
Depreciation and software and leasehold amortization |
| 8,192 |
| 6,755 |
| 22,582 |
| 20,006 |
| ||||
Amortization of identifiable intangible assets |
| 4,761 |
| 6,804 |
| 14,463 |
| 20,325 |
| ||||
Fair value adjustment to contingent consideration |
| — |
| (11,717 | ) | — |
| (17,188 | ) | ||||
Intangible asset impairment expense |
| — |
| — |
| — |
| 1,777 |
| ||||
Other operating income |
| (855 | ) | — |
| (759 | ) | (225 | ) | ||||
Total Operating Expense |
| 104,951 |
| 70,067 |
| 328,136 |
| 239,551 |
| ||||
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INCOME FROM OPERATIONS |
| 10,733 |
| 20,920 |
| 24,510 |
| 37,803 |
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INTEREST EXPENSE (INCOME): |
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Interest expense |
| 4,101 |
| 1,926 |
| 7,944 |
| 7,365 |
| ||||
Interest income |
| (2 | ) | (5 | ) | (14 | ) | (12 | ) | ||||
Net Interest Expense |
| 4,099 |
| 1,921 |
| 7,930 |
| 7,353 |
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INCOME BEFORE INCOME TAXES |
| 6,634 |
| 18,999 |
| 16,580 |
| 30,450 |
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PROVISION FOR INCOME TAXES |
| 2,399 |
| 7,733 |
| 5,566 |
| 11,988 |
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NET INCOME |
| $ | 4,235 |
| $ | 11,266 |
| $ | 11,014 |
| $ | 18,462 |
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NET INCOME PER SHARE INFORMATION: |
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Basic |
| $ | 0.12 |
| $ | 0.31 |
| $ | 0.31 |
| $ | 0.51 |
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Diluted |
| $ | 0.11 |
| $ | 0.31 |
| $ | 0.30 |
| $ | 0.50 |
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
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Basic |
| 35,684 |
| 35,438 |
| 35,738 |
| 35,505 |
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Diluted |
| 36,497 |
| 36,344 |
| 36,634 |
| 36,427 |
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Cash dividends declared per common share |
| $ | 0.09 |
| $ | 0.09 |
| $ | 0.27 |
| $ | 0.205 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
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NET INCOME |
| $ | 4,235 |
| $ | 11,266 |
| $ | 11,014 |
| $ | 18,462 |
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Other comprehensive income: |
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Foreign currency translation adjustment, net of tax |
| 1,437 |
| 485 |
| 412 |
| 572 |
| ||||
COMPREHENSIVE INCOME |
| $ | 5,672 |
| $ | 11,751 |
| $ | 11,426 |
| $ | 19,034 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
|
| September 30, 2013 |
| December 31, 2012 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
| $ | 37,520 |
| $ | 3,808 |
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Trade accounts receivable, less allowance for doubtful accounts of $5,721 and $4,825, respectively |
| 142,352 |
| 103,415 |
| ||
Prepaid expenses |
| 8,654 |
| 9,967 |
| ||
Other current assets |
| 1,140 |
| 3,414 |
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Total Current Assets |
| 189,666 |
| 120,604 |
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LONG-TERM ASSETS: |
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Property and equipment, net |
| 67,375 |
| 44,552 |
| ||
Internally developed software costs, net |
| 17,233 |
| 18,905 |
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Goodwill |
| 404,204 |
| 404,211 |
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Other intangibles, net of accumulated amortization of $104,562 and $90,099, respectively |
| 45,488 |
| 59,951 |
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Other long-term assets |
| 12,724 |
| 6,493 |
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Total Long-term Assets |
| 547,024 |
| 534,112 |
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Total Assets |
| $ | 736,690 |
| $ | 654,716 |
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES: |
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Current maturities of long-term obligations |
| $ | 11,059 |
| $ | 9,151 |
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Accounts payable |
| 17,112 |
| 17,351 |
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Accrued compensation |
| 12,041 |
| 5,086 |
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Customer deposits |
| 2,147 |
| 16,094 |
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Deferred revenue |
| 4,544 |
| 3,131 |
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Dividends payable |
| 3,170 |
| 3,231 |
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Other accrued liabilities |
| 7,375 |
| 6,905 |
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Total Current Liabilities |
| 57,448 |
| 60,949 |
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LONG-TERM LIABILITIES: |
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Deferred income taxes |
| 38,773 |
| 41,409 |
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Other long-term liabilities |
| 5,454 |
| 5,700 |
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Long-term obligations, excluding current maturities |
| 300,969 |
| 203,288 |
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Total Long-term Liabilities |
| 345,196 |
| 250,397 |
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COMMITMENTS AND CONTINGENCIES EQUITY: |
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Preferred stock - $1 par value; 2,000,000 shares authorized; none issued and outstanding |
| — |
| — |
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Common stock - $0.01 par value; 100,000,000 shares authorized; Issued and outstanding at September 30, 2013 — 40,298,852 and 35,296,518 shares, respectively Issued and outstanding at December 31, 2012 — 39,923,852 and 35,922,509 shares, respectively |
| 403 |
| 399 |
| ||
Additional paid-in capital |
| 292,580 |
| 291,065 |
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Accumulated other comprehensive loss |
| (1,020 | ) | (1,432 | ) | ||
Retained earnings |
| 105,749 |
| 104,445 |
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Treasury stock, at cost — 5,002,334 and 4,001,343 shares, respectively |
| (63,666 | ) | (51,107 | ) | ||
Total Equity |
| 334,046 |
| 343,370 |
| ||
Total Liabilities and Equity |
| $ | 736,690 |
| $ | 654,716 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
| Nine Months Ended September 30, |
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| 2013 |
| 2012 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
| $ | 11,014 |
| $ | 18,462 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and software and leasehold amortization |
| 22,582 |
| 20,006 |
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Amortization of intangible assets |
| 14,463 |
| 20,325 |
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Share-based compensation expense |
| 5,696 |
| 5,134 |
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Provision for doubtful accounts |
| 1,632 |
| 1,776 |
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Loan fee amortization and write-off |
| 1,559 |
| 537 |
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Fair value adjustment to contingent consideration |
| — |
| (17,188 | ) | ||
Intangible asset impairment expense |
| — |
| 1,777 |
| ||
Accretion of discount |
| — |
| 1,138 |
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Deferred income tax (benefit) expense |
| (1,538 | ) | 4,614 |
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Other, net |
| (796 | ) | (112 | ) | ||
Changes in operating assets and liabilities: |
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Trade accounts receivable |
| (40,268 | ) | (16,698 | ) | ||
Prepaid expenses and other assets |
| 1,490 |
| 3,448 |
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Accounts payable and other liabilities |
| 5,742 |
| (2,746 | ) | ||
Customer deposits |
| (13,947 | ) | 2,275 |
| ||
Deferred revenue |
| 1,413 |
| 303 |
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Excess tax benefit related to share-based compensation |
| (322 | ) | — |
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Other |
| (128 | ) | (474 | ) | ||
Net cash provided by operating activities |
| 8,592 |
| 42,577 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property and equipment |
| (28,087 | ) | (12,591 | ) | ||
Internally developed software costs |
| (4,875 | ) | (4,843 | ) | ||
Proceeds from sale of assets |
| 5 |
| 491 |
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Other investing activities, net |
| — |
| 187 |
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Net cash used in investing activities |
| (32,957 | ) | (16,756 | ) | ||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from the issuance of long-term debt |
| 300,000 |
| — |
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Proceeds from revolver borrowings |
| 88,000 |
| 59,000 |
| ||
Payments to reduce revolver borrowings |
| (287,000 | ) | (59,000 | ) | ||
Debt issuance costs |
| (8,105 | ) | — |
| ||
Payments under long-term obligations |
| (5,761 | ) | (5,736 | ) | ||
Payment of deferred acquisition consideration |
| (3,139 | ) | (8,400 | ) | ||
Excess tax benefit related to share-based compensation |
| 322 |
| — |
| ||
Common stock repurchases (Note 9) |
| (17,793 | ) | (5,939 | ) | ||
Cash dividends paid (Note 9) |
| (9,771 | ) | (5,925 | ) | ||
Proceeds from exercise of stock options |
| 969 |
| 617 |
| ||
Net cash provided by (used in) financing activities |
| 57,722 |
| (25,383 | ) | ||
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Effect of exchange rate changes on cash |
| 355 |
| 69 |
| ||
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
| 33,712 |
| 507 |
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CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
| 3,808 |
| 2,838 |
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 37,520 |
| $ | 3,345 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and with the rules and regulations for reporting on Form 10-Q for interim financial statements. Accordingly, the financial statements do not include certain disclosures required for comprehensive annual financial statements.
The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary to present fairly our results of operations, financial position, and cash flows for the periods presented. Prior year amounts have been reclassified to conform to the current year presentation. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Epiq Systems, Inc. (“Epiq,” “we,” “us,” or “our”) Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2013.
The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the entire year.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of Epiq and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations
We provide integrated technology solutions for the legal profession. Our solutions are designed to streamline the administration of bankruptcy, litigation, investigations, financial transactions and regulatory compliance matters. We offer innovative managed technology solutions for eDiscovery, document review, legal notification, claims administration and controlled disbursement of funds. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, government agencies, mortgage processors, and financial institutions.
Revenue Recognition
We have agreements with clients pursuant to which we deliver various services each month.
Following is a description of significant sources of revenue:
· Fees contingent upon the month-to-month delivery of services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, disbursement services, project management, collection and forensic services, consulting services, document review services and conversion of data into an organized, searchable electronic database. The amount we earn varies based primarily on the size and complexity of the engagement, the number of hours of professional services provided and the number of documents or volume of data processed or reviewed.
· Data hosting fees and volume-based fees.
· Deposit-based and service fees. Deposit-based fees are earned based on a percentage of Chapter 7 assets placed on deposit with designated financial institutions by our trustee clients to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support services. The fees earned based on assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates and changes in service fees assessed on such deposits.
· Legal noticing services to parties of interest in bankruptcy, class action and other administrative matters including direct notification and media campaign and advertising management in which we coordinate notification, primarily through print media outlets to potential parties of interest for a particular client engagement.
· Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.
· Reimbursed expenses, primarily related to postage on mailing services and other pass-through expenses.
Non-Software Arrangements
Certain of our services are billed based on unit prices and volumes for which we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has standalone value to our customers because we or other vendors sell such services separately from any other services and deliverables. For certain of these services we have obtained objective and reliable evidence of the fair value of each element based either on the price we charge when we sell an element on a standalone basis or on third-party evidence of fair value of such similar services. For elements where evidence cannot be established, the best estimate of sales price has been used. Our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting. We allocate revenue to the various units of accounting in our arrangements based on the fair value or best estimated selling price of each unit of accounting, which is generally consistent with the stated prices in our arrangements. In instances when revenue recognition is deferred, we utilize the relative selling price method to calculate the revenue recognized for each period. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period. Revenue is recognized as the services are rendered, our fee becomes fixed and determinable, and collectability is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.
