Our common stock is quoted on The Nasdaq Global Select Market under the symbol “PRFT.” The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on The Nasdaq Global Select Market since January 1, 2016.
Information on our Equity Compensation Plan has been included in Part III, Item 12 of this Annual Report on Form 10-K.
Since the program’s inception on August 11, 2008, we have repurchased approximately $135.0$220.0 million (12.4(15.4 million shares) of our outstanding common stock through December 31, 2017.2019.
| Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share (1) | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
| Beginning Balance as of October 1, 2017 | | | 11,926,538 | | | $ | 10.59 | | | | 11,926,538 | | | $ | 8,666,467 | |
| October 1-31, 2017 | | | 16,500 | | | | 19.39 | | | | 16,500 | | | $ | 8,346,459 | |
| November 1-30, 2017 | | | 260,536 | | | | 18.69 | | | | 260,536 | | | $ | 3,478,299 | |
| December 1-31, 2017 | | | 178,995 | | | | 19.33 | | | | 178,995 | | | $ | 17,691 | |
| Ending Balance as of December 31, 2017 | | | 12,382,569 | | | $ | 10.90 | | | | 12,382,569 | | | | | |
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid Per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| Beginning balance as of October 1, 2019 | 15,369,430 |
| | $ | 14.26 |
| | 15,369,430 |
| | $ | 15,800,781 |
|
| October 1-31, 2019 | 600 |
| | 35.98 |
| | 600 |
| | $ | 45,779,196 |
|
| November 1-30, 2019 | 20,539 |
| | 39.65 |
| | 20,539 |
| | $ | 44,964,924 |
|
| December 1-31, 2019 | — |
| | — |
| | — |
| | $ | 44,964,924 |
|
| Ending balance as of December 31, 2019 | 15,390,569 |
| | $ | 14.30 |
| | 15,390,569 |
| | |
|
| |
| (1) | Average price paid per share includes commission. |
Item |
| |
| Item 6. | Selected Financial Data. |
The selected financial data presented for, and as of the end of, each of the years in the five-year period ended December 31, 2017,2019, has been prepared in accordance with U.S. generally accepted accounting principles. The financial data presented is not directly comparable between periods as a result of the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers in 2018 and Topic 842, Leases in 2019,one acquisitionin 2019, three acquisitions in 2018, two acquisitions in 2017, one acquisition in 2016 and three acquisitions in each of 2015, 2014 and 2013.2015.
The following data should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements appearing in Part II, Item 8, and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Part II, Item 7.
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| Income Statement Data: | | (In thousands, except per share information) | |
| Revenues | | $ | 485,261 | | | $ | 486,982 | | | $ | 473,621 | | | $ | 456,692 | | | $ | 373,325 | |
| Cost of revenues | | $ | 323,748 | | | $ | 335,702 | | | $ | 318,411 | �� | | $ | 307,357 | | | $ | 250,226 | |
| Selling, general and administrative | | $ | 108,192 | | | $ | 101,264 | | | $ | 99,963 | | | $ | 90,202 | | | $ | 77,601 | |
| Depreciation and amortization | | $ | 19,747 | | | $ | 18,238 | | | $ | 18,315 | | | $ | 18,187 | | | $ | 11,236 | |
| Acquisition costs | | $ | 1,359 | | | $ | 1,252 | | | $ | 1,235 | | | $ | 3,446 | | | $ | 2,297 | |
| Adjustment to fair value of contingent consideration | | $ | 3,235 | | | $ | (1,679 | ) | | $ | 445 | | | $ | (1,463 | ) | | $ | 287 | |
| Income from operations | | $ | 28,980 | | | $ | 32,205 | | | $ | 35,252 | | | $ | 38,963 | | | $ | 31,678 | |
| Net interest expense | | $ | 1,838 | | | $ | 1,636 | | | $ | 2,085 | | | $ | 1,438 | | | $ | 293 | |
| Net other (income) expense | | $ | (1 | ) | | $ | 60 | | | $ | 332 | | | $ | 5 | | | $ | (112 | ) |
| Income before income taxes | | $ | 27,143 | | | $ | 30,509 | | | $ | 32,835 | | | $ | 37,520 | | | $ | 31,497 | |
| Net income | | $ | 18,581 | | | $ | 20,459 | | | $ | 23,007 | | | $ | 23,163 | | | $ | 21,432 | |
| Basic net income per share | | $ | 0.56 | | | $ | 0.60 | | | $ | 0.69 | | | $ | 0.73 | | | $ | 0.71 | |
| Diluted net income per share | | $ | 0.55 | | | $ | 0.58 | | | $ | 0.67 | | | $ | 0.70 | | | $ | 0.67 | |
| | | As of December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| Balance Sheet Data: | | (In thousands) | |
| Cash and cash equivalents | | $ | 6,307 | | | $ | 10,113 | | | $ | 8,811 | | | $ | 10,935 | | | $ | 7,018 | |
| Working capital (1) | | $ | 67,935 | | | $ | 76,446 | | | $ | 83,176 | | | $ | 76,276 | | | $ | 56,477 | |
| Property and equipment, net | | $ | 7,145 | | | $ | 8,888 | | | $ | 7,891 | | | $ | 7,966 | | | $ | 7,709 | |
| Goodwill and intangible assets, net | | $ | 356,304 | | | $ | 320,320 | | | $ | 322,791 | | | $ | 282,235 | | | $ | 218,997 | |
| Total assets | | $ | 499,060 | | | $ | 456,576 | | | $ | 474,364 | | | $ | 425,363 | | | $ | 324,958 | |
| Long-term debt | | $ | 55,000 | | | $ | 32,000 | | | $ | 56,000 | | | $ | 54,000 | | | $ | 19,000 | |
| Total stockholders’ equity | | $ | 366,351 | | | $ | 359,465 | | | $ | 348,810 | | | $ | 304,728 | | | $ | 259,490 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Income Statement Data: | (In thousands, except per share information) |
| Revenues | $ | 565,527 |
| | $ | 498,375 |
| | $ | 485,261 |
| | $ | 486,982 |
| | $ | 473,621 |
|
| Cost of revenues | $ | 354,213 |
| | $ | 319,831 |
| | $ | 323,748 |
| | $ | 335,702 |
| | $ | 318,411 |
|
| Selling, general and administrative | $ | 134,187 |
| | $ | 118,484 |
| | $ | 108,192 |
| | $ | 101,264 |
| | $ | 99,963 |
|
| Depreciation and amortization | $ | 20,598 |
| | $ | 20,428 |
| | $ | 19,747 |
| | $ | 18,238 |
| | $ | 18,315 |
|
| Acquisition costs | $ | 896 |
| | $ | 1,872 |
| | $ | 1,359 |
| | $ | 1,252 |
| | $ | 1,235 |
|
| Adjustment to fair value of contingent consideration | $ | 301 |
| | $ | 1,816 |
| | $ | 3,235 |
| | $ | (1,679 | ) | | $ | 445 |
|
| Income from operations | $ | 55,332 |
| | $ | 35,944 |
| | $ | 28,980 |
| | $ | 32,205 |
| | $ | 35,252 |
|
| Net interest expense | $ | 7,418 |
| | $ | 3,560 |
| | $ | 1,838 |
| | $ | 1,636 |
| | $ | 2,085 |
|
| Net other (income) expense | $ | (27 | ) | | $ | 12 |
| | $ | (1 | ) | | $ | 60 |
| | $ | 332 |
|
| Income before income taxes | $ | 47,941 |
| | $ | 32,372 |
| | $ | 27,143 |
| | $ | 30,509 |
| | $ | 32,835 |
|
| Net income | $ | 37,125 |
| | $ | 24,559 |
| | $ | 18,581 |
| | $ | 20,459 |
| | $ | 23,007 |
|
| Basic net income per share | $ | 1.18 |
| | $ | 0.76 |
| | $ | 0.56 |
| | $ | 0.60 |
| | $ | 0.69 |
|
| Diluted net income per share | $ | 1.15 |
| | $ | 0.73 |
| | $ | 0.55 |
| | $ | 0.58 |
| | $ | 0.67 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Balance Sheet Data: | (In thousands) |
| Cash and cash equivalents | $ | 70,728 |
| | $ | 44,984 |
| | $ | 6,307 |
| | $ | 10,113 |
| | $ | 8,811 |
|
| Working capital (1) | $ | 127,313 |
| | $ | 102,981 |
| | $ | 67,935 |
| | $ | 76,446 |
| | $ | 83,176 |
|
| Property and equipment, net | $ | 12,170 |
| | $ | 6,677 |
| | $ | 7,145 |
| | $ | 8,888 |
| | $ | 7,891 |
|
| Operating lease right-of-use assets | $ | 27,748 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Goodwill and intangible assets, net | $ | 373,517 |
| | $ | 376,084 |
| | $ | 356,304 |
| | $ | 320,320 |
| | $ | 322,791 |
|
| Total assets | $ | 640,492 |
| | $ | 570,544 |
| | $ | 499,060 |
| | $ | 456,576 |
| | $ | 474,364 |
|
| Long-term debt, net | $ | 124,664 |
| | $ | 120,067 |
| | $ | 55,000 |
| | $ | 32,000 |
| | $ | 56,000 |
|
| Non-current operating lease liabilities | $ | 19,649 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total stockholders’ equity | $ | 381,015 |
| | $ | 353,684 |
| | $ | 366,351 |
| | $ | 359,465 |
| | $ | 348,810 |
|
(1) Working capital is total current assets less total current liabilities
|
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K and in the documents that we incorporate by reference into this Annual Report on Form 10-K. This Annual Report on Form 10-K may contain certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Risk Factors.”
We are an information technology and management consulting firma digital consultancy serving Forbes Global 2000® and other large enterprise companies with a primary focus on the United States. We help clients gain competitive advantage by using technology to:designing, building and delivering digital solutions that: make their
businesses more responsive to market opportunities; strengthen relationships with customers, suppliers, and partners; improve productivity; and reduce information technology costs. Our digital experience, business optimizationunparalleled technology, management consulting, and industry solutionscreative capabilities, across industries, enable these benefits by developing, integrating, automating, and extending business processes, technology infrastructure and software applications end-to-end within an organization and with key partners, suppliers, and customers. Our solutions include analytics, custom applications, analytics, management consulting, commerce, portals and collaboration, content management, business integration, customer relationship management, portals and collaboration,business process management, platform implementations and business process management,artificial intelligence, among others. Our solutions enable our clients to operate a real-time enterprise that delivers exceptional front-end customer experiences and dynamically adapts business processes and the systems that support them, to meet the changing demands of an increasingly global Internet-driven, and competitive marketplace.
15
Adoption of ASC Topic 606
As further detailed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, we adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. The most significant impact upon adoption was to third-party software and hardware revenue, which was primarily recorded on a gross basis as the principal in the transaction through December 31, 2017 and presented on a net basis as the agent beginning on January 1, 2018. Since the change in presentation was applied prospectively and prior period results were not restated, the adoption of the new standard resulted in significantly lower software and hardware revenues and costs for the years ended December 31, 2019 and 2018 as compared to the year ended December 31, 2017. The impact of adopting ASC Topic 606 to services revenues and costs was immaterial.
