| THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company
NIC is a leading provider of digital government services that help
governments use technology to provide a higher level of service to
businesses and citizens and increase efficiencies. The Company
accomplishes this currently through two channels: its primary
outsourced portal businesses and its software & services
businesses.
In its primary outsourced portal businesses, the Company generally
designs, builds, and operates internet-based portals on an
enterprise-wide basis on behalf of state and local governments
desiring to provide access to government information and to
complete secure government-based transactions through multiple
online channels, including mobile devices. These portals consist of
websites and applications the Company has built that allow
businesses and citizens to access government information online and
complete transactions, such as applying for a permit, retrieving
government records, or filing a government-mandated form or report.
Typically operating under multiple-year contracts (See
Note 2), NIC markets the services and solicits users to
complete government-based transactions and to enter into subscriber
contracts permitting users to access the portal and the government
information contained therein in exchange for transactional and/or
subscription user fees. The Company typically manages operations
for each contractual relationship through separate local
subsidiaries that operate as decentralized businesses with a high
degree of autonomy. NIC’s business model allows the Company
to generate revenues by sharing in the fees the Company collects
from online transactions. The Company is typically responsible for
funding the up-front investments and ongoing operations and
maintenance costs of the outsourced government portals.
The Company’s software & services businesses primarily
include its subsidiaries that provide software development and
digital government services, other than outsourced portal services,
to state and local governments as well as federal agencies (See
Note 2).
Basis of presentation
The
Company classifies its revenues and cost of revenues into two
categories: (1) portal and (2) software & services. The portal
category generally includes revenues and cost of revenues from the
Company’s subsidiaries operating outsourced portals on behalf
of state and local governments. The software & services
category primarily includes revenues and cost of revenues from the
Company’s subsidiaries that provide software development and
services, other than outsourced portal services, to state and local
governments as well as federal agencies. The primary categories of
operating expenses include: cost of portal revenues, cost of
software & services revenues, selling & administrative and
depreciation & amortization. Cost of portal revenues consists
of all direct costs associated with operating government portals on
an outsourced basis including employee compensation and benefits
(including stock-based compensation), fees required to process
credit/debit card and automated clearinghouse transactions,
subcontractor labor costs, telecommunications, provision for losses
on accounts receivable, and all other costs associated with the
provision of dedicated client service such as dedicated
facilities. Cost
of software & services revenues consists of all direct project
costs to provide software development and services such as employee
compensation and benefits (including stock-based compensation),
subcontractor labor costs, and all other direct project costs
including hardware, software, materials, travel and other
out-of-pocket expenses. Selling & administrative expenses
consist primarily of corporate-level expenses relating to human
resource management, administration, information technology,
security, legal, finance and accounting, internal audit and all
non-customer service related costs from the Company’s
software & services businesses, including compensation and
benefits, information systems and office rent. Selling &
administrative expenses also consist of management incentive
compensation, including stock-based compensation, and
corporate-level expenses for market development and public
relations.
Certain amounts included in the unaudited consolidated statement of
cash flows for the three-month period ended March 31, 2016 were
reclassified to conform to the current year presentation. The
reclassifications had no effect on total cash flows or the income
statement for the three-month period ended March 31, 2016.
Adoption of accounting standard
In
March 2016, the Financial Accounting Standards Board
(“FASB”) issued new authoritative literature,
Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”), which simplifies several aspects of accounting for
employee share-based payment transactions, including accounting for
income taxes, forfeitures, and statutory tax withholding
requirements, as well as classification in the statement of cash
flows. The standard is effective for the annual reporting period
beginning January 1, 2017, including interim periods within that
reporting period. The Company adopted the standard on January 1,
2017. Adoption of the standard resulted in a decrease in retained
earnings of approximately $0.4 million and a corresponding increase
in additional paid-in capital in the Company’s unaudited
consolidated balance sheet at January 1, 2017, reflecting a associated
with the Company’s policy election to account for forfeitures
of awards as they occur. Previously, the Company estimated and
excluded compensation cost related to awards not expected to vest
based on estimated forfeitures. Furthermore, changes in
presentation as a result of the adoption of ASU 2016-09 increased
both cash provided by operating activities and cash used in
financing activities by approximately $2.2 million in the
Company’s unaudited consolidated statement of cash flows for
the three-month period ended March 31, 2016.
Upon adoption of ASU 2016-09, excess tax benefits or deficiencies
from share-based award activity are reflected in the consolidated
statement of income prospectively as a component of the provision
for income taxes, whereas previously such benefits or deficiencies
were recognized in additional paid-in capital in the consolidated
balance sheet. Excess tax benefits resulted in a reduction of the
Company’s provision for income taxes of approximately $0.5
million for the three-month period ended March 31, 2017.