Software Arrangements
For our Chapter 7 bankruptcy trustee arrangements, we provide our trustee clients with a software license, hardware lease, hardware maintenance, and postcontract customer support services, all at no charge to the trustee. The trustees place their liquidated estate deposits with a financial institution with which we have an arrangement. We earn contingent monthly fees from the financial institutions based on the average dollar amount of deposits held by the trustees with that financial institution related to the software license, hardware lease, hardware maintenance, and postcontract customer support services provided to our trustee clients. The monthly deposit fees have two components consisting of an interest-based component and a non-interest based service fee. Since we have not established vendor specific objective evidence of the fair value of the software license, we do not recognize any revenue on delivery of the software. The software element is deferred and included with the remaining undelivered elements, which are postcontract customer support services. Revenue related to postcontract customer support is entirely contingent on the placement of liquidated estate deposits by the trustee with the financial institution. Accordingly, we recognize this contingent usage based revenue as the fee becomes fixed or determinable at the time actual usage occurs and collectability is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we have also satisfied the other revenue recognition criteria since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
We also provide our trustee clients with certain hardware, such as desktop computers, monitors, and printers as well as hardware maintenance. We retain ownership of all hardware provided and we account for this hardware as a lease. As the hardware maintenance arrangement is an executory contract similar to an operating lease, we use guidance related to contingent rentals in operating lease arrangements for hardware maintenance as well as for the hardware lease. Since the payments under all of our arrangements are contingent upon the level of trustee deposits and the delivery of upgrades and other services, and there remain important uncertainties regarding the amount of unreimbursable costs yet to be incurred by us, we account for the hardware lease as an operating lease. Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals, which requires that we recognize rental income when the changes in the factor on which the contingent lease payment is based actually occur. This occurs at the end of each period as we achieve our target when deposits are held at the financial institution as, at that time, evidence of an arrangement exists, delivery has occurred, the amount has become fixed and determinable, and collection is reasonably assured.
Reimbursements
We have revenue related to reimbursed expenses, primarily postage. Reimbursed postage and other reimbursable direct costs are recorded gross in the Condensed Consolidated Statements of Income as “Reimbursable expenses” and “Reimbursed direct costs”, in the revenue and operating expenses sections, respectively.
Goodwill
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. In the first quarter of 2013, we reorganized our internal management reporting structure. Under the new structure, we began reporting our financial performance for our two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment (“Technology”). The former Bankruptcy segment and Settlement Administration segment were combined and are now reported as the Bankruptcy and Settlement Administration segment (“Bankruptcy and Settlement Administration”). We assess goodwill for impairment on an annual basis at a reporting unit level and have identified our operating segments (Technology and Bankruptcy and Settlement Administration) as our reporting units for purposes of testing for goodwill impairment. At the time of the prior year’s goodwill impairment testing, we had identified our three operating segments as our reporting units (eDiscovery, Bankruptcy, and Settlement Administration). At the time of the change in reporting units during the first quarter of 2013, we evaluated our goodwill balance and determined that there was no impairment of goodwill as a result of the change in reporting units.
Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units. Our annual test is performed as of July 31 each year, and there have been no events since our last annual test to indicate that it is more likely than not that the recorded goodwill balance had become impaired. As of July 31, 2013, which is the date of our most recent impairment test, the fair value of each of our reporting units was in excess of the carrying value of the reporting unit. Our consolidated goodwill totaled $404.2 million as of September 30, 2013.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We considered both a market approach and an income approach in order to develop an estimate of the fair value of each reporting unit for purposes of our annual impairment test. When available, and as appropriate, we used market multiples derived from a set of competitors or companies with comparable market characteristics to establish fair values for a particular reporting unit (market approach). We also estimated fair value using discounted projected cash flow analysis (income approach). Potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, which is used to determine our discount rate, and through our stock price, which is used to determine our market capitalization. We may be required to recognize impairment of goodwill based on future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units.
If we determine that the estimated fair value of any reporting unit is less than the reporting unit’s carrying value, then we proceed to the second step of the goodwill impairment analysis to measure the potential impairment charge. An impairment loss is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. If goodwill on our Condensed Consolidated Balance Sheet or Consolidated Balance Sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and financial condition.
The application of judgment, such as is required to complete a goodwill impairment test, inherently involves uncertainties and as such there can be no assurances that the estimates and assumptions made for purposes of our annual goodwill impairment test will prove to be accurate predictions of the future. If assumptions regarding forecasted revenues or margins of certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would occur, and if it does occur whether such charge would be material.
Income Taxes
Our effective income tax rate for the nine months ending September 30, 2013 is lower than the U.S. federal statutory income tax rate. The lower effective tax rate is primarily due to the enactment of the 2012 American Taxpayer Relief Act which extended the federal research credit for both the 2013 and 2012 tax years. Since this law was not enacted until January 2, 2013, we have recognized approximately $0.4 million of tax benefit relating to the 2012 credits and a portion of our 2013 tax credits during 2013. In addition, we generate taxable income in foreign jurisdictions that have income tax rates lower than the U.S federal statutory income tax rate.
For the three month period ending September 30, 2013 and September 2012 and the nine month period ending September 30, 2012, our effective income tax rate approximated the U.S federal statutory income tax rate.
NOTE 2: GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the nine months ended September 30, 2013 was as follows:
|
| Technology |
| Bankruptcy |
| Total |
| |||
|
| (in thousands) |
| |||||||
Balance as of December 31, 2012 |
| $ | 189,248 |
| $ | 214,963 |
| $ | 404,211 |
|
Foreign currency translation |
| (7 | ) | — |
| (7 | ) | |||
Balance as of September 30, 2013 |
| $ | 189,241 |
| $ | 214,963 |
| $ | 404,204 |
|
Identifiable intangible assets as of September 30, 2013 and December 31, 2012 consisted of the following:
|
| September 30, 2013 |
| December 31, 2012 |
| ||||||||
|
| Gross Carrying |
| Accumulated |
| Gross Carrying |
| Accumulated |
| ||||
|
| (in thousands) |
| ||||||||||
Amortizing intangible assets: |
|
|
|
|
|
|
|
|
| ||||
Customer relationships |
| $ | 124,512 |
| $ | 86,407 |
| $ | 124,512 |
| $ | 73,713 |
|
Trade names |
| 6,591 |
| 2,272 |
| 6,591 |
| 1,650 |
| ||||
Non-compete agreements |
| 18,947 |
| 15,883 |
| 18,947 |
| 14,736 |
| ||||
Total |
| $ | 150,050 |
| $ | 104,562 |
| $ | 150,050 |
| $ | 90,099 |
|
Customer relationships, trade names, and non-compete agreements carry a weighted average life of seven years, eight years, and five years, respectively.
Amortization expense related to identifiable intangible assets was $4.8 million and $6.8 million for the three months ended September 30, 2013 and 2012, respectively, and $14.5 million and $20.3 million for the nine months ended September 30, 2013 and 2012, respectively. The following table outlines the estimated future amortization expense related to intangible assets at September 30, 2013:
(in thousands) |
|
|
| |
Year Ending December 31, |
|
|
| |
2013 (from October 1, 2013 to December 31, 2013) |
| $ | 4,371 |
|
2014 |
| 12,569 |
| |
2015 |
| 9,893 |
| |
2016 |
| 6,232 |
| |
2017 |
| 5,390 |
| |
2018 and thereafter |
| 7,033 |
| |
Total |
| $ | 45,488 |
|
NOTE 3: LONG-TERM OBLIGATIONS
The following is a summary of long-term debt and other long-term obligations outstanding (in thousands):
|
| Final |
| Weighted- |
| September 30, |
| December 31, |
| ||
|
|
|
|
|
| (in thousands) |
| ||||
Senior secured term loan |
| August 2020 |
| 4.75 | % | $ | 300,000 |
| $ | — |
|
Senior revolving loan |
| August 2018 |
| — |
| — |
| 199,000 |
| ||
Capital leases |
| April 2017 |
| 6.0 | % | 6,943 |
| 2,860 |
| ||
Note payable |
| October 2014 |
| 2.2 | % | 5,085 |
| 7,080 |
| ||
Acquisition-related liabilities |
| July 2013 |
| — |
| — |
| 3,499 |
| ||
Total long-term obligations, including current portion |
|
|
|
|
| 312,028 |
| 212,439 |
| ||
Current maturities of long-term obligations |
|
|
|
|
|
|
|
|
| ||
Senior secured term loan |
|
|
|
|
| 3,000 |
| — |
| ||
Capital leases |
|
|
|
|
| 4,002 |
| 1,640 |
| ||
Notes payable |
|
|
|
|
| 4,057 |
| 4,012 |
| ||
Acquisition-related liabilities |
|
|
|
|
| — |
| 3,499 |
| ||
Total current maturities of long-term obligations |
|
|
|
|
| 11,059 |
| 9,151 |
| ||
Total long-term obligations |
|
|
|
|
| $ | 300,969 |
| $ | 203,288 |
|
2013 Secured Credit Facility
On August 27, 2013, we entered into a $400 million senior secured credit facility consisting of a senior revolving loan in a principal amount equal to $100 million, maturing in August 2018, and a senior secured term loan in a principal amount equal to $300 million, maturing in August 2020 (the “Credit Facility”). The Credit Facility replaces the Fourth Amended and Restated Credit and Security Agreement, dated as of April 25, 2011 (the “Former Credit Facility”).
During the term of the Credit Facility, Epiq has the right, subject to compliance with the covenants specified in the Credit Facility, to increase the Credit Facility to a maximum of $600 million including increasing the total borrowing capacity under the senior revolving loan up to a maximum of $200 million. The Credit Facility is secured by liens on our real property and a significant portion of our personal property.
Proceeds from the senior secured term loan were used to pay for, among other items, fees and expenses of approximately $8.1 million associated with the Credit Facility, and the repayment of the outstanding balance under the Former Credit Facility, which was then terminated. During the three months ended September 30, 2013, approximately $1.0 million was included in interest expense on the accompanying Condensed Consolidated Statements of Income, related to the write-off of a portion of the unamortized deferred debt issuance costs for the Former Credit Facility. Within 90 days following the August 27, 2013 closing date of the Credit Facility, we are required, under terms specified in the Credit Facility, to enter into a hedging arrangement related to protection against interest rate fluctuations. As of the filing date these financial statements were issued we have not yet entered into any hedging arrangements.