Services Revenues
Services revenues are derived from professional services that include developing, implementing, integrating, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered. Most of our projects are performed on a time and materials basis, while a portion of our revenues is derived from projects performed on a fixed fee basis. Fixed fee engagements represented approximately 8% of our services revenues for the year ended December 31, 2017 compared to 11% for each of the years ended December 31, 2016 and 2015. The decrease inor fixed fee revenues is primarily attributable to an organic decrease in fixed fee engagements overall.percent complete basis. For time and material projects, revenues are recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the established billinghourly rates. For fixed fee contracts, revenues are recognized and billed by multiplying the established fixed rate per time period by the number of time periods elapsed. For fixed fee percent complete projects, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoicedFixed fee percent complete engagements represented approximately 7% of our services revenues for the year ended December 31, 2019 compared to 8%for each of the years ended December 31, 2018 and collected in excess of revenues recognized are classified as deferred revenues. In conjunction with services provided, we occasionally receive referral fees under partner programs. These referral fees are recognized when earned and recorded within services revenues.2017. On most projects, we are also reimbursed for out-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of revenues.the transaction price of the respective professional services contract. The aggregate amount of reimbursed expenses will fluctuate depending on the location of our clients, the total number of our projects that require travel, and whether our arrangements with our clients provide for the reimbursement of such expenses. In conjunction with services provided, we occasionally receive referral fees under partner programs. These referral fees are recognized at a point in time when earned and recorded within services revenues.
Software and Hardware Revenues
Software and hardware revenues are derived from sales of third-party software and hardware resales, in which we are considered the agent, and sales of internally developed software, and hardware.in which we are considered the principal. Revenues from sales of third-party software and hardware are generallyrecorded on a net basis, while revenues from internally developed software sales are recorded on a gross basis provided that we act as a principal in the transaction. Revenues from sales of third-party software-as-a-service arrangements where we are not the primary obligor are recorded on a net basis. Software and hardware revenues are expected to fluctuate depending on our clients’ demand for these products.
If we enter into contracts for the sale of services and software or hardware, management evaluates whether each element should be accounted for separately by considering the following criteria: (1) whether the deliverables have value to the client on a stand-alone basis; and (2) whether delivery or performance of the undelivered item or items is considered probable and substantially in our control (only if the arrangement includes a general right of return related to the delivered item). Further, for sales of software and services, management also evaluates whether the services are essential to the functionality of the software and whether there is fair value evidence for each deliverable. If management concludes that the separation criteria are met, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of our multiple element arrangements meet these criteria and are accounted for separately, with the arrangement consideration allocated among the deliverables using vendor specific objective evidence of the selling price. As a result, we generally recognize software and hardware sales upon delivery to the customer and services consistent with the policies described herein.
Further, delivery of software and hardware sales, when sold contemporaneously with services, can generally occur at varying times depending on the specific client project arrangement. Delivery of services generally occurs over a period of time consistent with the timeline as outlined in the client contract.
There are no significant cancellation or termination-type provisions for our software and hardware sales. Contracts for our professional services provide for a general right, to the client or us, to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.
Cost of Revenues
Cost of revenues consists of costcosts of services and software and hardware costs, and reimbursable expenses. Costcosts. Costs of services consists primarily of cash and non-cash compensation and benefits (including bonuses and non-cash compensation related to equity awards), costs associated with subcontractors, reimbursable expenses and other unreimbursed project-related expenses. Cost of revenues does not include depreciation of
assets used in the production of revenues which are primarily personal computers, servers, and other information technology related equipment. Upon adoption of ASC Topic 606 on January 1, 2018, sales of third-party software and hardware were presented on a net basis, and as such, third-party software and hardware costs are no longer presented within cost of revenue in the current and prior year.
Our cost of services as a percentage of services revenues is affected by the utilization rates of our professionals (defined as the percentage of our professionals’ time billed to clients divided by the total available hours in the respective period), the salaries we pay our professionals, and the average billing rate we receive from our clients. If a project ends earlier than scheduled, we retain professionals in advance of receiving project assignments, or demand for our services declines, our utilization rate will decline and adversely affect our cost of services as a percentage of services revenues. Software and hardware costs as a percentage of software and hardware revenues (excluding internally developed software) are typically higher than cost of services as a percentage of services revenues, and the mix of services and software and hardware for a particular period can significantly impact our total combined cost of revenues as a percentage of total revenues for such period. In addition, software and hardware costs as a percentage of software and hardware revenues can fluctuate due to pricing and other competitive pressures.
Selling, General, and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses are primarily composed of sales-related costs, general and administrative salaries, stock compensation expense, office costs, recruiting expense, variable compensation costs, marketing costs and other miscellaneous expenses. We have access to sales leads generated by our software vendors most notably IBM, Oracle and Microsoft, whose products we use to design and implement solutions for our clients. These relationships enable us to optimize our selling costs and sales cycle times and increase win rates through leveraging our partners’ marketing efforts and endorsements.
Plans for Growth and Acquisitions
Our goal is to continue to build one of the leading information technology consulting firms by expanding our relationships with existing and new clients and through the continuation of our disciplined acquisition strategy. Our future growth plan includes expanding our business with a primary focus on customers in the United States, both organically and through acquisitions. We also intend to further leverage and expand our existing offshore capabilities to support our future growth and provide our clients flexible options for project delivery.
When analyzing revenue growth by base business compared to acquired companies in the Results of Operations section below, revenue attributable to base business includes revenue from an acquired company that has been owned for a full four quarters after the date of acquisition.
United States Tax Reform
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act was signed into law on December 22, 2017. The law includesAct”) included significant changes to the U.S. corporate income tax system, including a federal corporate tax rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. This change may result in a U.S. tax liability on those earnings which have not previously been repatriated to the U.S., with future foreign earnings potentially not subject to U.S. income taxes when repatriated. See Note 10, Income Taxes, in the Notes to Consolidated Financial Statements for a discussion of the Company’s repatriation of earnings from the Company’s Chinese subsidiary. The majority of the provisions will havehad an impact on Perficientthe Company beginning in fiscal years 2018 and 2019.year 2018. However, there arewere certain transitional impacts of the 2017 Tax Act which affected the Company’s tax provision during the fourth quarter of 2017. As part of the transition to the new territorial tax system, the 2017 Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries, which produced a $1.1 million tax expense payable over eight years. As a result, a $0.1 million current liability and a $1.0 million non-current liability were recorded in the Company’s consolidated financial statements during the fourth quarter of 2017. The reduction of the federal corporate tax rate caused the Company to adjust its U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. The reduction in the corporate tax rate resulted in a provisional net tax credit of $3.3 million for the fourth quarter of 2017. In addition, as a resultSee Note 13, Income Taxes, in the Notes to Consolidated Financial Statements for further information regarding the impact of the 2017 Tax Act, changes to the net tax costAct.
Adoption of certain China dividends repatriated during 2017 created a $1.6 million tax credit during the fourth quarterASC Topic 842
As further detailed in Note 2, Summary of 2017.
There were no specific impacts of the 2017 Tax Act that could not be reasonably estimated which the Company accounted for under prior tax law. However, the SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period. We currently anticipate finalizing and recording any resulting adjustments within a year of the enactment date. See Note 10, Income Taxes,Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, for additional information regarding the 2017 Tax Act.
Revenue Recognition Standard Adoptedwe adopted ASC Topic 842 on January 1, 2018
In May 2014,2019 using the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, whichmodified retrospective method. ASC Topic 842 requires an entitylessees to recognize the amountlease liabilities and right of revenue to which it expects to be entitleduse (“ROU”) assets for the transfer of promised goods or services to customers. ASU No. 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. In 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year. In 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations, ASU No. 2016-10, Identifying Performance Obligations and Licensing, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contractsall leases, including operating leases, with Customers, all of which further amended ASU No. 2014-09. Thea term greater than 12 months on its balance sheet. As the Company adopted the standard on January 1, 2018 using the modified retrospective method, which requires a cumulative-effect adjustment to the opening balance of retained earnings within stockholders’ equity, as will be fully presented in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018. The Company has determined that the most significant impact upon adoption is to third-party software and hardware revenue, which has primarily been recorded on a gross basis as the principal in the transaction through December 31, 2017 and will be presented on a net basis as the agent as of January 1, 2018. Had the Company historically presented third-party software and hardware revenues on a net basis, software and hardware revenues would have been $5.3 million, $6.4 million, and $5.5 million for the years ended December 31, 2017, 2016, and 2015, respectively. As the Company adopted ASU No. 2014-09 using the modified retrospective method, the gross versus net presentation willrecognition of the ROU assets and lease liabilities does not impact the historical presentation, but willcomparative period consolidated balance sheet. There was no material impact on the 2018 presentation. Additionally, asConsolidated Statement of Operations or the agent, revenue from multi-year salesConsolidated Statement of third-party software and support will be recognized upfront asCash Flows for the performance obligation is fulfilled, rather than annually as invoiced to the customer. The impact from this timing change is expected to be immaterial. Variable consideration related to service contracts, such as volume discounts and holdbacks, may be recognized earlier under the new standard, and the Company is currently evaluating the impact of this change on contracts that are open as ofyear ended December 31, 2017. The adoption of ASU No. 2014-09 and its amendments will also result in additional disclosures around the nature and timing of performance obligations, contract costs, and deferred revenue, as well as significant judgments and practical expedients used by the Company.2019.
Results of Operations
The following table summarizes our results of operations as a percentage of total revenues:
| Revenues: | | 2017 | | | 2016 | | | 2015 | |
| Services revenues | | | 89.5 | % | | | 85.9 | % | | | 86.9 | % |
| Software and hardware revenues | | | 8.0 | | | | 10.3 | | | | 9.8 | |
| Reimbursable expenses | | | 2.5 | | | | 3.8 | | | | 3.3 | |
| Total revenues | | | 100.0 | | | | 100.0 | | | | 100.0 | |
| Cost of revenues (depreciation and amortization, shown separately below): | | | | | | | | | | | | |
| Cost of services | | | 57.3 | | | | 56.2 | | | | 55.2 | |
| Software and hardware costs | | | 6.9 | | | | 8.9 | | | | 8.7 | |
| Reimbursable expenses | | | 2.5 | | | | 3.8 | | | | 3.3 | |
| Total cost of revenues | | | 66.7 | | | | 68.9 | | | | 67.2 | |
| Selling, general and administrative | | | 22.3 | | | | 20.8 | | | | 21.1 | |
| Depreciation and amortization | | | 4.1 | | | | 3.7 | | | | 3.9 | |
| Acquisition costs | | | 0.3 | | | | 0.3 | | | | 0.3 | |
| Adjustment to fair value of contingent consideration | | | 0.7 | | | | (0.3 | ) | | | 0.1 | |
| Income from operations | | | 6.0 | | | | 6.6 | | | | 7.4 | |
| Net interest expense | | | 0.4 | | | | 0.3 | | | | 0.4 | |
| Net other expense | | | 0.0 | | | | 0.0 | | | | 0.1 | |
| Income before income taxes | | | 5.6 | | | | 6.3 | | | | 6.9 | |
| Provision for income taxes | | | 1.8 | | | | 2.1 | | | | 2.0 | |
| Net income | | | 3.8 | % | | | 4.2 | % | | | 4.9 | % |
|
| | | | | | | | |
| | Year Ended December 31, |
| Revenues: | 2019 | | 2018 | | 2017 |
| Services | 99.4 | % | | 99.1 | % | | 92.0 | % |
| Software and hardware | 0.6 |
| | 0.9 |
| | 8.0 |
|
| Total revenues | 100.0 |
| | 100.0 |
| | 100.0 |
|
| Cost of revenues (exclusive of depreciation and amortization, shown separately below): | |
| | |
| | |
|
| Cost of services | 62.6 |
| | 64.2 |
| | 59.8 |
|
| Software and hardware costs | — |
| | — |
| | 6.9 |
|
| Total cost of revenues | 62.6 |
| | 64.2 |
| | 66.7 |
|
| Selling, general and administrative | 23.7 |
| | 23.8 |
| | 22.3 |
|
| Depreciation and amortization | 3.6 |
| | 4.1 |
| | 4.0 |
|
| Acquisition costs | 0.2 |
| | 0.4 |
| | 0.3 |
|
| Adjustment to fair value of contingent consideration | 0.1 |
| | 0.3 |
| | 0.7 |
|
| Income from operations | 9.8 |
| | 7.2 |
| | 6.0 |
|
| Net interest expense | 1.3 |
| | 0.7 |
| | 0.4 |
|
| Net other (income) expense | — |
| | — |
| | — |
|
| Income before income taxes | 8.5 |
| | 6.5 |
| | 5.6 |
|
| Provision for income taxes | 1.9 |
| | 1.6 |
| | 1.8 |
|
| Net income | 6.6 | % | | 4.9 | % | | 3.8 | % |
A discussion of changes in our financial condition and results of operations during the year ended December 31, 2018 compared to the year ended December 31, 2017 has been omitted from this Annual Report on Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 26, 2019, which is available free of charge on the SEC’s website at www.sec.gov and on our investor relations website at www.perficient.com.