Earnings per share
Unvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and are included in the
computation of earnings per share pursuant to the two-class method
for all periods presented. The two-class method is an earnings
allocation formula that treats a participating security as having
rights to undistributed earnings that would otherwise have been
available to common stockholders. The Company’s service-based
restricted stock awards contain non-forfeitable rights to dividends
and are participating securities. Accordingly, service-based
restricted stock awards were included in the calculation of
earnings per share using the two-class method for all periods
presented. Unvested service-based restricted shares totaled
approximately 0.6 million and 0.7 million at March 31, 2017 and
2016, respectively. Basic earnings per share is calculated by first
allocating earnings between common stockholders and participating
securities. Earnings attributable to common stockholders are
divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by
giving effect to dilutive potential common shares outstanding
during the period. The dilutive effect of shares related to the
Company’s employee stock purchase plan is determined based on
the treasury stock method. The dilutive effect of service-based
restricted stock awards is based on the more dilutive of the
treasury stock method or the two-class method assuming a
reallocation of undistributed earnings to common stockholders after
considering the dilutive effect of potential common shares other
than the participating unvested restricted stock awards. The
dilutive effect of performance-based restricted stock awards is
based on the treasury stock method.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three months ended
March 31,
2017
2016
Numerator:
Net income
$
13,985
$
12,894
Less: Income allocated to participating securities
(135
)
(120
)
Net income available to common stockholders
$
13,850
$
12,774
Denominator:
Weighted average shares - basic
66,046
65,739
Performance-based restricted stock awards
-
-
Weighted average shares - diluted
66,046
65,739
Basic net income per share:
Net income
$
0.21
$
0.19
Diluted net income per share:
Net income
$
0.21
$
0.19
Concentration of credit risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash
and accounts receivable. The Company limits its exposure to credit
loss by depositing its cash with high credit quality financial
institutions and monitoring the financial stability of those
institutions. The Federal Deposit Insurance Corporation
(“FDIC”) provides deposit insurance coverage up to
$250,000 per depositor for deposit accounts at each FDIC-insured
depository institution. At March 31, 2017, the amount of cash
covered by FDIC deposit insurance was approximately $8.5 million,
and approximately $115.1 million of cash was above the FDIC deposit
insurance limit. The Company performs ongoing credit evaluations of
its customers and generally requires no collateral to secure
accounts receivable.
Recently issued accounting pronouncements
Credit Losses
In June 2016, the FASB issued a new standard to replace the
incurred loss impairment methodology in current U.S. GAAP with a
methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable
information to inform credit loss estimates. For trade and other
receivables, the Company will be required to use a forward-looking
expected loss model rather than the incurred loss model for
recognizing credit losses which reflects losses that are probable.
The new standard will be effective for the Company beginning
January 1, 2020, with early adoption permitted beginning January 1,
2019. Application of the amendments is through a cumulative-effect
adjustment to retained earnings as of the effective date. The
Company is currently evaluating the new standard and the estimated
impact it will have on the Company’s financial
statements.
Leases
In February 2016, the FASB issued a new standard related to leases
to increase transparency and comparability among organizations by
requiring the recognition of lease assets and lease liabilities on
the balance sheet. Most prominent among the amendments is the
recognition of assets and liabilities by lessees for those leases
classified as operating leases under current U.S. GAAP. Under the
new standard, disclosures are required to meet the objective of
enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases.
The
standard is effective for the annual reporting period beginning
January 1, 2019, including interim periods within that reporting
period. The Company will be required to recognize and measure
leases at the beginning of the earliest period presented using a
modified retrospective approach. Early application is permitted.
The Company is currently evaluating the effects that the standard
will have on its consolidated financial statements, which the
Company anticipates could be significant, due mainly to its
non-cancellable leases for office space. As further described in
Note 7, Commitments and Contingencies, of the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, filed with the SEC on February 22, 2017, as of
December 31, 2016, the Company had minimum lease commitments under
non-cancellable operating leases totaling $17.9
million.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new standard related to revenue
recognition. Under the new standard, revenue is recognized when a
customer obtains control of promised goods or services in an amount
that reflects the consideration which the entity expects to receive
in exchange for those goods or services. In addition, the standard
requires expanded disclosure of the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with
customers. The FASB has issued several amendments to the standard,
including clarification on accounting for licenses of intellectual
property and identifying performance obligations.
The guidance permits two methods of adoption: retrospectively to
each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying
the guidance recognized at the date of initial application (the
modified retrospective approach). The standard is effective for the
annual reporting period beginning January 1, 2018, including
interim periods within that reporting period. The Company currently
expects it will adopt the standard using the modified retrospective
approach during the first quarter of 2018.
The Company has established an implementation team that has
completed a preliminary impact assessment of the new standard and a
scoping of its revenue sources by type of service provided under
its contracts with customers. The Company continues to assess the
standard and is currently evaluating a sample of customer contracts
for each revenue source to determine the estimated impact the
standard will have on the Company’s sources of revenue and
financial statements. |