The senior secured term loan bears interest as follows: (1) 2.75% plus prime rate subject to a 2% floor; or (2) 3.75% plus one, two, three or six month LIBOR rate subject to a 1% LIBOR floor. As of September 30, 2013, all outstanding borrowings under the term loan were based on LIBOR subject to a 1% LIBOR floor and the applicable margin was 3.75%.
Borrowings under the senior revolving loan bear interest at various rates based on our total net leverage ratio with two rate options as follows: (1) for base rate advances, borrowings bear interest at prime rate plus 200 to 300 basis points; and (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 300 to 400 basis points. As of September 30, 2013, there were no borrowings outstanding under the senior revolving loan.
Commencing on December 31, 2013, the term loan facility requires quarterly payments of principal, in equal installments, in an aggregate principal amount equal to 0.25% per quarter, or approximately $3.0 million annually, of the original aggregate principal amount of the term loan facility and a final installment equal to the remaining principal balance in August 2020.
The Credit Facility contains a financial covenant related to a net leverage ratio (as defined in the Credit Facility) which is not permitted to exceed 4.50 to 1.00 as well as other customary covenants related to limitations on (i) creating liens, debt, guarantees or other contingent obligations, (ii) engaging in mergers, acquisitions and consolidations, (iii) paying
dividends or other distributions to, and redeeming and repurchasing securities from, equity holders, (iv) prepaying, redeeming or repurchasing subordinated or junior debt, and (v) engaging in certain transactions with affiliates, in each case, subject to customary exceptions. As of September 30, 2013, we were in compliance with all covenants.
The annual maturities under the senior secured term loan, due August 2020, for the next five fiscal years and thereafter are:
(in thousands) |
|
|
| |
Year Ending December 31, |
|
|
| |
2013 |
| $ | 750 |
|
2014 |
| 3,000 |
| |
2015 |
| 3,000 |
| |
2016 |
| 3,000 |
| |
2017 |
| 3,000 |
| |
2018 and Thereafter |
| 287,250 |
| |
Total |
| $ | 300,000 |
|
Capital Leases
We lease certain equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2017. As of September 30, 2013, our capital lease obligations had a weighted-average interest rate of approximately 6.0%.
Note Payable
During 2011 we entered into a note payable related to a software license agreement that bears interest of approximately 2.2% and is payable quarterly through October 2014.
Acquisition-related Liabilities
Amounts recorded in connection with acquisition-related liabilities as of September 30, 2013 and December 31, 2012 are as follows:
|
| September 30, |
| December 31, |
| ||
|
| (in thousands) |
| ||||
De Novo deferred acquisition price |
|
|
|
|
| ||
Current portion |
| $ | — |
| $ | 3,499 |
|
Total De Novo deferred acquisition price |
| $ | — |
| $ | 3,499 |
|
De Novo Legal LLC
In connection with the acquisition of De Novo Legal LLC (“De Novo”) on December 28, 2011, a portion of the purchase price was deferred and was being held for potential indemnification claims. During the third quarter of 2013 we paid $3.1 million of the deferred purchase price, adjusted for indemnification claims, to the sellers. The balance remaining after payment to the sellers of $0.8 million was written off as a credit to operating expense, which is included in Other Operating Income on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013.
The undiscounted amount of all potential future payments that could be required under the De Novo contingent consideration opportunity is between $0 and $29.1 million over the remaining measurement period which ends on December 31, 2013. Based on our assessments of projected revenue over the remainder of the measurement period, we determined that it is not likely that any contingent consideration for De Novo will be realized and as such there is no liability recorded related to this contingent consideration as of September 30, 2013 and December 31, 2012.
Jupiter eSources LLC
The undiscounted amount of all potential future payments that could be required under the Jupiter eSources LLC (“Jupiter eSources”) contingent consideration is between $0 and $10.0 million over the remaining measurement period through December 2014. Based on our assessments of projected revenue over the remainder of the measurement period, we determined that it is not likely that any contingent consideration for Jupiter eSources will be realized and as such there is no liability recorded related to this contingent consideration as of September 30, 2013 and December 31, 2012.
In connection with the acquisition of Jupiter eSources we withheld a portion of the purchase price for potential claims for indemnification and purchase price adjustments in the amount of $8.4 million that was paid in May 2012. The $8.4 million payment was previously misclassified as an investment activity and has been reclassified as a financing activity in the unaudited Condensed Consolidated Statement of Cash Flows for the nine month period ended September 30, 2012.
NOTE 4: NET INCOME PER SHARE
Basic net income per share is computed on the basis of weighted average outstanding common shares. We have determined that certain nonvested share awards (also referred to as restricted stock awards) issued by the Company are participating securities because they have non-forfeitable rights to dividends. Accordingly, basic net income per share is calculated under the two-class method calculation.
Diluted net income per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect, if any, of outstanding stock options. The numerator of the diluted net income per share calculation is decreased by the allocation of net income and dividends declared to nonvested shares, if the impact is dilutive.
In determining diluted earnings per share, we use the more dilutive earnings per share result between two-class method calculation and the treasury stock method calculation applied to our outstanding nonvested share awards.
The computation of basic and diluted net income per share for the three and nine months ended September 30, 2013 is as follows:
|
| Three Months Ended September 30, 2013 |
| Nine Months Ended September 30, 2013 |
| ||||||||||||
|
| Net Income |
| Weighted |
| Per Share |
| Net Income |
| Weighted |
| Per Share |
| ||||
|
| (in thousands, except per share data) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 4,235 |
|
|
|
|
| $ | 11,014 |
|
|
|
|
| ||
Less: amounts allocated to nonvested shares |
| (43 | ) |
|
|
|
| (111 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income available to common stockholders |
| 4,192 |
| 35,684 |
| $ | 0.12 |
| 10,903 |
| 35,738 |
| $ | 0.31 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock options |
| — |
| 813 |
|
|
| — |
| 896 |
|
|
| ||||
Add back: amounts allocated to nonvested shares |
| 43 |
| — |
|
|
| 111 |
| — |
|
|
| ||||
Less: amounts re-allocated to nonvested shares |
| (43 | ) | — |
|
|
| (111 | ) | — |
|
|
| ||||
Diluted net income available to common stockholders |
| $ | 4,192 |
| 36,497 |
| $ | 0.11 |
| $ | 10,903 |
| 36,634 |
| $ | 0.30 |
|
The computation of basic and diluted net income per share for the three and nine months ended September 30, 2012 is as follows:
|
| Three Months Ended September 30, 2012 |
| Nine Months Ended September 30, 2012 |
| ||||||||||||
|
| Net Income |
| Weighted |
| Per Share |
| Net Income |
| Weighted |
| Per Share |
| ||||
|
| (in thousands, except per share data) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 11,266 |
|
|
|
|
| $ | 18,462 |
|
|
|
|
| ||
Less: amounts allocated to nonvested shares |
| (135 | ) |
|
|
|
| (221 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income available to common stockholders |
| 11,131 |
| 35,438 |
| $ | 0.31 |
| 18,241 |
| 35,505 |
| $ | 0.51 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock options |
| — |
| 906 |
|
|
| — |
| 922 |
|
|
| ||||
Add back: amounts allocated to nonvested shares |
| 135 |
| — |
|
|
| 221 |
| — |
|
|
| ||||
Less: amounts re-allocated to nonvested shares |
| (135 | ) | — |
|
|
| (221 | ) | — |
|
|
| ||||
Diluted net income available to common stockholders |
| $ | 11,131 |
| 36,344 |
| $ | 0.31 |
| $ | 18,241 |
| 36,427 |
| $ | 0.50 |
|
For the three months ended September 30, 2013 and 2012, weighted-average outstanding stock options totaling approximately 2.3 million and 3.1 million, respectively, were anti-dilutive and for the nine months ended September 30, 2013 and 2012, weighted-average outstanding stock options totaling approximately 2.4 million and 3.1 million, respectively, were anti-dilutive and therefore not included in the computation of diluted net income per share.
NOTE 5: SHARE-BASED COMPENSATION
The fair value of the share-based awards is measured at grant date and the resulting compensation expense is recognized on a straight-line basis over the requisite service period. The following table presents share-based compensation expense, which is a non-cash charge, included in the below noted captions within the Condensed Consolidated Statements of Income:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct cost of services |
| $ | 20 |
| $ | 65 |
| $ | 640 |
| $ | 186 |
|
Selling, general and administrative |
| 1,312 |
| 1,666 |
| 5,056 |
| 4,948 |
| ||||
Share-based compensation expense |
| 1,332 |
| 1,731 |
| 5,696 |
| 5,134 |
| ||||
Income tax benefit |
| (575 | ) | (762 | ) | (2,216 | ) | (2,249 | ) | ||||
Total share-based compensation expense, net of tax |
| $ | 757 |
| $ | 969 |
| $ | 3,480 |
| $ | 2,885 |
|
We grant stock options, stock appreciation rights, and restricted stock awards under our 2004 Equity Incentive Plan, as amended (the “2004 Plan”), which allows for the issuance of 7,500,000 shares. We settle stock option exercises and the vesting of restricted stock awards with newly issued authorized shares or the reissuance of treasury stock. Shares granted that expire, terminate or are forfeited are then available for reissuance as future grants. At September 30, 2013, there were approximately 575,000 shares available for future grants under the 2004 Plan.
During the nine months ended September 30, 2013, we granted 527,600 restricted stock awards at a weighted-average grant date price of $12.90 per share of which 330,000 shares will vest upon certification by the compensation committee of the Company’s Board of directors (the “Board”) of the achievement of certain company financial performance criteria for the calendar year ending December 31, 2013 and 164,100 shares vested upon issuance. The remaining 33,500 restricted stock awards vest one year from the grant date. As of September 30, 2013, we have assessed the likelihood that the performance condition will be met and have recorded the related expense based on the estimated outcome.
No options were granted during the nine months ended September 30, 2013. As of September 30, 2013 there was $4.1 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based awards, which will be recognized over a weighted-average period of 2.1 years.
NOTE 6: SEGMENT REPORTING
In the first quarter of 2013, we reorganized our internal management reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment. The former Bankruptcy segment and Settlement Administration segment were combined and will now be reported as the Bankruptcy and Settlement Administration segment. Although our consolidated results of operations, financial position and cash flows were not impacted, we have updated the segment disclosures for prior periods to reflect our new internal management reporting structure.
Our Technology segment provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, and document review to companies and law firms. Produced documents are made available primarily through a hosted environment utilizing our proprietary software DocuMatrix™, and third-party software which allows for efficient attorney review and data requests. Our Bankruptcy and Settlement Administration segment provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements, corporate restructuring, bankruptcy and class action proceedings.