Year Ended December 31, 20172019 Compared to Year Ended December 31, 20162018
Revenues. Total revenues decreased less than 1%increased 13% to $485.3$565.5 million for the year ended December 31, 20172019 from $487.0$498.4 million for the year ended December 31, 2016.2018.
| | | | | Financial Results | | | Explanation for Increases (Decreases) Over Prior Year Period | | Financial Results (in thousands) | | Explanation for Increases (Decreases) Over Prior Year Period (in thousands) |
| | | (in thousands) | | | (in thousands) | | Year Ended December 31, | | Total Increase (Decrease) Over Prior Year Period | | Increase Attributable to Acquired Companies | | Increase (Decrease) Attributable to Base Business |
| | | For the Year Ended December 31, 2017 | | | For the Year Ended December 31, 2016 | | | Total Increase (Decrease) Over Prior Year Period | | | Increase Attributable to Acquired Companies | | | Decrease Attributable to Base Business | | 2019 | | 2018 | |
| Services Revenues | | $ | 434,253 | | | $ | 418,589 | | | $ | 15,664 | | | $ | 33,607 | | | $ | (17,943 | ) | $ | 561,918 |
| | $ | 494,001 |
| | $ | 67,917 |
| | $ | 20,013 |
| | $ | 47,904 |
|
| Software and Hardware Revenues | | | 38,642 | | | | 49,954 | | | | (11,312 | ) | | | - | | | | (11,312 | ) | 3,609 |
| | 4,374 |
| | (765 | ) | | — |
| | (765 | ) |
| Reimbursable Expenses | | | 12,366 | | | | 18,439 | | | | (6,073 | ) | | | 440 | | | | (6,513 | ) | |
| Total Revenues | | $ | 485,261 | | | $ | 486,982 | | | $ | (1,721 | ) | | $ | 34,047 | | | $ | (35,768 | ) | $ | 565,527 |
| | $ | 498,375 |
| | $ | 67,152 |
| | $ | 20,013 |
| | $ | 47,139 |
|
Services revenues increased 4%14% to $434.3$561.9 million for the year ended December 31, 20172019 from $418.6$494.0 million for the year ended December 31, 2016. The increase in services revenues was primarily due to acquisitions.2018. Services revenues attributable to our base business decreased $17.9increased $47.9 million while services revenues attributable to acquired companies was $33.6$20.0 million, resulting in a total increase of $15.7$67.9 million.
Software and hardware revenues decreased 23%17% to $38.6$3.6 million for the year ended December 31, 20172019 from $50.0$4.4 million for the year ended December 31, 2016 primarily due to a decrease in initial and renewal software license sales. Reimbursable expenses decreased 33% to $12.4 million for the year ended December 31, 2017 from $18.4 million for the year ended December 31, 2016 primarily as a result of a higher mix of projects performed in our offices and lower media buy expenses passed through to customers of $2.6 million. We do not realize any profit on reimbursable expenses.2018.
Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost Total cost of revenues decreased 4%increased 11% to $323.7$354.2 million for the year ended December 31, 20172019 from $335.7$319.8 million for the year ended December 31, 2016. The decrease in cost of revenues is2018 primarily related to software and hardware costs which decreased 24% to $33.3 million for the year ended December 31, 2017 from $43.6 million for the year ended December 31, 2016, as a result of the decrease in software license sales. Software and hardware costs as a percentage of software and hardware revenues was 86.2% for the year ended December 31, 2017 and 87.2% for the year ended December 31, 2016. Services revenue costs increased 2% to $278.1 million for the year ended December 31, 2017 from $273.7 million for the year ended December 31, 2016 due to an increasehigher headcount in service revenue as noted above. response to higher services revenues and acquisitions.Services costs as a percentage of services revenues decreased to 64.0%63% for the year ended December 31, 20172019 from 65.4% 65% for the year ended December 31, 20162018 primarily driven by improvementsan increase in the North American average bill rate and utilization, as well as a $1.0 million cost reduction related to labor incentives earned by the Company’s Louisiana and China operations. rates. The average bill rate for our professionals decreasedincreased to $126$125 per hour for the year ended December 31, 20172019 from $127$124 per hour for the year ended December 31, 2016 primarily due to the impact of a higher mix of lower bill rate offshore resources.2018.
Selling, General and Administrative. SG&A expenses increased 7%13% to $108.2$134.2 million for the year ended December 31, 20172019 from $101.3$118.5 million for the year ended December 31, 2016 2018 primarily due to acquisitions completed during the first half of 2017 increased variable compensation expense related to bonus costs and sales commissions, increased headcount to support our growth and the fluctuations in expenses as detailed in the following table. SG&A expenses, as a percentage of total revenues, increased to 22.3%was 24% for both of the yearyears ended December 31, 2017 from 20.8% for the year ended December 31, 2016.2019 and 2018.
| Selling, General and Administrative Expense (in millions) | | For the Year Ended December 31, 2017 | | | For the Year Ended December 31, 2016 | | | Increase (Decrease) | | | Percentage Change | |
| Sales-related costs | | $ | 30.3 | | | $ | 28.4 | | | $ | 1.9 | | | | 7 | % |
| Salary expense | | | 26.3 | | | | 25.3 | | | | 1.0 | | | | 4 | |
| Stock compensation expense | | | 9.3 | | | | 8.9 | | | | 0.4 | | | | 4 | |
| Office costs | | | 9.2 | | | | 8.9 | | | | 0.3 | | | | 3 | |
| Marketing expense | | | 5.9 | | | | 5.6 | | | | 0.3 | | | | 5 | |
| Variable compensation expense | | | 5.2 | | | | 2.0 | | | | 3.2 | | | | 160 | |
| Recruiting expense | | | 5.1 | | | | 5.7 | | | | (0.6 | ) | | | (11 | ) |
| Bad debt expense | | | 0.9 | | | | 1.1 | | | | (0.2 | ) | | | (18 | ) |
| Other | | | 16.0 | | | | 15.4 | | | | 0.6 | | | | 4 | |
| Total | | $ | 108.2 | | | $ | 101.3 | | | $ | 6.9 | | | | 7 | % |
|
| | | | | | | | | | | | | | |
| Selling, General and Administrative Expense | Year Ended December 31, | | Increase | | Percentage Change |
| (in millions) | 2019 | | 2018 | | |
| Salary expense | $ | 48.4 |
| | $ | 45.2 |
| | $ | 3.2 |
| | 7 | % |
| Sales-related costs | 13.6 |
| | 11.0 |
| | 2.6 |
| | 24 | % |
| Office costs | 11.9 |
| | 10.3 |
| | 1.6 |
| | 16 | % |
| Stock compensation expense | 11.3 |
| | 10.2 |
| | 1.1 |
| | 11 | % |
| Variable compensation expense | 13.3 |
| | 9.3 |
| | 4.0 |
| | 43 | % |
| Travel & entertainment | 6.6 |
| | 6.2 |
| | 0.4 |
| | 6 | % |
| Benefits expense | 7.5 |
| | 6.1 |
| | 1.4 |
| | 23 | % |
| IT/Infrastructure | 6.2 |
| | 5.2 |
| | 1.0 |
| | 19 | % |
| Bad debt expense | 0.4 |
| | 0.4 |
| | — |
| | — | % |
| Other | 15.0 |
| | 14.6 |
| | 0.4 |
| | 3 | % |
| Total | $ | 134.2 |
| | $ | 118.5 |
| | $ | 15.7 |
| | 13 | % |
Depreciation. Depreciation expense decreased 3%increased 9% to $4.7$4.4 million for the year ended December 31, 20172019 from $4.9$4.1 million for the year ended December 31, 2016. The decrease in depreciation expense is primarily attributable to certain property and equipment becoming fully depreciated. 2018. Depreciation expense as a percentage of total revenues was 1.0%0.8% for eachboth of the years ended December 31, 20172019 and 2016.2018.
Amortization. Amortization expense increased 12%decreased 1% to $15.0$16.2 million for the year ended December 31, 20172019 from $13.4$16.4 million for the year ended December 31, 2016. 2018. The increasedecrease in amortization expense was due to intangible assets from previous acquisitions becoming fully amortized, partially offset by the addition of intangible assets from the 20162019 and 2017 acquisitions, partially offset by intangible assets from previous acquisitions becoming fully amortized.2018 acquisitions. Amortization expense as a percentage of total revenues was 3.1%2.9% for the year ended December 31, 20172019 and 2.7% 3.3% for the year ended December 31, 2016.2018.
Acquisition Costs. Acquisition-related costs of $1.4$0.9 million were incurred during 20172019 compared to $1.3$1.9 million during 2016.2018. Costs were incurred for legal, accounting, tax, investment bank and advisor fees, and valuation services performed by third parties in connection with merger and acquisition-related activities.
Adjustment to Fair Value of Contingent Consideration. An unfavorable adjustment of $3.2$0.3 million was recorded during the year ended December 31, 2017 2019 which represents the net impact of the fair market value adjustments to the Southport Services Group, LLC (“Southport”), Stone Temple Consulting Corporation (“Stone Temple”), Elixiter, Inc. (“Elixiter”) and Sundog revenue and earnings-based contingent consideration liabilities, as well as accretion. An adjustment of $1.8 million was recorded during the year ended December 31, 2018 which represents the net impact of the fair market value adjustments to the Clarity RAS,Consulting, Inc. and BluetubeTruth Labs, LLC (together, “Clarity”) and Southport revenue and earnings-based contingent consideration liabilities, in addition to theas well as accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisitionacquisitions of BluetubeClarity, Southport, Stone Temple and Clarity. A favorable adjustment of $1.7Elixiter.
Net Interest Expense. Net interest expense increased to $7.4 million was recorded duringfor the year ended December 31, 2016 which represents the net impact of the fair market value adjustments to the Enlighten revenue and earnings-based contingent consideration liability partially offset by the accretion of the fair value estimate2019 from $3.6 million for the revenueyear ended December 31, 2018. The increase in net interest expense was primarily due to non-cash amortization of debt discount and earnings-based contingent considerationissuance costs related to the acquisition of Zeon, Market Street, Enlighten and Bluetube.Notes issued in September 2018.
Provision for Income Taxes. We provide for federal, state, and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. The effective income tax rate decreased to 31.5%22.6% for the year ended December 31, 20172019 from 32.9%24.1% for the year ended December 31, 2016. 2018. The decrease in the effective rate is primarily due to the effects of certain foreign withholding taxes, a foreign toll charge on historic foreign earnings, and a revaluation of ending deferred income tax caused by passage of the 2017 Tax Act. These favorable items were partially offset by an increase in our unrecognized tax benefits. See Note 10, Income Taxes, in the Notes to the Consolidated Financial Statements for additional information regarding the 2017 Tax Act.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues. Total revenues increased 3% to $487.0 million for the year ended December 31, 2016 from $473.6 million for the year ended December 31, 2015.
| | | Financial Results | | | Explanation for Increases (Decreases) Over Prior Year Period | |
| | | (in thousands) | | | (in thousands) | |
| | | For the Year Ended December 31, 2016 | | | For the Year Ended December 31, 2015 | | | Total Increase Over Prior Year Period | | | Increase Attributable to Acquired Companies | | | Decrease Attributable to Base Business | |
| Services Revenues | | $ | 418,589 | | | $ | 411,469 | | | $ | 7,120 | | | $ | 16,405 | | | $ | (9,285 | ) |
| Software and Hardware Revenues | | | 49,954 | | | | 46,622 | | | | 3,332 | | | | 4,226 | | | | (894 | ) |
| Reimbursable Expenses | | | 18,439 | | | | 15,530 | | | | 2,909 | | | | 4,427 | | | | (1,518 | ) |
| Total Revenues | | $ | 486,982 | | | $ | 473,621 | | | $ | 13,361 | | | $ | 25,058 | | | $ | (11,697 | ) |
Services revenues increased 2% to $418.6 million for the year ended December 31, 2016 from $411.5 million for the year ended December 31, 2015. The increase in services revenues was primarily due to acquisitions. Services revenues attributable to our base business decreased $9.3 million while services revenues attributable to acquired companies was $16.4 million, resulting in a total increase of $7.1 million.
Software and hardware revenues increased 7% to $50.0 million for the year ended December 31, 2016 from $46.6 million for the year ended December 31, 2015 primarily due to acquisitions. Reimbursable expenses increased 19% to $18.4 million for the year ended December 31, 2016 from $15.5 million for the year ended December 31, 2015. The increase in reimbursable expenses is primarily due to the acquisition of Enlighten in which media buy expenses are passed through to customers. We do not realize any profit on reimbursable expenses.
Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost of revenues increased 5% to $335.7 million for the year ended December 31, 2016 from $318.4 million for the year ended December 31, 2015. The increase in cost of revenues is primarily related to costs associated with services revenues which increased 5% to $273.7 million for the year ended December 31, 2016 from $261.7 million for the year ended December 31, 2015 due to an increase in revenue as noted above. Services costs as a percentage of services revenues increased to 65.4% for the year ended December 31, 2016 from 63.6% for the year ended December 31, 2015 primarily driven by a decrease in the average bill rate of our professionals, in addition to higher salaries and subcontractor costs. The average bill rate decreased to $127per hour for the year ended December 31, 2016 from $134 per hour for the year ended December 31, 2015 primarily due to the impact of a higher mix of lower bill rate offshore resources combined with a 1% reduction in the North American employee bill rate. Software and hardware costs increased 6% to $43.6 million for the year ended December 31, 2016 from $41.2 million for the year ended December 31, 2015, as a result of the increase in software license sales. Software and hardware costs as a percentage of software and hardware revenues was 87.2% for the year ended December 31, 2016 and 88.3% for the year ended December 31, 2015.
Selling, General and Administrative. SG&A expenses increased 1% to $101.3 million for the year ended December 31, 2016 from $100.0 million for the year ended December 31, 2015 primarily due to acquisitions completed during the second half of 2015 and October 2016 and the fluctuations in expenses as detailed in the following table. SG&A expenses, as a percentage of total revenues, decreased to 20.8% for the year ended December 31, 2016 from 21.1% for the year ended December 31, 2015.
| Selling, General and Administrative Expense (in millions) | | For the Year Ended December 31, 2016 | | | For the Year Ended December 31, 2015 | | | Increase (Decrease) | | | Percentage Change | |
| Sales-related costs | | $ | 28.4 | | | $ | 29.1 | | | $ | (0.7 | ) | | | (2 | )% |
| Salary expense | | | 25.3 | | | | 23.9 | | | | 1.4 | | | | 6 | |
| Stock compensation expense | | | 8.9 | | | | 8.7 | | | | 0.2 | | | | 2 | |
| Office costs | | | 8.9 | | | | 8.2 | | | | 0.7 | | | | 9 | |
| Recruiting expense | | | 5.7 | | | | 6.0 | | | | (0.3 | ) | | | (5 | ) |
| Marketing expense | | | 5.6 | | | | 5.6 | | | | 0.0 | | | | 0 | |
| Variable compensation expense | | | 2.0 | | | | 3.4 | | | | (1.4 | ) | | | (41 | ) |
| Bad debt expense | | | 1.1 | | | | 0.4 | | | | 0.7 | | | | 175 | |
| Other | | | 15.4 | | | | 14.7 | | | | 0.7 | | | | 5 | |
| Total | | $ | 101.3 | | | $ | 100.0 | | | $ | 1.3 | | | | 1 | % |
Depreciation. Depreciation expense increased 8% to $4.9 million for the year ended December 31, 2016 from $4.5 million for the year ended December 31, 2015. The increase in depreciation expense is primarily attributable to an increase in capital expenditures to support our growth. Depreciation expense as a percentage of total revenues was 1.0% and 0.9% for the years ended December 31, 2016 and 2015, respectively.
Amortization. Amortization expense decreased 3% to $13.4 million for the year ended December 31, 2016 from $13.8 million for the year ended December 31, 2015. The decrease in amortization expense was due to intangible assetstax benefits recognized related to previous acquisitions becoming fully amortized partially offset by the addition of intangible assets from the 2015 and 2016 acquisitions. Amortization expense as a percentage of total revenues was 2.7% for the year ended December 31, 2016 and 2.9% for the year ended December 31, 2015.
Acquisition Costs. Acquisition-related costs of $1.3 million were incurred during 2016share-based compensation deductions compared to $1.2 million during 2015. Costs were incurred for legal, accounting, tax, investment bank and advisor fees, and valuation services performed by third parties in connection with merger and acquisition-related activities.the prior year.
Adjustment to Fair Value of Contingent Consideration. A favorable adjustment of $1.7 million was recorded during the year ended December 31, 2016 which represents the net impact of the fair market value adjustments to the Enlighten revenue and earnings-based contingent consideration liability partially offset by the accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisition of Zeon, Market Street, Enlighten and Bluetube. An adjustment of $0.4 million was recorded during the year ended December 31, 2015 for the accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisitions of the Zeon, Market Street, and Enlighten.
Provision for Income Taxes. We provide for federal, state, and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. The effective income tax rate increased to 32.9% for the year ended December 31, 2016 from 29.9% for the year ended December 31, 2015. The increase in the effective rate is primarily due to an additional research and development tax credit recorded during the year ended December 31, 2015 related to the finalization of the Company’s 2014 research and development tax assessment. The increase in the effective rate year ended December 31, 2016 was partially offset by an incremental research and development tax credit related to the current year and a favorable impact related to the early adoption of ASU No. 2016-09. See Note 2, Summary of Significant Accounting Policies-Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements for additional information regarding the adoption of ASU No. 2016-09.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows (in millions):
| | | As of December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Cash and cash equivalents (1) | | $ | 6.3 | | | $ | 10.1 | | | $ | 8.8 | |
| Working capital (including cash and cash equivalents) (2) | | $ | 67.9 | | | $ | 76.4 | | | $ | 83.2 | |
| Amounts available under credit facilities | | $ | 69.7 | | | $ | 93.0 | | | $ | 69.0 | |
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash and cash equivalents (1) | $ | 70.7 |
| | $ | 45.0 |
| | $ | 6.3 |
|
| Working capital (including cash and cash equivalents) (2) | $ | 127.3 |
| | $ | 103.0 |
| | $ | 67.9 |
|
| Amounts available under credit facilities | $ | 124.8 |
| | $ | 124.8 |
| | $ | 69.7 |
|
(1)The balance at December 31, 20172019 includes $3.9 $5.5 million held by our Canadian, Indian and United Kingdom subsidiaries which is not available to fund domestic operations unless deemed repatriated. We currently do not plan or foresee a need to repatriate such funds. The balance also includes $1.8$1.1 million in cash held in our Chinese subsidiary. During the year ended December 31, 2017, the Company determined that the Chinese subsidiary’s earnings were no longer permanently reinvested and repatriated a total of approximately $9.6 million in cash to the U.S. parent in the second and third quarters of 2017. See Note 10, Income Taxes, in the Notes to Consolidated Financial Statements for a discussion of the Company’s repatriation of earnings from the Company’s Chinese subsidiary.
On June 9, 2017, we entered into a Credit Agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank, National Association, as administrative agent and the other lenders parties thereto. The Credit Agreement replaces the Second Amended and Restated Credit Agreement dated as of July 31, 2013 between the Company, Silicon Valley Bank and the other lenders and signatories thereto (the “Prior Credit Agreement”). The new credit facility was used to repay amounts due under the Prior Credit Agreement and will be used for working capital and general corporate purposes. In connection with the new agreement, the Company wrote off $0.2 million in unamortized credit facility fees associated with the Prior Credit Agreement, which was included in “Net interest expense” on the Consolidated Statements of Operations during the year ended December 31, 2017. The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $125.0 million, subject to a commitment increase of $75.0 million. All
outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of June 9, 2022.
The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $10.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. As of December 31, 2017,2019, the Company had one outstanding letter of credit for $0.3$0.2 million. Substantially all of the Company’s assets are pledged to secure the credit facility.
Borrowings under the Credit Agreement bear interest at the Company’s option of the prime rate (4.50%(4.75% on December 31, 2017)2019) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (1.56%(1.76% on December 31, 2017)2019) plus a margin ranging from 1.00% to 1.75%. The Company incurs an annual commitment fee of 0.15% to 0.20% on the unused portion of the line of credit. The additional margin amount and annual commitment fee are dependent on the level of outstanding borrowings. As of December 31, 2017,2019, the Company had $69.7$124.8 million of unused borrowing capacity.
From time to time, we establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which we make a portion of our stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors.