The segment performance measure is based on earnings before interest, taxes, depreciation and amortization, other operating expense, and share-based compensation expense. In management’s evaluation of performance, certain costs, such as compensation for administrative staff and executive management, are not allocated by segment and, accordingly, the following reporting segment results do not include such unallocated costs.
Assets reported within a segment are those assets that can be identified to a segment and primarily consist of trade receivables, property, equipment and leasehold improvements, software, identifiable intangible assets and goodwill. Cash, certain tax-related assets, and certain prepaid assets and other assets are not allocated to our segments. Although we can and do identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets to reporting segments, we do not allocate the related depreciation and amortization to the segment as management evaluates segment performance exclusive of these non-cash charges.
Following is a summary of segment information for the three months ended September 30, 2013.
|
| Three Months Ended September 30, 2013 |
| ||||||||||
|
| Technology |
| Bankruptcy |
| Eliminations |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ | 75,624 |
| $ | 34,213 |
| $ | — |
| $ | 109,837 |
|
Intersegment revenues |
| 154 |
| — |
| (154 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
| 75,778 |
| 34,213 |
| (154 | ) | 109,837 |
| ||||
Reimbursable expenses |
| 676 |
| 5,171 |
| — |
| 5,847 |
| ||||
Total revenues |
| 76,454 |
| 39,384 |
| (154 | ) | 115,684 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
| 50,857 |
| 28,589 |
| (154 | ) | 79,292 |
| ||||
Segment performance measure |
| $ | 25,597 |
| $ | 10,795 |
| $ | — |
| $ | 36,392 |
|
Following is a summary of segment information for the three months ended September 30, 2012.
|
| Three Months Ended September 30, 2012 |
| ||||||||||
|
| Technology |
| Bankruptcy |
| Eliminations |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ | 50,896 |
| $ | 32,969 |
| $ | — |
| $ | 83,865 |
|
Intersegment revenues |
| 42 |
| — |
| (42 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
| 50,938 |
| 32,969 |
| (42 | ) | 83,865 |
| ||||
Reimbursable expenses |
| 441 |
| 6,681 |
| — |
| 7,122 |
| ||||
Total revenues |
| 51,379 |
| 39,650 |
| (42 | ) | 90,987 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
| 31,584 |
| 28,420 |
| (42 | ) | 59,962 |
| ||||
Segment performance measure |
| $ | 19,795 |
| $ | 11,230 |
| $ | — |
| $ | 31,025 |
|
Following is a reconciliation of our segment performance measure to income before income taxes.
|
| Three Months Ended September 30, |
| ||||
|
| 2013 |
| 2012 |
| ||
|
| (in thousands) |
| ||||
Segment performance measure |
| $ | 36,392 |
| $ | 31,025 |
|
Unallocated corporate expenses |
| (12,229 | ) | (6,532 | ) | ||
Share-based compensation expense |
| (1,332 | ) | (1,731 | ) | ||
Depreciation and software and leasehold amortization |
| (8,192 | ) | (6,755 | ) | ||
Amortization of intangible assets |
| (4,761 | ) | (6,804 | ) | ||
Fair value adjustment to contingent consideration |
| — |
| 11,717 |
| ||
Other operating income |
| 855 |
| — |
| ||
Income from operations |
| 10,733 |
| 20,920 |
| ||
Interest expense, net |
| (4,099 | ) | (1,921 | ) | ||
Income before income taxes |
| $ | 6,634 |
| $ | 18,999 |
|
Following is a summary of segment information for the nine months ended September 30, 2013.
|
| Nine Months Ended September 30, 2013 |
| ||||||||||
|
| Technology |
| Bankruptcy |
| Eliminations |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ | 200,537 |
| $ | 117,184 |
| $ | — |
| $ | 317,721 |
|
Intersegment revenues |
| 237 |
| — |
| (237 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
| 200,774 |
| 117,184 |
| (237 | ) | 317,721 |
| ||||
Reimbursable expenses |
| 1,498 |
| 33,427 |
| — |
| 34,925 |
| ||||
Total revenues |
| 202,272 |
| 150,611 |
| (237 | ) | 352,646 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
| 138,523 |
| 114,294 |
| (237 | ) | 252,580 |
| ||||
Segment performance measure |
| $ | 63,749 |
| $ | 36,317 |
| $ | — |
| 100,066 |
| |
Following is a summary of segment information for the nine months ended September 30, 2012.
|
| Nine Months Ended September 30, 2012 |
| ||||||||||
|
| Technology |
| Bankruptcy |
| Eliminations |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ | 142,455 |
| $ | 114,074 |
| $ | — |
| $ | 256,529 |
|
Intersegment revenues |
| 194 |
| — |
| (194 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
| 142,649 |
| 114,074 |
| (194 | ) | 256,529 |
| ||||
Reimbursable expenses |
| 1,163 |
| 19,662 |
| — |
| 20,825 |
| ||||
Total revenues |
| 143,812 |
| 133,736 |
| (194 | ) | 277,354 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
| 90,402 |
| 92,810 |
| (194 | ) | 183,018 |
| ||||
Segment performance measure |
| $ | 53,410 |
| $ | 40,926 |
| $ | — |
| $ | 94,336 |
|
Following is a reconciliation of our segment performance measure to income before income taxes.
|
| Nine Months Ended September 30, |
| ||||
|
| 2013 |
| 2012 |
| ||
|
| (in thousands) |
| ||||
Segment performance measure |
| $ | 100,066 |
| $ | 94,336 |
|
Unallocated corporate expenses |
| (33,574 | ) | (26,704 | ) | ||
Share-based compensation expense |
| (5,696 | ) | (5,134 | ) | ||
Depreciation and software and leasehold amortization |
| (22,582 | ) | (20,006 | ) | ||
Amortization of intangible assets |
| (14,463 | ) | (20,325 | ) | ||
Fair value adjustment to contingent consideration |
| — |
| 17,188 |
| ||
Intangible asset impairment expense |
| — |
| (1,777 | ) | ||
Other operating income |
| 759 |
| 225 |
| ||
Income from operations |
| 24,510 |
| 37,803 |
| ||
Interest expense, net |
| (7,930 | ) | (7,353 | ) | ||
Income before income taxes |
| $ | 16,580 |
| $ | 30,450 |
|
Following are total assets by segment.
|
| September 30, |
| December 31, |
| ||
|
| (in thousands) |
| ||||
Assets |
|
|
| ||||
Technology |
| $ | 367,736 |
| $ | 335,051 |
|
Bankruptcy and Settlement Administration |
| 277,707 |
| 296,811 |
| ||
Unallocated corporate |
| 91,247 |
| 22,854 |
| ||
Total consolidated assets |
| $ | 736,690 |
| $ | 654,716 |
|
NOTE 7: FAIR VALUES OF ASSETS AND LIABILITIES
Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are listed below.
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets.
Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value and estimated fair value of our cash equivalents, which consist of short-term money market funds, are classified as Level 1. There have been no transfers between Level 1 and Level 2 during the nine months ended September 30, 2013. In connection with the acquisitions of De Novo and Jupiter eSources, we established liabilities related to potential contingent consideration that were considered to be Level 3 liabilities. These liabilities were valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value. As of September 30, 2013 and December 31, 2012, the value of these liabilities was $0.
For fair value measurements categorized within Level 3 of the fair value hierarchy, our accounting and finance management, who report to the chief financial officer, determine our valuation policies and procedures. The development and
determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of our accounting and finance management and are approved by the chief financial officer. Fair value calculations are generally prepared with the assistance of third-party valuation experts who rely on discussions with management in addition to the use of management’s assumptions and estimates as they relate to the assets or liabilities in Level 3. Such assumptions and estimates include such inputs as estimates of future cash flows, projected profit and loss information, discount rates, and assumptions as they relate to future pertinent events. Through regular interaction with the third-party valuation experts, finance and accounting management determine that the valuation techniques used and inputs and outputs of the models reflect the requirements of accounting standards as they relate to fair value measurements. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. As of September 30, 2013 there were no assets or liabilities that were measured and recorded at fair value on a recurring basis.
Fair Value of Financial Assets and Liabilities
As of September 30, 2013 and December 31, 2012, the carrying value of our trade accounts receivable, accounts payable, certain other liabilities, and capital leases approximated fair value. The amount outstanding under our Credit Facility was $300.0 million as of September 30, 2013 and the amount outstanding under our Former Credit Facility was $199.0 million at December 31, 2012, respectively, both of which approximated fair value due to the borrowing rates currently available to us for debt with similar terms and are classified as Level 2.
NOTE 8: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows (in thousands):
|
| Nine Months Ended |
| ||||
|
| 2013 |
| 2012 |
| ||
|
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
| ||
Interest |
| $ | 7,321 |
| $ | 5,677 |
|
Income taxes, net |
| 4,869 |
| 4,959 |
| ||
Non-cash investing and financing transactions: |
|
|
|
|
| ||
Property, equipment, and leasehold improvements accrued in accounts payable and other long-term liabilities |
| 5,923 |
| 1,191 |
| ||
Dividends declared but not yet paid |
| 3,170 |
| 3,233 |
| ||
Capitalized lease obligations incurred |
| 7,902 |
| 176 |
| ||
NOTE 9: EQUITY
Share Repurchases
On June 1, 2012, our Board authorized the repurchase, through December 31, 2013, of up to an aggregate of $35.0 million of our outstanding shares of common stock (the “2012 Program”). Through June 30, 2013, approximately $31.7 million remained outstanding under the 2012 Program, and on September 5, 2013, we announced that we reactivated the 2012 Program. As of September 30, 2013 we had purchased 1,132,040 shares under the 2012 Program during the nine months ended September 30, 2013 at an average cost of $12.62 per share. As of September 30, 2012, we had purchased 283,980 shares of common stock under the 2012 Program for approximately $3.3 million, at an average cost of $11.62 per share.
We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options. During the three months ended September 30, 2013 and 2012, we repurchased 60,198 shares and 44,588 shares, respectively, for approximately $0.8 million and $0.6 million, respectively, to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises. During the nine months ended September 30, 2013 and September 30, 2012, we repurchased 332,027 shares and 213,681 shares, respectively, for approximately $4.3 million and $2.6 million, respectively, to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises.
Dividends
On February 28, 2013, the Board declared a cash dividend of $0.09 per outstanding share of common stock, which was paid on June 3, 2013 to shareholders of record as of the close of business on May 1, 2013.
On June 13, 2013, the Board declared a cash dividend of $0.09 per outstanding share of common stock, which was paid on September 9, 2013 to shareholders of record as of the close of business on August 1, 2013.
On September 5, 2013, the Board declared a cash dividend of $0.09 per outstanding share of common stock, which is payable on December 9, 2013 to shareholders of record as of the close of business on November 1, 2013.