We have incurred commitments to make future paymentsunder contracts such as leases, the Credit Agreement and the Credit Agreement.Notes, as well as noncancellable purchase obligations, which primarily relate to multi-year third-party software sales. Maturities under these contracts are set forth in the following table as of December 31, 20172019 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| Contractual Obligations | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Operating lease obligations | $ | 31,707 |
| | $ | 8,627 |
| | $ | 12,804 |
| | $ | 8,125 |
| | $ | 2,151 |
|
| Total debt (1) | 143,750 |
| | — |
| | — |
| | 143,750 |
| | — |
|
| Purchase obligations | 8,082 |
| | 2,857 |
| | 3,746 |
| | 1,479 |
| | — |
|
| Total | $ | 183,539 |
| | $ | 11,484 |
| | $ | 16,550 |
| | $ | 153,354 |
| | $ | 2,151 |
|
(1)Debt obligations include the principal amount of the Notes, but exclude interest payments to be made under the Notes.
| | | Payments Due by Period | |
| Contractual Obligations | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than 5 Years | |
| Operating lease obligations | | $ | 29,484 | | | $ | 6,535 | | | $ | 12,611 | | | $ | 7,368 | | | $ | 2,970 | |
| Software license purchase obligation | | | 835 | | | | 835 | | | | - | | | | - | | | | - | |
| Total debt | | | 55,000 | | | | - | | | | - | | | | 55,000 | | | | - | |
| Total | | $ | 85,319 | | | $ | 7,370 | | | $ | 12,611 | | | $ | 62,368 | | | $ | 2,970 | |
If our capital is insufficient to fund our activities in either the short- or long-term, we may need to raise additional funds. In the ordinary course of business, we may engage in discussions with various persons in connection with additional financing. If we raise additional funds through the issuance of equity securities, our existing stockholders’ percentage ownership will be diluted. These equity securities may also have rights superior to our common stock. Additional debt or equity financing may not be available when needed or on satisfactory terms. If adequate funds are not available on acceptable terms, we may be unable to expand our services, respond to competition, pursue acquisition opportunities, or continue our operations.
Of the total cash and cash equivalents reported on the Consolidated Balance Sheet as of December 31, 20172019 of $6.3$70.7 million, approximately $3.9$5.5 million was held by the Company’s Canadian, Indian and United Kingdom subsidiaries and is considered to be indefinitely reinvested in those operations. The Company is able to fund its liquidity needs outside of these subsidiaries, primarily through cash flows generated by domestic operations and our credit facility.facility, as well as the proceeds from the Notes issuance in the third quarter of 2018. Therefore, the Company has no current plans to repatriate cash from these foreign subsidiaries in the foreseeable future. As of December 31, 2017,2019, the aggregate unremitted earnings of the Company’s foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $4.9$11.7 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.2$0.4 million. See Note 10, Income Taxes, in the Notes to Consolidated Financial Statements for a discussionAs of December 31, 2019, $1.1 million of the Company’s repatriation of earnings fromtotal cash and cash equivalents was held by the Company’s Chinese subsidiary. During the year ended December 31, 2017, the Company determined that the Chinese subsidiary’s earnings were no longer permanently reinvested and may repatriate available earnings from time to time.
We believe that the currently available funds, access to capital from our credit facility, and cash flows generated from operations will be sufficient to meet our working capital requirements and other capital needs for the next 12 months.
Critical Accounting Policies
Our accounting policies are fully described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. We believe our most critical accounting policies include revenue recognition, purchase accounting and related fair value measurements, convertible debt, and income taxes.
Revenue Recognition and Allowance for Doubtful Accounts
ServicePrior to January 1, 2018, the Company recognized revenue under ASC Subtopic 985-605, Software - Revenue Recognition, ASC Subtopic 605-25, Revenue Recognition - Multiple-Element Arrangements, and ASC Section 605-10-S99 (Staff Accounting Bulletin Topic 13, Revenue Recognition). On January 1, 2018, the Company adopted ASC Topic 606, which replaced most existing revenue recognition guidance. The most significant impact upon adoption was to third-party software and hardware revenue, which was primarily recorded on a gross basis as the principal in the transaction through December 31, 2017 and presented on a net basis as the agent as of January 1, 2018. Refer to Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements for additional information on the impact of adoption.
The following discussion relates to the Company’s revenue recognition policy, effective January 1, 2018, under ASC Topic 606.
The Company’s revenues consist of services and software and hardware sales. In accordance with ASC Topic 606, revenues are recognized when control of these services or goods are transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.
Services revenues are primarily derived fromcomprised of professional services providedthat include developing, implementing, automating and extending business processes, technology infrastructure, and software applications. The Company’s professional services span multiple industries, platforms and solutions; however, the Company has remained relatively diversified and does not believe that it has significant revenue concentration within any single industry, platform or solution.
Professional services revenues are recognized over time as services are rendered. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee or fixed fee percent complete basis. For time and material contracts, service revenues are generally recognized and billedinvoiced by multiplying the number of hours expended in the performance of the contract by the established billinghourly rates. For fixed fee projects, servicecontracts, revenues are generally recognized and invoiced by multiplying the fixed rate per time period established in the contract by the number of time periods elapsed. For fixed fee percent complete contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoicedhours, and collected in excess of revenues recognized are classified as deferred revenues. In conjunction with services provided, the Company occasionally receives referral fees under partner programs. These referral fees are recognized when earned and recorded within service revenues. Revenues from software and hardware sales are generally recorded on a gross basis considering the Company’s role as a principal in the transaction. Revenues from sales of third-party software-as-a-service arrangements where the Company is not the primary obligor are recorded on a net basis. On many projects the Company is also reimbursed for out-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of revenues. We did not realize any profit on reimbursable expenses.
Unbilled revenues represent the project time and expenses that have been incurred, but not yet billed to the client, prior to the end of the fiscal period. For time and materials projects, the client is invoiced for the amount of hours worked multiplied by the billing rates as stated in the contract. For fixed fee arrangements, the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract.
Clients are typically billed monthly for services provided during that month, but can be billed on a more or less frequent basis as determined by the contract. If the time and expenses are worked/incurredis worked and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as unbilled revenue once the Company verifies all other revenue recognition criteria have been met.
Revenuesmet, and the amount is classified as a receivable as the right to consideration is unconditional at that point. Amounts invoiced in excess of revenues recognized are recognized when the following criteriacontract liabilities, which are met: (1) persuasive evidence of the customer arrangement exists; (2) fees are fixed and determinable; (3) delivery and acceptance have occurred; and (4) collectability is deemed probable. The Company’s policy for revenue recognition in instances where multiple deliverables are sold contemporaneously to the same customer is in accordance with the FASB Accounting Standards Codification (“ASC”) Subtopic 985-605, Software – Revenue Recognition, ASC Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements, and ASC Section 605-10-S99 (Staff Accounting Bulletin Topic 13, Revenue Recognition). Specifically, if the Company enters into contracts for the sale of services and software or hardware, then the Company evaluates whether each element should be accounted for separately by considering the following criteria: (1) whether the deliverables have value to the client on a stand-alone basis; and (2) whether delivery or performance of the undelivered item or items is considered probable and substantiallyclassified as deferred revenues in the control of the Company (only if the arrangement includes a general right of return related to the delivered item). Further, for sales of softwareConsolidated Balance Sheet. The term between invoicing and services, the Company also evaluates whether the services are essential to the functionality of the software and if it has fair value evidence for each deliverable. If the Company has concluded that the separation criteria are met, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of the Company’s multiple element arrangements meet these criteria and are accounted for separately, with the arrangement consideration allocated among the deliverables using vendor specific objective evidence of the selling price. As a result, the Company generally recognizes software and hardware sales upon delivery to the customer and services consistent with the policies described herein.
Further, delivery of software and hardware sales, when sold contemporaneously with services, can generally occur at varying times depending on the specific client project arrangement. Delivery of services generally occurs over a period of time consistent with the timeline as outlined in the client contract.
There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales.payment due date is not significant. Contracts for professional services provide for a general right, to the client or the Company, to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.
The Company Certain contracts may provide multiple services under the terms of an arrangement and is required to assess whether oneinclude volume discounts or more units of accountingholdbacks, which are present. Service fees are typically accounted for as one unitvariable consideration, but are not typically significant. The Company estimates variable consideration based on historical experience and forecasted sales and includes the variable consideration in the transaction price.
Other services revenues are comprised of accounting,hosting fees, partner referral fees, maintenance agreements, training and internally developed software-as-a-service (“SaaS”) sales. Revenues from hosting fees, maintenance agreements, training and internally developed SaaS sales are generally recognized over time using a time-based measure of progress as fair value evidenceservices are rendered. Partner referral fees are recorded at a point in time upon meeting specified requirements set by each partner to earn the respective fee.
On many professional service projects, the Company is also reimbursed for individual tasksout-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of the transaction price of the respective professional services contract and are invoiced as the expenses are incurred. The Company structures its professional services arrangements to recover the cost of reimbursable expenses without a markup.
Software and hardware revenues are comprised of third-party software and hardware resales, in which the Company is considered the agent, and sales of internally developed software, in which the Company is considered the principal. Third-party software and hardware revenues are recognized and invoiced when the Company fulfills its obligation to arrange the sale, which occurs when the purchase order with the vendor is executed and the customer has access to the software or milestonesthe hardware has been shipped to the customer. Internally developed software revenues are recognized and invoiced when control is transferred to the customer, which occurs when the software has been made available to the customer and the license term has commenced. Revenues from third-party software and hardware sales are recorded on a net basis, while revenues from internally developed software sales are recorded on a gross basis. There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales, and the term between invoicing and payment due date is not available. The Company followssignificant.
Arrangements with clients may contain multiple promises such as delivery of software, hardware, professional services or post-contract support services. These promises are accounted for as separate performance obligations if they are distinct. For arrangements with clients that contain multiple performance obligations, the guidelines discussed above in determining revenues; however, certain judgmentstransaction price is allocated to the separate performance obligations based on estimated relative standalone selling price, which is estimated by the expected cost plus a margin approach, taking into consideration market conditions and estimates are made and usedcompetitive factors. Since the duration of contracts that contain multiple performance obligations is typically short given contract cancellation provisions, the allocation of the transaction price to determine revenues recognized in any accounting period. If estimates are revised, material differences may result in the amount and timing of revenues recognized forseparate performance obligations is not considered a given period.significant estimate.
Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all software and hardware sales and certain services transactions as appropriate.
Allowance for doubtful accounts is based upon specific identification of likely and probable losses. Each accounting period, accounts receivable is evaluated for risk associated with a client’s inability to make contractual payments, historical experience and other currently available information. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue or bad debts as appropriate in the period the risk is identified. Considerable judgment is used in assessing the ultimate realization of these receivables, including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. If the evaluation of service delivery issues or a client’s ability to pay is incorrect, future reductions to revenue or bad debt expense may be incurred.
Purchase Accounting and Related Fair Value Measurements
The Company allocates the purchase price, including contingent consideration, of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Such fair market value assessments are primarily based on third-party valuations using assumptions developed by management that require significant judgments and estimates that can change materially as additional information becomes available. The purchase
price allocated to intangibles is based on unobservable factors, including but not limited to, projected revenues, expenses, customer attrition rates, royalty rates, a weighted average cost of capital, among others. The weighted average cost of capital uses a market participant’s cost of equity and after-tax cost of debt and reflects the riskrisks inherent in the cash flows. The approach to valuing the initial contingent consideration associated with the purchase price also uses similar unobservable factors such as projected revenues and expenses over the term of the contingent earn-out period, discounted for the period over which the contingent consideration is measured.measured, and volatility rates. Based upon these assumptions, the initial contingent consideration is then valued using a Monte Carlo simulation. The Company finalizes the purchase price allocation within 12 months of the acquisition date asonce certain initial accounting valuation estimates are finalized.
finalized, and no later than 12 months following the acquisition date.
Convertible Debt
In accordance with accounting for debt with conversion and other options, the Company bifurcated the principal amount of the Notes issued on September 11, 2018 into liability and equity components. The initial liability component of the Notes was valued based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.7%. The equity component representing the conversion option and calculated as the residual amount of the proceeds was recorded as an increase in additional paid-in capital within stockholders’ equity, partially offset by the associated deferred tax effect. The amount recorded within additional paid-in capital is not to be remeasured as long as it continues to meet the conditions for equity classification. The resulting debt discount is being amortized to interest expense using the effective interest method over the period from the issuance date through the contractual maturity date of September 15, 2023. The Company utilizes the treasury stock method to calculate the effects of the Notes on diluted earnings per share.
In connection with the issuance of the Notes, the Company entered into Notes Hedges with the Option Counterparties. The Notes Hedges provide the Company with the option to acquire, on a net settlement basis, shares of common stock equal to the number of shares of common stock that notionally underlie the Notes and corresponds to the conversion price of the Notes. If the Company elects cash settlement and exercises the Notes Hedges, the aggregate amount of cash received from the Option Counterparties will cover the aggregate amount of cash that the Company would be required to pay to the holders of the Notes, less the principal amount thereof. The Notes Hedges do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock and are accounted for as freestanding financial instruments. The Notes Hedges were recorded as a reduction in additional paid-in capital within stockholders’ equity, partially offset by the associated deferred tax effect.
Additionally, in connection with the issuance of the Notes, the Company sold the Notes Warrants in privately negotiated transactions with the Option Counterparties. The strike price of the Notes Warrants is subject to certain adjustments under the terms of the Notes Warrants. As a result of the Notes Warrants and related transactions, the Company is required to recognize incremental dilution of earnings per share to the extent the average share price is over the strike price of the Notes Warrants for any fiscal quarter. The Notes Warrants may be settled in net shares of common stock or net cash at the Company’s election. The Notes Warrants were recorded as an increase in additional paid-in capital within stockholders’ equity.
Income Taxes
The Company calculates and provides for income taxes in each jurisdiction in which it operates. Deferred tax assets and liabilities, measured using enacted tax rates, are recognized for the future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company has established liabilities or reduced assets for uncertain tax positions when it believes those tax positions are not more likely than not of being sustained if challenged. The Company evaluates these uncertain tax positions and adjusts the related tax assets and liabilities in light of changing facts and circumstances each quarter. On December 22, 2017, the U.S. government enacted the 2017 Tax Act. The 2017 Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. See Note 10, 13,Income Taxes, in the Notes to the Consolidated Financial Statements for additional information regarding the 2017 Tax Act.
Recent Accounting Pronouncements
Recent accounting pronouncements are fully described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We haveno off-balance sheet arrangements, except operating lease commitments as disclosed in Note 12, 17, Commitments and Contingencies, in the Notes to Consolidated Financial Statements.
|
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to market risks related to changes in foreign currency exchange rates and interest rates. We believe our exposure to market risks is immaterial.
Exchange Rate Sensitivity
We are exposed to market risks associated with changes in foreign currency exchange rates because we generate a portion of our revenues and incur a portion of our expenses in currencies other than the U.S. dollar. As of December 31, 2017,2019, we were exposed to changes in exchange rates between the U.S. dollar and the Canadian dollar, Indian rupee, Chinese Yuan, Indian Rupee,yuan, British Pound,pound, and Euro.euro. We hedge material foreign currency exchange rate exposures when feasible using forward contracts. These instruments are subject to fluctuations in foreign currency exchange rates and credit risk. Credit risk is managed through careful selection and ongoing evaluation of the financial institutions utilized as counter parties.counterparties. Refer to Note 11, Financial Instruments14, Derivatives, in the Notes to Consolidated Financial Statements for further discussion.
Interest Rate Sensitivity
As of December 31, 2017,2019, there was $55.0 millionno outstanding balance and $69.7$124.8 million of available borrowing capacity under our credit facility. OurTo the extent we have outstanding borrowings under the credit facility, our interest expense will fluctuate as the interest rate for the line of credit floats based, at our option, on the prime rate plus a margin or the one-month LIBOR rate plus a margin.
During the third quarter of 2018, we issued Notes which have a fixed interest rate of 2.375%. The fair value of the Notes may increase or decrease for various reasons, including fluctuations in the market price of our common stock, fluctuations in market interest rates and fluctuations in general economic conditions. Based onupon the $55.0 million outstanding on the line of creditquoted market price as of December 31, 2017, an increase in2019, the interest rateaggregate fair value of 100 basis points would add $550,000 of interest expense per year, which is not considered material to our financial position or results of operations.the Notes was approximately $195.4 million.
We had unrestricted cash and cash equivalents totaling $6.3$70.7 million at December 31, 20172019 and $10.1$45.0 million at December 31, 2016.2018. The unrestricted cash and cash equivalents are primarily held for working capital purposes.purposes and acquisitions. We do not enter into investments for trading or speculative purposes.
24
|
| |
| Item 8. | Financial Statements and Supplementary Data. |
PERFICIENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
| | | December 31, | |
| | | 2017 | | | 2016 | |
| ASSETS | | (In thousands, except share information) | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 6,307 | | | $ | 10,113 | |
| Accounts receivable, net | | | 112,194 | | | | 103,702 | |
| Prepaid expenses | | | 4,470 | | | | 3,353 | |
| Other current assets | | | 6,237 | | | | 5,331 | |
| Total current assets | | | 129,208 | | | | 122,499 | |
| Property and equipment, net | | | 7,145 | | | | 8,888 | |
| Goodwill | | | 305,238 | | | | 275,205 | |
| Intangible assets, net | | | 51,066 | | | | 45,115 | |
| Other non-current assets | | | 6,403 | | | | 4,869 | |
| Total assets | | $ | 499,060 | | | $ | 456,576 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 23,196 | | | $ | 18,416 | |
| Other current liabilities | | | 38,077 | | | | 27,637 | |
| Total current liabilities | | | 61,273 | | | | 46,053 | |
| Long-term debt | | | 55,000 | | | | 32,000 | |
| Other non-current liabilities | | | 16,436 | | | | 19,058 | |
| Total liabilities | | $ | 132,709 | | | $ | 97,111 | |
| | | | | | | | | |
| Commitments and contingencies (see Note 12) | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Common stock (par value $.001 per share; 100,000,000 shares authorized and 47,370,945 shares issued and 33,249,665 shares outstanding as of December 31, 2017; 50,000,000 shares authorized and 45,895,086 shares issued and 33,865,688 shares outstanding as of December 31, 2016) | | $ | 47 | | | $ | 46 | |
| Additional paid-in capital | | | 403,906 | | | | 379,094 | |
| Accumulated other comprehensive loss | | | (1,822 | ) | | | (2,743 | ) |
| Treasury stock, at cost (14,121,280 shares as of December 31, 2017; 12,029,398 shares as of December 31, 2016) | | | (163,871 | ) | | | (126,442 | ) |
| Retained earnings | | | 128,091 | | | | 109,510 | |
| Total stockholders’ equity | | | 366,351 | | | | 359,465 | |
| Total liabilities and stockholders’ equity | | $ | 499,060 | | | $ | 456,576 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| ASSETS | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 70,728 |
| | $ | 44,984 |
|
| Accounts receivable, net | 129,118 |
| | 122,446 |
|
| Prepaid expenses | 4,647 |
| | 4,663 |
|
| Other current assets | 7,404 |
| | 5,711 |
|
| Total current assets | 211,897 |
| | 177,804 |
|
| Property and equipment, net | 12,170 |
| | 6,677 |
|
| Operating lease right-of-use assets | 27,748 |
| | — |
|
| Goodwill | 335,564 |
| | 327,992 |
|
| Intangible assets, net | 37,953 |
| | 48,092 |
|
| Other non-current assets | 15,160 |
| | 9,979 |
|
| Total assets | $ | 640,492 |
| | $ | 570,544 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
| Current liabilities: | |
| | |
|
| Accounts payable | $ | 23,081 |
| | $ | 24,437 |
|
| Other current liabilities | 61,503 |
| | 50,386 |
|
| Total current liabilities | 84,584 |
| | 74,823 |
|
| Long-term debt, net | 124,664 |
| | 120,067 |
|
| Operating lease liabilities | 19,649 |
| | — |
|
| Other non-current liabilities | 30,580 |
| | 21,970 |
|
| Total liabilities | $ | 259,477 |