Dividends payable were approximately $3.2 million at September 30, 2013 and December 31, 2012.
NOTE 10: LEGAL PROCEEDINGS
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending litigation and other claims. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations or financial condition.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
In this report, in other filings with the SEC and in press releases and other public statements by our officers throughout the year, Epiq Systems, Inc. makes or will make statements that plan for or anticipate the future. These forward-looking statements include, but are not limited to any projection or expectation of earnings, revenue or other financial items; the plans, strategies and objectives of management for future operations; factors that may affect our operating results; new products or services; the demand for our products and services; our ability to consummate acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future economic conditions or performance; industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations. In this Quarterly Report on Form 10-Q, we make statements that plan for or anticipate the future. Many of these statements are found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report.
Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated,” “goal,” “objective,” “seeks,” and “potential” and variations of these words and similar expressions or negatives of these words. Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a “safe harbor” for forward-looking statements. Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) any material changes in our total number of client engagements and the volume associated with each engagement, (2) any material changes in our clients’ deposit portfolio or the services required or selected by our clients in engagements, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, or changes in government legislation or court rules affecting these filings, (4) overall strength and stability of general economic conditions, both in the United States and in the global markets, (5) failure to keep pace with technological changes and significant changes in the competitive environment, (6) risks associated with the handling of confidential data and compliance with information privacy laws, (7) changes in or the effects of pricing structures and arrangements, (8) risks associated with the integration of acquisitions into our existing business operations, (9) risks associated with indebtedness, (10) risks associated with foreign currency fluctuations, (11) risks associated with developing and providing software and internet-based technology solutions to our clients, (12) risks associated with cyber-attacks, interruptions or delays in services at data centers, (13) risks of errors or failures of software or services, (14) risks associated with our international operations, (15) risks of litigation against us or failure to protect our intellectual property, (16) any material non-cash write-downs based on impairment of our goodwill, and (17) other risks detailed from time to time in our SEC filings, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements contained herein to reflect future events or developments, except as required by law.
This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Overview
We provide integrated technology solutions for the legal profession. Our solutions are designed to streamline the administration of bankruptcy, litigation, investigations, financial transactions and regulatory compliance matters. We offer innovative managed technology solutions for eDiscovery, document review, legal notification, claims administration and controlled disbursement of funds. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, government agencies, mortgage processors, and financial institutions.
In the first quarter of 2013, we reorganized our internal management reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment. The former Bankruptcy segment and Settlement Administration segment were combined and are now reported as the Bankruptcy and Settlement Administration segment. Although our consolidated results of operation, financial position and cash flows will not be impacted, we have updated the segment disclosures for prior periods to reflect our new internal management reporting structure.
Technology
Our Technology segment provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, production of documents and document review services to companies and the litigation departments of law firms. Our eDataMatrix® and third-party software analyzes, filters, deduplicates and produces documents for review. Documents are made available primarily through a hosted environment, and our DocuMatrix™ and third-party software allow for efficient attorney review and data requests. Our customers are typically large corporations that use our products and services cooperatively with their legal counsel to manage the eDiscovery process for litigation, investigations, anti-trust filings and regulatory matters and data requests.
The substantial amount of electronic documents and other data used by businesses has changed the dynamics of how attorneys support discovery in complex litigation, investigations and data requests. Due to the complexity of matters, the volume of data that are maintained electronically, and the volume of documents that are produced, law firms have become increasingly reliant on electronic evidence management systems to organize and manage the litigation discovery process.
Following is a description of the significant sources of revenue in our Technology segment.
· Consulting, forensics, collection and project management service fees based on the number of hours that services are provided.
· Fees related to the conversion of data into an organized, searchable electronic database. The amount earned varies primarily on the number of documents or volume of data processed.
· Hosting fees based on the amount of data stored.
· Production of documents based on the number of documents
· Document review fees based on the number of hours spent reviewing documents, the number of pages reviewed, or the amount of data reviewed.
Our primary offices are in New York, Phoenix, Washington D.C., Dallas, London, Hong Kong and Tokyo, which we opened for business during the second quarter of 2013. We operate data centers in the United States, Europe and Asia. During the second quarter of 2013 we opened a new data center in Shanghai.
Bankruptcy and Settlement Administration
Our Bankruptcy and Settlement Administration segment provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements corporate restructuring bankruptcy and class action proceedings.
Bankruptcy is an integral part of the United States’ economy. As of the most recently reported data by the Administrative Office of the U.S. Courts for the twelve-month period ended June 30, 2013, there were approximately 1.13 million new bankruptcy filings as compared to 1.31 million bankruptcy filings for the prior twelve-month period ended June 30, 2012. This number of bankruptcy filings represents the lowest level in any 12-month period since the twelve-month period ended December 31, 2008. Bankruptcy filings for the twelve-month period ended June 30, 2013 decreased 13% versus the prior twelve-month period with Chapter 7 filings declining 15%, Chapter 11 filings declining 12%, and Chapter 13 filings declining 10%.
This segment provides solutions that address the needs of Chapter 7, Chapter 11, and Chapter 13 bankruptcy trustees to administer bankruptcy proceedings and of debtor corporations that file a plan of reorganization.
· Chapter 7 is a liquidation bankruptcy for individuals or businesses that, as measured by the number of new cases filed in the twelve-month period ended December 31, 2012, accounted for approximately 68% of all bankruptcy filings. In a Chapter 7 case, the debtor’s assets are liquidated and the resulting cash proceeds are used by the Chapter 7 bankruptcy trustee to pay creditors. Chapter 7 cases typically last several years.
· Chapter 11 is a reorganization model of bankruptcy for corporations that, as measured by the number of new cases filed in the twelve-month period ended December 31, 2012, accounted for less than 1% of all bankruptcy filings. Chapter 11 generally allows a company, often referred to as the debtor-in-possession, to continue operating under a plan of reorganization to restructure its business and to modify payment terms of both secured and unsecured obligations. Chapter 11 bankruptcy engagements are generally long-term, multi-year assignments that provide revenue visibility into future periods.
· Chapter 13 is a reorganization model of bankruptcy for individuals that, as measured by the number of new cases filed in the twelve-month period ended December 31, 2012, accounted for approximately 31% of all bankruptcy filings. In a Chapter 13 case, debtors make periodic cash payments into a reorganization plan and a Chapter 13 bankruptcy trustee uses these cash payments to make monthly distributions to creditors. Chapter 13 cases typically last between three and five years.
Our trustee services deposit portfolio averaged approximately $1.8 billion during the nine months ended September 30, 2013 as compared to approximately $2.0 billion for the nine months ended September 30, 2012, and our interest-based deposit fees continued at low pricing levels under our agreements due to the low short-term interest rate environment.
We provide our Chapter 7 products and services to our trustee customers at no direct charge, and they maintain deposit accounts for bankruptcy cases under their administration at a designated banking institution. We have arrangements with various banks under which we provide the bankruptcy trustee case management software and related services, and the bank provides the bankruptcy trustee with deposit-related banking services.
The key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor’s legal counsel, the creditors, the creditors’ legal counsel, and the bankruptcy judge. Chapter 7 and Chapter 13 cases also include a professional bankruptcy trustee, who is responsible for administering the bankruptcy case. The end-user customers of our Chapter 7 and Chapter 13 bankruptcy businesses are professional bankruptcy trustees and our Chapter 11 customers are debtor corporations that file a plan of reorganization. The Executive Office for United States Trustees, a division of the United States Department of Justice, appoints all bankruptcy trustees. A United States Trustee is appointed in most federal court districts and generally has responsibility for overseeing the integrity of the bankruptcy system. The bankruptcy trustee’s primary responsibilities include liquidating the debtor’s assets or collecting funds from the debtor, distributing the collected funds to creditors pursuant to the orders of the bankruptcy court and preparing regular status reports for the Executive Office for United States Trustees and for the bankruptcy court. Trustees manage an entire caseload of bankruptcy cases simultaneously.
Our proprietary software product, AACER® (Automated Access to Court Electronic Records) (“AACER®”), assists creditors including banks, mortgage processors and their administrative services professionals to streamline processing of their portfolios of loans in bankruptcy cases. AACER® electronically monitors developments in all United States bankruptcy courts and applies sophisticated algorithms to classify docket filings automatically in each case to facilitate the management of large bankruptcy claims operations. By implementing AACER®, clients achieve greater accuracy in faster timeframes, with a significant cost savings compared to manual attorney review of each case in the portfolio. Banking PortalTM, a centralized hub for processing online banking transactions across Epiq’s family of Chapter 7 products, facilitates the rapid on-boarding of new banks and provides ebanking capabilities.
Class action refers to litigation in which class representatives bring a lawsuit against a defendant company or other persons on behalf of a large group of similarly affected persons. Mass tort refers to class action cases that are particularly large or prominent. Class action and mass tort litigation is often complex and the cases, including administration of any settlement, may last several years. Key participants in this marketplace include law firms that specialize in representing class action and mass tort plaintiffs and other law firms that specialize in representing defendants.
Following is a description of the significant sources of revenue in our Bankruptcy and Settlement Administration segment.
· Data hosting fees and volume-based fees.
· Professional service fees and other support service fees contingent upon the month-to-month delivery of services such as data conversion, claims processing, claims reconciliation, project management, professional services, call center support, website development and administration, and controlled disbursements. The amount we earn varies primarily on the size and complexity of the engagement.
· Deposit-based and service fees. Deposit-based fees are earned on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients, to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support services. The fees earned based on assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates and changes in service fees assessed on such deposits.
· Legal noticing services to parties of interest in bankruptcy, class action, and other administrative matters, including direct notification and media campaign and advertising management in which we coordinate notification, primarily through print media outlets, to potential parties of interest for a particular client engagement.
· Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.
· Reimbursed expenses, primarily related to postage on mailing services and other pass-through expenses.
Results of Operations for the Three Months Ended September 30, 2013 Compared with the Three Months Ended September 30, 2012
The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see our discussion of segment results in the “Results of Operations by Segment” section below.