| | $ | 216,860 |
|
| | | | |
| Commitments and contingencies (see Note 17) |
|
| |
|
|
| | | | |
| Stockholders’ equity: | |
| | |
|
| Preferred stock (par value $.001 per share; 8,000,000 authorized; no shares issued or outstanding as of December 31, 2019 and December 31, 2018) | $ | — |
| | $ | — |
|
| Common stock (par value $.001 per share; 100,000,000 authorized; 49,272,243 shares issued and 31,686,991 shares outstanding as of December 31, 2019; 48,429,299 shares issued and 31,770,888 shares outstanding as of December 31, 2018) | 49 |
| | 48 |
|
| Additional paid-in capital | 455,465 |
| | 437,250 |
|
| Accumulated other comprehensive loss | (2,650 | ) | | (2,588 | ) |
| Treasury stock, at cost (17,585,252 shares as of December 31, 2019; 16,658,411 shares as of December 31, 2018) | (261,624 | ) | | (233,676 | ) |
| Retained earnings | 189,775 |
| | 152,650 |
|
| Total stockholders’ equity | 381,015 |
| | 353,684 |
|
| Total liabilities and stockholders’ equity | $ | 640,492 |
| | $ | 570,544 |
|
See accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Revenues: | | (In thousands, except per share information) | |
| Services | | $ | 434,253 | | | $ | 418,589 | | | $ | 411,469 | |
| Software and hardware | | | 38,642 | | | | 49,954 | | | | 46,622 | |
| Reimbursable expenses | | | 12,366 | | | | 18,439 | | | | 15,530 | |
| Total revenues | | | 485,261 | | | | 486,982 | | | | 473,621 | |
| Cost of revenues (exclusive of depreciation and amortization, shown separately below): | | | | | | | | | | | | |
| Cost of services | | | 278,087 | | | | 273,682 | | | | 261,711 | |
| Software and hardware costs | | | 33,295 | | | | 43,581 | | | | 41,170 | |
| Reimbursable expenses | | | 12,366 | | | | 18,439 | | | | 15,530 | |
| Total cost of revenues | | | 323,748 | | | | 335,702 | | | | 318,411 | |
| | | | | | | | | | | | | |
| Selling, general, and administrative | | | 108,192 | | | | 101,264 | | | | 99,963 | |
| Depreciation | | | 4,722 | | | | 4,867 | | | | 4,496 | |
| Amortization | | | 15,025 | | | | 13,371 | | | | 13,819 | |
| Acquisition costs | | | 1,359 | | | | 1,252 | | | | 1,235 | |
| Adjustment to fair value of contingent consideration | | | 3,235 | | | | (1,679 | ) | | | 445 | |
| Income from operations | | | 28,980 | | | | 32,205 | | | | 35,252 | |
| | | | | | | | | | | | | |
| Net interest expense | | | 1,838 | | | | 1,636 | | | | 2,085 | |
| Net other (income) expense | | | (1 | ) | | | 60 | | | | 332 | |
| Income before income taxes | | | 27,143 | | | | 30,509 | | | | 32,835 | |
| Provision for income taxes | | | 8,562 | | | | 10,050 | | | | 9,828 | |
| | | | | | | | | | | | | |
| Net income | | $ | 18,581 | | | $ | 20,459 | | | $ | 23,007 | |
| | | | | | | | | | | | | |
| Basic net income per share | | $ | 0.56 | | | $ | 0.60 | | | $ | 0.69 | |
| Diluted net income per share | | $ | 0.55 | | | $ | 0.58 | | | $ | 0.67 | |
| Shares used in computing basic net income per share | | | 33,016 | | | | 34,023 | | | | 33,408 | |
| Shares used in computing diluted net income per share | | | 34,066 | | | | 35,001 | | | | 34,324 | |
See accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)thousands, except per share information)
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Net income | | $ | 18,581 | | | $ | 20,459 | | | $ | 23,007 | |
| Other comprehensive income (loss), net of reclassification adjustments: | | | | | | | | | | | | |
| Foreign benefit plan | | | 88 | | | | (34 | ) | | | - | |
| Foreign currency translation adjustment | | | 833 | | | | (834 | ) | | | (1,224 | ) |
| Comprehensive income | | $ | 19,502 | | | $ | 19,591 | | | $ | 21,783 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenues: | |
| Services | $ | 561,918 |
| | $ | 494,001 |
| | $ | 446,619 |
|
| Software and hardware | 3,609 |
| | 4,374 |
| | 38,642 |
|
| Total revenues | 565,527 |
| | 498,375 |
| | 485,261 |
|
| | | | | | |
| Cost of revenues (exclusive of depreciation and amortization, shown separately below): | | | | | |
| Cost of services | 354,213 |
| | 319,831 |
| | 290,453 |
|
| Software and hardware costs | — |
| | — |
| | 33,295 |
|
| Total cost of revenues | 354,213 |
| | 319,831 |
| | 323,748 |
|
| | | | | | |
| Selling, general, and administrative | 134,187 |
| | 118,484 |
| | 108,192 |
|
| Depreciation | 4,447 |
| | 4,072 |
| | 4,722 |
|
| Amortization | 16,151 |
| | 16,356 |
| | 15,025 |
|
| Acquisition costs | 896 |
| | 1,872 |
| | 1,359 |
|
| Adjustment to fair value of contingent consideration | 301 |
| | 1,816 |
| | 3,235 |
|
| Income from operations | 55,332 |
| | 35,944 |
| | 28,980 |
|
| | | | | | |
| Net interest expense | 7,418 |
| | 3,560 |
| | 1,838 |
|
| Net other (income) expense | (27 | ) | | 12 |
| | (1 | ) |
| Income before income taxes | 47,941 |
| | 32,372 |
| | 27,143 |
|
| Provision for income taxes | 10,816 |
| | 7,813 |
| | 8,562 |
|
| | | | | | |
| Net income | $ | 37,125 |
| | $ | 24,559 |
| | $ | 18,581 |
|
| | | | | | |
| Basic net income per share | $ | 1.18 |
| | $ | 0.76 |
| | $ | 0.56 |
|
| Diluted net income per share | $ | 1.15 |
| | $ | 0.73 |
| | $ | 0.55 |
|
| Shares used in computing basic net income per share | 31,344 |
| | 32,415 |
| | 33,016 |
|
| Shares used in computing diluted net income per share | 32,243 |
| | 33,502 |
| | 34,066 |
|
See accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 37,125 |
| | $ | 24,559 |
| | $ | 18,581 |
|
| Other comprehensive income (loss): net of reclassification adjustments and income taxes | | | | | |
| Foreign benefit plan | (71 | ) | | 211 |
| | 88 |
|
| Foreign currency translation adjustment | 9 |
| | (977 | ) | | 833 |
|
| Comprehensive income | $ | 37,063 |
| | $ | 23,793 |
| | $ | 19,502 |
|
See accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Common Stock | | | | | |
| Beginning of period | $ | 48 |
| | $ | 47 |
| | $ | 46 |
|
| | Stock compensation related to restricted stock vesting and retirement savings plan contributions | 1 |
| | 1 |
| | — |
|
| | Issuance of stock in conjunction with acquisition including stock attributed to future compensation | — |
| | — |
| | 1 |
|
| End of period | 49 |
| | 48 |
| | 47 |
|
| Additional Paid-in Capital | | | | | |
| Beginning of period | 437,250 |
| | 403,906 |
| | 379,094 |
|
| | Proceeds from the sales of stock through the Employee Stock Purchase Plan | 178 |
| | 167 |
| | 135 |
|
| | Stock compensation related to restricted stock vesting and retirement savings plan contributions | 16,581 |
| | 15,730 |
| | 14,096 |
|
| | Issuance of stock in conjunction with acquisition including stock attributed to future compensation | 1,456 |
| | 5,739 |
| | 10,581 |
|
| | Equity component of convertible notes, net of tax | — |
| | 15,547 |
| | — |
|
| | Debt issuance costs of convertible notes allocated to equity, net of tax | — |
| | (523 | ) | | — |
|
| | Purchase of hedges on convertible notes, net of tax | — |
| | (15,376 | ) | | — |
|
| | Proceeds from issuance of warrants on convertible notes | — |
| | 12,060 |
| | — |
|
| End of period | 455,465 |
| | 437,250 |
| | 403,906 |
|
| Accumulated Other Comprehensive Loss | | | | | |
| Beginning of period | (2,588 | ) | | (1,822 | ) | | (2,743 | ) |
| | Foreign benefit plan | (71 | ) | | 211 |
| | 88 |
|
| | Foreign currency translation adjustment | 9 |
| | (977 | ) | | 833 |
|
| End of period | (2,650 | ) | | (2,588 | ) | | (1,822 | ) |
| Treasury Stock | | | | | |
| Beginning of period | (233,676 | ) | | (163,871 | ) | | (126,442 | ) |
| | Purchases of treasury stock and buyback of shares for taxes | (27,948 | ) | | (69,502 | ) | | (36,797 | ) |
| | Surrender of stock in conjunction with net working capital settlement | — |
| | (303 | ) | | (632 | ) |
| End of period | (261,624 | ) | | (233,676 | ) | | (163,871 | ) |
| Retained Earnings | | | | | |
| Beginning of period | 152,650 |
| | 128,091 |
| | 109,510 |
|
| | Net income | 37,125 |
| | 24,559 |
| | 18,581 |
|
| End of period | 189,775 |
| | 152,650 |
| | 128,091 |
|
| Total Stockholders’ Equity | $ | 381,015 |
| | $ | 353,684 |
| | $ | 366,351 |
|
| | | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-in Capital | | | Accumulated Other Comprehensive Loss | | | Treasury Stock | | | Retained Earnings | | | Total Stockholders’ Equity | |
| Balance at December 31, 2014 | | | 32,855 | | | $ | 43 | | | $ | 334,645 | | | $ | (651 | ) | | $ | (95,353 | ) | | $ | 66,044 | | | $ | 304,728 | |
| Proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan | | | 26 | | | | - | | | | 337 | | | | - | | | | - | | | | - | | | | 337 | |
| Net tax benefit from stock option exercises and restricted stock vesting | | | - | | | | - | | | | 1,335 | | | | - | | | | - | | | | - | | | | 1,335 | |
| Stock compensation related to restricted stock vesting and retirement savings plan contributions | | | 893 | | | | - | | | | 13,110 | | | | - | | | | - | | | | - | | | | 13,110 | |
| Purchases of treasury stock and buyback of shares for taxes | | | (411 | ) | | | - | | | | - | | | | - | | | | (7,844 | ) | | | - | | | | (7,844 | ) |
| Issuance of stock for acquisitions | | | 1,031 | | | | 2 | | | | 15,359 | | | | - | | | | - | | | | - | | | | 15,361 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 23,007 | | | | 23,007 | |
| Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | (1,224 | ) | | | - | | | | - | | | | (1,224 | ) |
| Balance at December 31, 2015 | | | 34,394 | | | $ | 45 | | | $ | 364,786 | | | $ | (1,875 | ) | | $ | (103,197 | ) | | $ | 89,051 | | | $ | 348,810 | |
| Proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan | | | 10 | | | | - | | | | 197 | | | | - | | | | - | | | | - | | | | 197 | |
| Stock compensation related to restricted stock vesting and retirement savings plan contributions | | | 753 | | | | 1 | | | | 13,973 | | | | - | | | | - | | | | - | | | | 13,974 | |
| Purchases of treasury stock and buyback of shares for taxes | | | (1,213 | ) | | | - | | | | - | | | | - | | | | (21,746 | ) | | | - | | | | (21,746 | ) |
| Surrender of stock in conjunction with net working capital settlement | | | (86 | ) | | | - | | | | - | | | | - | | | | (1,499 | ) | | | - | | | | (1,499 | ) |
| Issuance of stock for acquisitions | | | 8 | | | | - | | | | 138 | | | | - | | | | - | | | | - | | | | 138 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 20,459 | | | | 20,459 | |
| Foreign benefit plan | | | - | | | | - | | | | - | | | | (34 | ) | | | - | | | | - | | | | (34 | ) |
| Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | (834 | ) | | | - | | | | - | | | | (834 | ) |
| Balance at December 31, 2016 | | | 33,866 | | | $ | 46 | | | $ | 379,094 | | | $ | (2,743 | ) | | $ | (126,442 | ) | | $ | 109,510 | | | $ | 359,465 | |
| Proceeds from the sales of stock through the Employee Stock Purchase Plan | | | 8 | | | | - | | | | 135 | | | | - | | | | - | | | | - | | | | 135 | |
| Stock compensation related to restricted stock vesting and retirement savings plan contributions | | | 784 | | | | - | | | | 14,096 | | | | - | | | | - | | | | - | | | | 14,096 | |
| Purchases of treasury stock and buyback of shares for taxes | | | (2,058 | ) | | | - | | | | - | | | | - | | | | (36,797 | ) | | | - | | | | (36,797 | ) |