Consolidated Results
|
| Three Months Ended |
| $ Change |
|
|
| |||||
Amounts in thousands |
| 2013 |
| 2012 |
| (Decrease) |
| % Change |
| |||
Operating revenue |
| $ | 109,837 |
| $ | 83,865 |
| $ | 25,972 |
| 31 | % |
Reimbursable expenses |
| 5,847 |
| 7,122 |
| (1,275 | ) | -18 | % | |||
Total Revenue |
| 115,684 |
| 90,987 |
| 24,697 |
| 27 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
| 52,126 |
| 34,346 |
| 17,780 |
| 52 | % | |||
Reimbursed direct costs |
| 5,565 |
| 6,891 |
| (1,326 | ) | -19 | % | |||
Selling, general and administrative |
| 35,162 |
| 26,988 |
| 8,174 |
| 30 | % | |||
Depreciation and software and leasehold amortization |
| 8,192 |
| 6,755 |
| 1,437 |
| 21 | % | |||
Amortization of identifiable intangible assets |
| 4,761 |
| 6,804 |
| (2,043 | ) | -30 | % | |||
Fair value adjustment to contingent consideration |
| — |
| (11,717 | ) | 11,717 |
| n/m |
| |||
Other operating income |
| (855 | ) | — |
| (855 | ) | n/m |
| |||
Total Operating Expense |
| 104,951 |
| 70,067 |
| 34,884 |
| 50 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Income From Operations |
| 10,733 |
| 20,920 |
| (10,187 | ) | -49 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Interest Expense (Income) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
| 4,101 |
| 1,926 |
| 2,175 |
| 113 | % | |||
Interest income |
| (2 | ) | (5 | ) | 3 |
| n/m |
| |||
Net Interest Expense |
| 4,099 |
| 1,921 |
| 2,178 |
| 113 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Income Before Income Taxes |
| 6,634 |
| 18,999 |
| (12,365 | ) | -65 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Provision for Income Taxes |
| 2,399 |
| 7,733 |
| (5,334 | ) | -69 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Net Income |
| $ | 4,235 |
| $ | 11,266 |
| $ | (7,031 | ) | -62 | % |
n/m — not meaningful
Revenue
The increase in operating revenue for the three months ended September 30, 2013 as compared to the same period in the prior year was driven by a $24.7 million increase in the Technology segment along with a $1.2 million increase in the Bankruptcy and Settlement Administration segment.
Total revenue includes reimbursed expenses, such as postage related to notification services. We reflect these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our quarter to quarter income from operations as we realize little or no margin from this revenue.
Operating Expense
The $17.8 million increase in direct cost of operating revenue, exclusive of depreciation and amortization, was primarily the result of the increase in and the mix of operating revenue and includes a $15.0 million increase in direct compensation-related costs primarily in support of the revenue growth in our Technology segment. Outside services operating expenses also increased by $3.7 million related to our revenue growth. These increases were partially offset by a $1.1 million decrease in costs for legal notification and advertising services.
The decline in reimbursed direct costs for the three months ended September 30, 2013 as compared to the same period of 2012 corresponds to the decline in revenue from reimbursed expenses.
Selling, general and administrative expenses increased $8.2 million primarily as a result of an increase in the number of employees to support increased revenues, primarily in the Technology segment and included an increase of $3.9 million in compensation-related expense, an increase of $1.2 million in travel related expense, an increase of $1.2 million in office-related expenses such as lease expense, maintenance, utilities and supplies and a $0.9 million increase in outside professional services.
Depreciation and software and leasehold amortization costs increased $1.4 million as a result of increased depreciation on equipment and software related to segment investments.
Amortization of intangible assets decreased related to certain of our intangible assets being amortized on an accelerated amortization method which are at lower amortization stages of the estimated useful lives of the intangible assets.
Operating expenses for the three months ended September 30, 2012, included income of $11.7 million related to a fair value adjustment to contingent consideration related to our acquisition of De Novo in 2011. No fair value adjustment to contingent consideration is included in operating expenses for the three months ended September 30, 2013.
Interest Expense, Net
The increase in net interest expense was primarily due to increased borrowings during the third quarter of 2013 as compared to the prior year and the partial write-off of loan fees in the amount of $1.0 million associated with the former credit facility. See Note 3 of our Notes to Condensed Consolidated Financial Statements for further information.
Income Taxes
Our effective tax rate for the three months ended September 30, 2013 was 36.2% compared to 40.7% in the prior year. The lower rate is primarily due to a current year income being generated in lower tax-rate jurisdictions.
On September 13, 2013, the United States Department of the Treasury and the Internal Revenue Service issued final regulations that provide guidance for taxpayers in determining whether a taxpayer must capitalize costs, for tax return purposes, incurred in acquiring, maintaining or improving tangible personal property. The regulations are generally effective for taxable years beginning on or after January 1, 2014. We do not believe it will have a material impact on our financial statements.
Results of Operations by Segment
The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 6 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.
|
| Three Months Ended |
| $ Change |
| % |
| |||||
Amounts in thousands |
| 2013 |
| 2012 |
| (Decrease) |
| Change |
| |||
Operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 75,624 |
| $ | 50,896 |
| $ | 24,728 |
| 49 | % |
Bankruptcy and Settlement Administration |
| 34,213 |
| 32,969 |
| 1,244 |
| 4 | % | |||
Total operating revenue |
| $ | 109,837 |
| $ | 83,865 |
| $ | 25,972 |
| 31 | % |
|
|
|
|
|
|
|
|
|
| |||
Reimbursable expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 676 |
| $ | 441 |
| $ | 235 |
| 53 | % |
Bankruptcy and Settlement Administration |
| 5,171 |
| 6,681 |
| (1,510 | ) | -23 | % | |||
Total reimbursable expenses |
| $ | 5,847 |
| $ | 7,122 |
| $ | (1,275 | ) | -18 | % |
|
|
|
|
|
|
|
|
|
| |||
Direct costs, selling, general and administrative costs |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 50,857 |
| $ | 31,584 |
| $ | 19,273 |
| 61 | % |
Bankruptcy and Settlement Administration |
| 28,589 |
| 28,420 |
| 169 |
| 1 | % | |||
Intercompany eliminations |
| (154 | ) | (42 | ) | (112 | ) | n/m |
| |||
Total direct costs, selling, general and administrative costs |
| $ | 79,292 |
| $ | 59,962 |
| $ | 19,330 |
| 32 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 25,597 |
| $ | 19,795 |
| $ | 5,802 |
| 29 | % |
Bankruptcy and Settlement Administration |
| 10,795 |
| 11,230 |
| (435 | ) | -4 | % | |||
Total segment performance measure |
| $ | 36,392 |
| $ | 31,025 |
| $ | 5,367 |
| 17 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
| $ | 36,392 |
| $ | 31,025 |
| $ | 5,367 |
| 17 | % |
Unallocated corporate expenses |
| (12,229 | ) | (6,532 | ) | (5,697 | ) | 87 | % | |||
Share-based compensation expense |
| (1,332 | ) | (1,731 | ) | 399 |
| -23 | % | |||
Depreciation and software and leasehold amortization |
| (8,192 | ) | (6,755 | ) | (1,437 | ) | 21 | % | |||
Amortization of intangible assets |
| (4,761 | ) | (6,804 | ) | 2,043 |
| -30 | % | |||
Fair value adjustment to contingent consideration |
| — |
| 11,717 |
| (11,717 | ) | n/m |
| |||
Other operating income |
| 855 |
| — |
| 855 |
| n/m |
| |||
Income from operations |
| 10,733 |
| 20,920 |
| (10,187 | ) | -49 | % | |||
Interest expense, net |
| (4,099 | ) | (1,921 | ) | (2,178 | ) | 113 | % | |||
Income before income taxes |
| $ | 6,634 |
| $ | 18,999 |
| $ | (12,365 | ) | -65 | % |
n/m — not meaningful
Technology Segment
Operating revenue increased $24.7million compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the third quarter of 2012. We expect continued strength in our global eDiscovery franchise as we progress through the remainder of 2013.
Direct, selling, general and administrative costs increased primarily in support of revenue growth and included a $15.5 million increase in direct compensation-related expenses primarily in support of our eDiscovery document review services, a $1.5 million increase in technology-related expenses, a $1.1 million increase in office related expenses, and a $0.6 million increase related to other production costs.
The Technology segment’s financial results for the three months ended September 30, 2013 reflect the impact of strategic investments primarily in support of global expansion and revenue growth of the eDiscovery franchise as well as a higher mix of eDiscovery document review services compared to the prior year which have lower operating margins than the Company’s overall margin.
Bankruptcy and Settlement Administration Segment
Operating revenue increased $1.2 million as compared to the prior year. Operating revenue for the three months ended September 30, 2013 included revenues from a large settlement administration engagement which increased legal notification and advertising services for that period. This increase was offset by a decline in revenues resulting from the current cyclical downturn in bankruptcy filings. We expect the current cyclical downturn in bankruptcy filings to continue through the remainder of 2013. Settlement administration continues to be dependent on the timing and size of contracts awarded.
Direct, selling, general and administrative costs in the third quarter of 2013 were comparable to the same period in the prior year.
The Bankruptcy and Settlement Administration segment’s financial results for the three months ended September 30, 2013 reflect a higher mix of settlement administration services as compared to the prior year which have lower operating margins than the Company’s overall margin.
Results of Operations for the Nine Months Ended September 30, 2013 Compared with the Nine Months Ended September 30, 2012
The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see our discussion of segment results in the “Results of Operations by Segment” section below.
Consolidated Results
|
| Nine Months Ended |
| $ Change |
|
|
| |||||
Amounts in thousands |
| 2013 |
| 2012 |
| (Decrease) |
| % Change |
| |||
Operating revenue |
| $ | 317,721 |
| $ | 256,529 |
| $ | 61,192 |
| 24 | % |
Reimbursable expenses |
| 34,925 |
| 20,825 |
| 14,100 |
| 68 | % | |||
Total Revenue |
| 352,646 |
| 277,354 |
| 75,292 |
| 27 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
| 154,150 |
| 107,425 |
| 46,725 |
| 43 | % | |||
Reimbursed direct costs |
| 33,179 |
| 20,179 |
| 13,000 |
| 64 | % | |||
Selling, general and administrative |
| 104,521 |
| 87,252 |
| 17,269 |
| 20 | % | |||
Depreciation and software and leasehold amortization |
| 22,582 |
| 20,006 |
| 2,576 |
| 13 | % | |||
Amortization of identifiable intangible assets |
| 14,463 |
| 20,325 |
| (5,862 | ) | -29 | % | |||
Fair value adjustment to contingent consideration |
| — |
| (17,188 | ) | 17,188 |
| n/m |
| |||
Intangible asset impairment expense |
| — |
| 1,777 |
| (1,777 | ) | n/m |
| |||
Other operating income |
| (759 | ) | (225 | ) | (534 | ) | n/m |
| |||
Total Operating Expense |
| 328,136 |
| 239,551 |
| 88,585 |
| 37 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Income From Operations |
| 24,510 |
| 37,803 |
| (13,293 | ) | -35 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Interest Expense (Income) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
| 7,944 |
| 7,365 |
| 579 |
| 8 | % | |||
Interest income |
| (14 | ) | (12 | ) | (2 | ) | n/m |
| |||
Net Interest Expense |
| 7,930 |
| 7,353 |
| 577 |
| 8 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Income Before Income Taxes |
| 16,580 |
| 30,450 |
| (13,870 | ) | -46 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Provision for Income Taxes |
| 5,566 |
| 11,988 |
| (6,422 | ) | -54 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Net Income |
| $ | 11,014 |
| $ | 18,462 |
| $ | (7,448 | ) | -40 | % |
n/m — not meaningful
Revenue
The increase in operating revenue for the nine months ended September 30, 2013 as compared to the same period in the prior year was driven by a $58.1 million increase in the Technology segment and a $3.1 million increase in the Bankruptcy and Settlement Administration segment.
Total revenue includes reimbursed expenses, such as postage related to notification services. We reflect these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our quarter to quarter income from operations as we realize little or no margin from this revenue.
Operating Expense
The increase of $46.7 million in direct cost of operating revenue, exclusive of depreciation and amortization, was primarily the result of the increase in and mix of operating revenue and includes a $37.1 million increase in direct compensation-related expenses primarily in support of our eDiscovery document review services, a $9.2 million increase in outside services, partially offset by a $4.6 million decrease in legal notification and advertising services..
The increase in reimbursed direct costs for the nine months ended September 30, 2013 as compared to the same period of 2012 corresponds to the increase in revenue from reimbursed expenses.
Selling, general and administrative expenses increased $17.3 million as compared to the prior year primarily as a result of an increase in the number of employees to support increased revenue, primarily in the Technology segment and included an increase of $9.9 million in compensation-related expenses, an increase of $2.8 million in travel related expense, a $2.1 million increase in outside professional services and a $2.2 million increase in office related expenses.
Depreciation and software and leasehold amortization costs increased $2.6 million as a result of increased depreciation on equipment and software related to segment investments.
Amortization of intangible assets decreased related to certain of our intangible assets being amortized on an accelerated amortization method which are at lower amortization stages of the estimated useful lives of the intangible assets.
Operating expenses for the nine months ended September 30, 2012, included income of $17.2 million related to a fair value adjustment to contingent consideration related to our acquisition of De Novo in 2011. No fair value adjustment to contingent consideration is included in operating expenses for the nine months ended September 30, 2013. Also included in the nine months ended September 30, 2012 was intangible asset impairment expense of $1.8 million related to an impairment of the AACER® trade name acquired as part of the Jupiter eSources acquisition in 2010.
Interest Expense, Net
The change in net interest expense was primarily due to an increase in third-party bank debt interest expense, the write-off of loan fees in the amount of $1.0 million related to the former credit facility offset by a $1.2 million decrease in accreted interest expense related to acquisition-related liabilities for the nine months ended September 30, 2013 as compared to the same period in the prior year.
Income Taxes
Our effective tax rate for the nine months ended September 30, 2013 was 33.6% compared to 39.4% in the prior year. The lower tax rate compared to the prior year is primarily due to the enactment of the 2012 American Taxpayer Relief Act which extended the federal research credit for both the 2013 and 2012 tax years. Since this law was not enacted until January 2, 2013, no tax benefit related to the federal research credit was recognized in 2012. We have recognized approximately $0.4 million of tax benefit relating to the 2012 credits and a portion of our 2013 tax credits during 2013. The decreased rate was also impacted by current year income being generated in lower tax-rate jurisdictions.
We have been informed that our income tax returns for the years ended December 31, 2009, 2010 and 2011will be audited by the State of New York beginning in the third quarter of this year. The outcome of the tax examination cannot be predicted with certainty, but we do not expect any adjustments to be material. If any issues are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income tax in the period such resolution occurs.
Results of Operations by Segment
The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 6 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.
|
| Nine Months Ended |
| $ Change |
| % |
| |||||
Amounts in thousands |
| 2013 |
| 2012 |
| (Decrease) |
| Change |
| |||
Operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 200,537 |
| $ | 142,455 |
| $ | 58,082 |
| 41 | % |
Bankruptcy and Settlement Administration |
| 117,184 |
| 114,074 |
| 3,110 |
| 3 | % | |||
Total operating revenue |
| $ | 317,721 |
| $ | 256,529 |
| $ | 61,192 |
| 24 | % |
|
|
|
|
|
|
|
|
|
| |||
Reimbursable expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 1,498 |
| $ | 1,163 |
| $ | 335 |
| 29 | % |
Bankruptcy and Settlement Administration |
| 33,427 |
| 19,662 |
| 13,765 |
| 70 | % | |||
Total reimbursable expenses |
| $ | 34,925 |
| $ | 20,825 |
| $ | 14,100 |
| 68 | % |
|
|
|
|
|
|
|
|
|
| |||
Direct costs, selling, general and administrative costs |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 138,523 |
| $ | 90,402 |
| $ | 48,121 |
| 53 | % |
Bankruptcy and Settlement Administration |
| 114,294 |
| 92,810 |
| 21,484 |
| 23 | % | |||
Intercompany eliminations |
| (237 | ) | (194 | ) | (43 | ) | 22 | % | |||
Total direct costs, selling, general and administrative costs |
| $ | 252,580 |
| $ | 183,018 |
| $ | 69,562 |
| 38 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 63,749 |
| $ | 53,410 |
| $ | 10,339 |
| 19 | % |
Bankruptcy and Settlement Administration |
| 36,317 |
| 40,926 |
| (4,609 | ) | -11 | % | |||
Total segment performance measure |
| $ | 100,066 |
| $ | 94,336 |
| $ | 5,730 |
| 6 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
| $ | 100,066 |
| $ | 94,336 |
| $ | 5,730 |
| 6 | % |
Unallocated corporate expenses |
| (33,574 | ) | (26,704 | ) | (6,870 | ) | 26 | % | |||
Share-based compensation expense |
| (5,696 | ) | (5,134 | ) | (562 | ) | 11 | % | |||
Depreciation and software and leasehold amortization |
| (22,582 | ) | (20,006 | ) | (2,576 | ) | 13 | % | |||
Amortization of intangible assets |
| (14,463 | ) | (20,325 | ) | 5,862 |
| -29 | % | |||
Fair value adjustment to contingent consideration |
| — |
| 17,188 |
| (17,188 | ) | n/m |
| |||
Intangible asset impairment expense |
| — |
| (1,777 | ) | 1,777 |
| n/m |
| |||
Other operating income |
| 759 |
| 225 |
| 534 |
| n/m |
| |||
Income from operations |
| 24,510 |
| 37,803 |
| (13,293 | ) | -35 | % | |||
Interest expense, net |
| (7,930 | ) | (7,353 | ) | (577 | ) | 8 | % | |||
Income before income taxes |
| $ | 16,580 |
| $ | 30,450 |
| $ | (13,870 | ) | -46 | % |
n/m — not meaningful
Technology Segment
Operating revenue increased $58.1 million compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the first nine months of 2012. We expect continued strength in our global eDiscovery franchise as we progress through the remainder of 2013.
Direct, selling, general and administrative costs increased primarily in support of revenue growth and related to a $38.2 million increase in direct compensation-related expenses primarily in support of our eDiscovery document review services, a $3.6 million increase in information technology-related costs, a $3.2 million increase in other production costs and a $1.5 million increase in office related expenses.
The Technology segment’s financial results for the nine months ended September 30, 2013 reflect the impact of strategic investments primarily in support of global expansion and revenue growth of the eDiscovery franchise as well as a higher mix of eDiscovery document review services compared to the prior year which have lower operating margins than the Company’s overall margin.
Bankruptcy and Settlement Administration Segment
Operating revenue increased $3.1 million as compared to the prior year, primarily due to a large private anti-trust engagement which was principally completed in the first quarter of 2013 that increased legal notification and advertising services. This increase was partially offset by decreases in revenues resulting from the current cyclical downturn in bankruptcy filings, as well as revenues in the nine month period ended September 30, 2012 related to a large engagement which increased legal notification and advertising services for that period. We expect the current cyclical downturn in bankruptcy filings to continue through the remainder of 2013. Settlement administration continues to be dependent on the timing and size of contracts awarded.
Direct, selling, general and administrative costs increased primarily related to a $2.8 million increase in compensation-related costs, a $8.6 million increase in other production costs, and a $12.6 million increase in reimbursed direct costs related to the large private anti-trust engagement which was active during the first nine months of 2013, partially offset by a $4.6 million decrease in legal notification costs as compared to the nine months ended September 30, 2012.
The Bankruptcy and Settlement Administration segment’s financial results for the nine months ended September 30, 2013 reflect a higher mix of settlement administration services as compared to the prior year which have lower operating margins than the Company’s overall margin.
Liquidity and Capital Resources
Cash flows from operating activities
During the nine months ended September 30, 2013, our operating activities provided net cash of $8.6 million. Included in net cash provided by operating activities was net income of $11.0 million, including $43.6 million of non-cash expenses, for a total of $54.6 million. Cash provided by operating activities also included a $46.0 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $40.3 million increase in trade accounts receivable due primarily to sequential revenue growth during 2013 as compared to the second half of 2012 as well as an increase in days sales outstanding. Cash provided by operating activities also includes the use of cash for customer deposits primarily related to fourth quarter 2012 receipt of a $14.3 million customer deposit for a large settlement administration engagement and the current year expenditure incurred for that matter. These uses of cash were partially offset by a $5.7 million increase in accounts payable and other liabilities. Trade accounts receivable will fluctuate from period to period depending on the period to period change in revenue and the timing of revenue and collections. Accounts payable will fluctuate from period to period depending on the timing of purchases and payments.
During the nine months ended September 30, 2012, our operating activities provided net cash of $42.6 million. Contributing to net cash provided by operating activities were net income of $18.5 million and non-cash expenses, such as depreciation and amortization and share-based compensation expense, of $38.0 million, for a total of $56.5 million. Cash provided by operating activities also included a $13.9 million net use of cash resulting from changes in operating assets and liabilities, resulting primarily from a $16.7 million increase in trade accounts receivable primarily due to revenue growth in 2012 offset by a $3.5 million decrease in prepaid expenses and other assets.
Cash flows from investing activities
During the nine months ended September 30, 2013 and 2012, we used cash of $28.1 million and $12.6 million, respectively, for the purchase of property and equipment, including computer hardware and purchased software licenses primarily for our Technology segment and purchased computer hardware primarily for our network infrastructure. Also included in this
amount for the nine months ended September 30, 2013 was approximately $7.9 million related to the expansion of our Kansas City corporate headquarters which was completed in the third quarter of 2013. Software development is essential to our continued growth, and, during the nine months ended September 30, 2013 and 2012, we used cash of $4.9 million and $4.8 million, respectively, to fund internal costs related to the development of software.
Cash flows from financing activities
On August 27, 2013, we entered into a $400 million senior credit facility (the “Credit Facility”) which replaces our former credit facility (the “Former Credit Facility”). The Credit Facility provides for a senior revolving loan in the amount of $100 million maturing in August 2018 and a senior secured term loan in a principal amount of $300 million maturing in August 2020. Proceeds of the term loan were used to pay for, among other items, fees and expenses of approximately $8.1 million associated with the closing of the Credit Facility and the repayment of the outstanding indebtedness under the Former Credit Facility. During the nine months ended September 30, 2013, we borrowed $88.0 million and repaid $287.0 million under the Former Credit Facility, inclusive of the payment of the outstanding revolving loan balance on August 27, 2013, the proceeds of which were used primarily to fund working capital requirements associated with sequential revenue growth. During the nine months ended September 30, 2013 we paid $3.1 million of deferred acquisition consideration related to the December 28, 2011 acquisition of De Novo Legal LLC. Also during the nine months ended September 30, 2013, we paid $5.8 million of principal payments related to other debt. In addition, we paid $9.8 million in dividends and used $17.8 million to repurchase shares under our share repurchase program and shares required to be repurchased by the Company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises. See Notes 3 and 9 of our Notes to Condensed Consolidated Financial Statements for further information.
During the nine months ended September 30, 2012, we borrowed $59.0 million and repaid $59.0 million under our Former Credit Facility along with $5.7 million of principal payments related to other debt for total debt reduction of $5.7 million. In addition, we paid $5.9 million in dividends and used $5.9 million to repurchase shares under our share repurchase program and shares required to be repurchased by the Company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises. We also paid $8.4 million during the nine months ended September 30, 2012 for deferred acquisition consideration related to the October 1, 2010 acquisition of Jupiter eSources LLC.
We believe that funds generated from working capital, plus our existing cash balances and amounts available under our senior credit facility, will be sufficient to meet our currently anticipated working capital requirements, internal software development expenditures, property, equipment and third party software expenditures, deferred acquisition price obligations, capital leases, dividend payments, common stock repurchases, interest payments due on our outstanding borrowings, and other contractual obligations.
Foreign Cash
As of September 30, 2013 and December 31, 2012, our foreign subsidiaries had $6.9 million and $3.0 million, respectively, in cash located in financial institutions located outside of the United States. We consider the earnings of our non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. Should we decide to repatriate the foreign earnings, we would have to adjust the income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
Off-balance Sheet Arrangements
We do not utilize off-balance sheet arrangements in our operations; however, we enter into operating leases in the ordinary course of business. Our operating lease obligations are disclosed below under “Contractual Obligations”.
Contractual Obligations
There have been no significant developments outside the ordinary course of business with respect to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 5, 2013 (the “2012 Form 10-K”).
Critical Accounting Policies
In our 2012 Form 10-K, we disclose accounting policies, referred to as critical accounting policies, that require management to use significant judgment or that require significant estimates. Management regularly reviews the selection and application of our critical accounting policies. Other than the updates described below there have been no updates to the critical accounting policies contained in our 2012 Form 10-K.
Goodwill
We assess goodwill for impairment on an annual basis at a reporting unit level and have identified our operating segments (Technology segment and Bankruptcy and Settlement Administration segment) as our reporting units for purposes of testing for goodwill impairment. In the first quarter of 2013, we reorganized our internal management reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment. The former Bankruptcy segment and Settlement Administration segment were combined and are now reported as the Bankruptcy and Settlement Administration segment. At the time of the prior year’s goodwill impairment testing, we had identified our three operating segments as our reporting units (eDiscovery, Bankruptcy, and Settlement Administration). Based on the change in our operating segments effective in the first quarter of 2013, we evaluated our goodwill balances and determined that there was no impairment of goodwill as a result of this change.
Our recognized goodwill totaled $404.2 million as of September 30, 2013. As of July 31, 2013, which is the date of our most recent impairment test, the fair value of each of our reporting units was substantially in excess of the carrying value of the reporting unit. As of September 30, 2013, $189.2 million of goodwill is allocated to the Technology segment and $215.0 million of goodwill is allocated to the Bankruptcy and Settlement Administration segment.
Due to the current economic environment and the uncertainties regarding potential future economic impacts on our reporting units, there can be no assurances that estimates and assumptions made for purposes of our annual goodwill impairment test, will prove to be accurate predictions of the future. If assumptions regarding forecasted revenues or margins of certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would occur, and if it did occur, whether it would be material.
The following table illustrates the percentages by which each reporting unit’s fair value exceeded its carrying value as of July 31, 2013, the date of the most recent impairment test. In addition the table includes sensitivity analyses related to changes in certain key assumptions for each reporting unit. The impact of each assumption change within the sensitivity analyses was calculated independently and excludes the impact of the other assumed changes.
|
| Technology |
| Bankruptcy and |
| Total (2) |
|
|
|
|
|
|
|
|
|
Fair Values in Excess of Carrying Values | |||||||
Percentage by which fair value exceeds carrying value as of July 31, 2013 |
| 35 | % | 35 | % | 35 | % |
|
|
|
|
|
|
|
|
Sensitivity Analysis — 1% Changes in Certain Key Assumptions |
| ||||||
Percentage by which fair value would exceed carrying value: |
|
|
|
|
|
|
|
· 1% increase in discount rate (1) |
| 8 | % | 28 | % | n/a |
|
· 1% decrease in long-term growth assumptions(1) |
| 18 | % | 34 | % | n/a |
|
(1) Assumes all other inputs remain the same; the impact of each assumption change within the sensitivity analyses above was calculated independently and excludes the impact of the other assumed changes.
(2) Total fair value of the Company was determined using the NASDAQ stock price as of the measurement date adjusted by an assumed control premium. Changes in the discount rate or growth rates of individual reporting units would therefore not impact the total fair value of the Company in any of the sensitivity analyses presented above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which we are exposed include interest rates under our senior revolving credit facility, fluctuations in short-term interest rates on a portion of our bankruptcy trustee revenue and foreign exchange rates giving rise to translation.
Interest Rate Risk
The senior secured term loan under our Credit Facility bears interest as follows: (1) 2.75% plus prime rate subject to a 2% floor; or (2) 3.75% plus one, two, three or six month LIBOR rate subject to a 1% LIBOR floor. As of September 30, 2013, all outstanding borrowings under the term loan were based on LIBOR subject to a 1% LIBOR floor and the applicable margin was 3.75%.
Within 90 days following the August 27, 2013 closing date of the Credit Facility, we are required, under terms specified in the Credit Facility, to enter into a hedging arrangement related to partial protection against interest rate fluctuations. As of the filing date these financial statements were issued we have not yet entered into any hedging arrangements.
We earn deposit-based and service fees in our Chapter 7 bankruptcy business. Deposit-based fees are earned on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients. The fees we earn are based on assets placed on deposit by our trustee clients and may vary based on fluctuations in short-term interest rates. Based on sensitivity analysis we performed for the three and nine months ended September 30, 2013, a hypothetical 1% movement in interest rates would not have had a material effect on our consolidated financial position, results from operations or cash flows.
Foreign Currency Risk
We have operations outside of the United States, therefore, a portion of our revenues and expenses are incurred in a currency other than United States Dollars. We do not utilize hedge instruments to manage the exposures associated with fluctuating currency exchange rates. Our operating results are exposed to changes in exchange rates between the United States Dollar and the functional currency of the countries where we have operations. When the United States Dollar weakens against foreign currencies, the United States Dollar value of revenues and expenses denominated in foreign currencies increases. When the United States Dollar strengthens, the opposite situation occurs.
We performed a sensitivity analysis assuming a hypothetical 1% increase in foreign exchange rates applied to our 2013 results of operations. For the three and nine months ended September 30, 2013, the analysis indicated that such a movement would not have had a material effect on our total revenues, operating income or net income.
Item 4. Controls and Procedures
(a) Controls and Procedures
An evaluation was carried out by our Chief Executive Officer (the “CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the design and operations of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) or 15d-15(e). Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Change in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f), during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending litigation and other claims. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations or financial condition.
There have been no material changes in our Risk Factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 that was filed with the SEC on March 5, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 1, 2012, our board of directors (the “Board”) authorized the repurchase, through December 31, 2013, of up to an aggregate of $35.0 million of our outstanding shares of common stock (the “2012 Program”). Through June 30, 2013, approximately $31.7 million remainded outstanding under the 2012 Program, and on September 30, 2013, we announced that we reactivated the 2012 Program. During the three months ended September 30, 2013, we repurchased 1,132,040 shares under the 2012 Program at an average share price of $12.62 per share for a total of approximately $14.3 million. .
We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options. During the three months ended September 30, 2013, we repurchased 60,198 shares for approximately $0.8 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises.
The following table presents the total number of shares repurchased during each month of the quarter ended September 30, 2013, the average price paid per share (including brokerage commissions paid by the Company), the number of shares that were repurchased as part of the 2012 Program, and the approximate dollar value of shares that may yet be repurchased under the 2012 Program.
Period |
| Total Number of |
| Average Price Paid |
| Total Number of |
| Maximum Number (or |
| ||
|
|
|
|
|
|
|
|
|
| ||
July 1 – July 31 |
| — |
| — |
| — |
| $ | 31,700,000 |
| |
August 1 – August 31 |
| 432,318 |
| $ | 12.71 |
| 432,318 |
| 26,200,000 |
| |
September 1 – September 30 |
| 759,920 |
| $ | 12.64 |
| 699,722 |
| 17,400,000 |
| |
Total Activity for the Quarter Ended September 30, 2013 |
| 1,192,238 |
|
|
| 1,132,040 |
|
|
| ||
12.1 |
| Computation of ratio of earnings to fixed charges. |
|
|
|
31.1 |
| Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
| Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
| Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
|
|
|
101.INS† |
| XBRL Instance Document. |
|
|
|
101.SCH† |
| XBRL Taxonomy Extension Schema Document. |
|
|
|
101.CAL† |
| XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
101.DEF† |
| XBRL Taxonomy Definition Linkbase Document. |
|
|
|
101.LAB† |
| XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
101.PRE† |
| XBRL Taxonomy Extension Presentation Linkbase Document. |
† Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language). : (i) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012, (ii) Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,2013 and 2012, and (iv) and (iv) Notes to Condensed Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Epiq Systems, Inc. |
|
|
Date: October 28, 2013 | /s/ Tom W. Olofson |
| Tom W. Olofson |
| Chairman of the Board |
| Chief Executive Officer |
| (Principal Executive Officer) |
|
|
|
|
Date: October 28, 2013 | /s/ Elizabeth M. Braham |
| Elizabeth M. Braham |
| Executive Vice President, Chief Financial Officer |
| (Principal Financial & Accounting Officer) |