| Surrender of stock in conjunction with net working capital settlement | | | (34 | ) | | | - | | | | - | | | | - | | | | (632 | ) | | | - | | | | (632 | ) |
| Issuance of stock in conjunction with acquisitions including stock attributed to future compensation | | | 684 | | | | 1 | | | | 10,581 | | | | - | | | | - | | | | - | | | | 10,582 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 18,581 | | | | 18,581 | |
| Foreign benefit plan | | | - | | | | - | | | | - | | | | 88 | | | | - | | | | - | | | | 88 | |
| Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | 833 | | | | - | | | | - | | | | 833 | |
| Balance at December 31, 2017 | | | 33,250 | | | $ | 47 | | | $ | 403,906 | | | $ | (1,822 | ) | | $ | (163,871 | ) | | $ | 128,091 | | | $ | 366,351 | |
|
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Common Stock, shares | | | | | |
| Beginning of period | 31,771 |
| | 33,250 |
| | 33,866 |
|
| | Proceeds from the sales of stock through the Employee Stock Purchase Plan | 6 |
| | 7 |
| | 8 |
|
| | Stock compensation related to restricted stock vesting and retirement savings plan contributions | 783 |
| | 785 |
| | 784 |
|
| | Purchases of treasury stock and buyback of shares for taxes | (927 | ) | | (2,523 | ) | | (2,058 | ) |
| | Issuance of stock in conjunction with acquisition including stock attributed to future compensation | 54 |
| | 266 |
| | 684 |
|
| | Surrender of stock in conjunction with net working capital settlement | — |
| | (14 | ) | | (34 | ) |
| End of period | 31,687 |
| | 31,771 |
| | 33,250 |
|
See accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2017 | | | 2016 | | | 2015 | | 2019 | | 2018 | | 2017 |
| OPERATING ACTIVITIES | | (In thousands) | | |
| Net income | | $ | 18,581 | | | $ | 20,459 | | | $ | 23,007 | | $ | 37,125 |
| | $ | 24,559 |
| | $ | 18,581 |
|
| Adjustments to reconcile net income to net cash provided by operations: | | | | | | | | | | | | | | | | | |
| Depreciation | | | 4,722 | | | | 4,867 | | | | 4,496 | | 4,447 |
| | 4,072 |
| | 4,722 |
|
| Amortization | | | 15,025 | | | | 13,371 | | | | 13,819 | | 16,151 |
| | 16,356 |
| | 15,025 |
|
| Deferred income taxes | | | (4,140 | ) | | | 4,390 | | | | 1,497 | | 2,041 |
| | 1,378 |
| | (4,140 | ) |
| Non-cash stock compensation and retirement savings plan contributions | | | 14,096 | | | | 13,974 | | | | 13,110 | | 17,425 |
| | 15,731 |
| | 14,096 |
|
| Tax benefit from stock option exercises and restricted stock vesting | | | - | | | | - | | | | (1,432 | ) | |
| Amortization of debt issuance costs and discounts | | 4,667 |
| | 1,435 |
| | 140 |
|
| Adjustment to fair value of contingent consideration for purchase of business | | | 3,235 | | | | (1,679 | ) | | | 445 | | 301 |
| | 1,816 |
| | 3,235 |
|
| Write-off unamortized credit facility fees | | | 246 | | | | - | | | | - | | — |
| | — |
| | 246 |
|
| | | | | | | | | | | | | | | | | | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (3,003 | ) | | | 16,905 | | | | 3,512 | | (3,402 | ) | | (245 | ) | | (3,003 | ) |
| Other assets | | | (1,775 | ) | | | (467 | ) | | | (448 | ) | (7,677 | ) | | (2,402 | ) | | (1,915 | ) |
| Accounts payable | | | 4,780 | | | | (377 | ) | | | (3,242 | ) | (1,356 | ) | | 1,241 |
| | 4,780 |
|
| Other liabilities | | | 3,454 | | | | (8,142 | ) | | | (10,043 | ) | 8,243 |
| | 4,639 |
| | 3,454 |
|
| Net cash provided by operating activities | | | 55,221 | | | | 63,301 | | | | 44,721 | | 77,965 |
| | 68,580 |
| | 55,221 |
|
| | | | | | | | | | | | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | | | | | | | |
| | |
| | |
|
| Purchase of property and equipment | | | (3,361 | ) | | | (4,087 | ) | | | (3,356 | ) | (8,082 | ) | | (4,084 | ) | | (3,361 | ) |
| Capitalization of internally developed software costs | | | (961 | ) | | | (1,964 | ) | | | (1,035 | ) | (1,174 | ) | | (564 | ) | | (961 | ) |
| Purchase of short-term investments | | | - | | | | (869 | ) | | | - | | |
| Proceeds from sale of short-term investments | | | - | | | | 853 | | | | - | | |
| Proceeds from settlement of company-owned life insurance | | | - | | | | 2,792 | | | | - | | |
| Payments to fund company-owned life insurance | | | - | | | | (2,792 | ) | | | - | | |
| Purchase of businesses, net of cash acquired | | | (37,886 | ) | | | (7,464 | ) | | | (37,848 | ) | (11,143 | ) | | (26,640 | ) | | (37,886 | ) |
| Net cash used in investing activities | | | (42,208 | ) | | | (13,531 | ) | | | (42,239 | ) | (20,399 | ) | | (31,288 | ) | | (42,208 | ) |
| | | | | | | | | | | | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | | | | | | | |
| | |
| | |
|
| Proceeds from issuance of convertible notes | | — |
| | 143,750 |
| | — |
|
| Payment for convertible notes issuance costs | | — |
| | (4,832 | ) | | — |
|
| Purchase of convertible notes hedges | | — |
| | (20,686 | ) | | — |
|
| Proceeds from issuance of convertible notes warrants | | — |
| | 12,060 |
| | — |
|
| Proceeds from line of credit | | | 275,000 | | | | 208,500 | | | | 266,500 | | — |
| | 161,000 |
| | 275,000 |
|
| Payments on line of credit | | | (252,000 | ) | | | (232,500 | ) | | | (264,500 | ) | — |
| | (216,000 | ) | | (252,000 | ) |
| Payments for credit facility financing fees | | | (355 | ) | | | (194 | ) | | | (193 | ) | — |
| | — |
| | (355 | ) |
| Payment of contingent consideration for purchase of business | | | (3,258 | ) | | | (2,144 | ) | | | - | | (4,281 | ) | | (4,038 | ) | | (3,258 | ) |
| Tax benefit from stock option exercises and restricted stock vesting | | | - | | | | - | | | | 1,432 | | |
| Proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan | | | 135 | | | | 197 | | | | 337 | | 178 |
| | 167 |
| | 135 |
|
| Purchases of treasury stock | | | (32,601 | ) | | | (18,023 | ) | | | (2,840 | ) | (20,612 | ) | | (64,441 | ) | | (32,601 | ) |
| Remittance of taxes withheld as part of a net share settlement of restricted stock vesting | | | (4,196 | ) | | | (3,723 | ) | | | (5,004 | ) | (7,336 | ) | | (5,061 | ) | | (4,196 | ) |
| Net cash used in financing activities | | | (17,275 | ) | | | (47,887 | ) | | | (4,268 | ) | |
| Net cash (used in) provided by financing activities | | (32,051 | ) | | 1,919 |
| | (17,275 | ) |
| Effect of exchange rate on cash and cash equivalents | | | 456 | | | | (581 | ) | | | (338 | ) | 229 |
| | (534 | ) | | 456 |
|
| Change in cash and cash equivalents | | | (3,806 | ) | | | 1,302 | | | | (2,124 | ) | 25,744 |
| | 38,677 |
| | (3,806 | ) |
| Cash and cash equivalents at beginning of period | | | 10,113 | | | | 8,811 | | | | 10,935 | | 44,984 |
| | 6,307 |
| | 10,113 |
|
| Cash and cash equivalents at end of period | | $ | 6,307 | | | $ | 10,113 | | | $ | 8,811 | | $ | 70,728 |
| | $ | 44,984 |
| | $ | 6,307 |
|
| | | | | | | | | | | | | | | | | | |
| Supplemental disclosures: | | | | | | | | | | | | | |
| | |
| | |
|
| Cash paid for income taxes | | $ | 9,074 | | | $ | 5,038 | | | $ | 9,944 | | $ | 7,405 |
| | $ | 5,127 |
| | $ | 9,074 |
|
| Cash paid for interest | | $ | 1,551 | | | $ | 1,487 | | | $ | 2,005 | | $ | 3,674 |
| | $ | 1,399 |
| | $ | 1,551 |
|
| Non-cash activities: | | | | | | | | | | | | | |
| | |
| | |
|
| Stock issued for purchase of businesses (including settlement of contingent consideration) | | $ | 9,429 | | | $ | 96 | | | $ | 15,361 | | $ | 1,294 |
| | $ | 5,134 |
| | $ | 9,429 |
|
| Stock surrendered by sellers in conjunction with net working capital settlement | | $ | 572 | | | $ | 1,499 | | | $ | - | | $ | — |
| | $ | 303 |
| | $ | 572 |
|
| Liability incurred for purchase of property, plant and equipment | | $ | - | | | $ | 1,671 | | | $ | - | | $ | 1,851 |
| | $ | — |
| | $ | — |
|
See accompanying notes to consolidated financial statements.
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20172019
1. Description of Business and Principles of Consolidation
Perficient, Inc. (the “Company”) is an information technology consulting firm.a digital consultancy. The Company helps its clients use Internet-baseddigital technologies to make their businesses more responsive to market opportunities and threats; strengthen relationships with customers, suppliers, and partners; improve productivity; and reduce information technology costs. The Company designs, builds, and delivers digital solutions, often using a core set of middleware software products developed by third-party vendors. The Company’s solutionssoftware providers, to enable its clients to meet the changing demands of an increasingly global Internet-driven, and competitive marketplace.marketplace, drive positive customer experiences, and grow their business.
The Company is incorporated in Delaware. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences could be material to the financial statements.
Service revenues are primarily derived from professional services provided on a time and materials basis. For time and material contracts, service revenues are recognized and billed by multiplying the numberAs of hours expended in the performance of the contract by the established billing rates. For fixed fee projects, service revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoiced and collected in excess of revenues recognized are classified as deferred revenues. In conjunction with services provided,January 1, 2018, the Company occasionally receives referral fees under partner programs. These referral fees are recognized when earned and recorded within service revenues. Revenues from software and hardware sales are generally recorded on a gross basis considering the Company’s role as a principal in the transaction. Revenues from sales of third-party software-as-a-service arrangements where the Company is not the primary obligor are recorded on a net basis. On many projects the Company is also reimbursed for out-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of revenues. We did not realize any profit on reimbursable expenses.
Unbilledrecognizes revenues represent the project time and expenses that have been incurred, but not yet billed to the client, prior to the end of the fiscal period. For time and materials projects, the client is invoiced for the amount of hours worked multiplied by the billing rates as stated in the contract. For fixed fee arrangements, the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract. Clients are typically billed monthly for services provided during that month, but can be billed on a more or less frequent basis as determined by the contract. If the time and expenses are worked/incurred and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as unbilled revenue once the Company verifies all other revenue recognition criteria have been met.
Revenues are recognized when the following criteria are met: (1) persuasive evidence of the customer arrangement exists; (2) fees are fixed and determinable; (3) delivery and acceptance have occurred; and (4) collectability is deemed probable. The Company’s policy for revenue recognition in instances where multiple deliverables are sold contemporaneously to the same customer is in accordance with the FASB Accounting Standards Codification (“ASC”) Subtopic 985-605, Software –Topic 606, Revenue Recognition, ASC Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements, and ASC Section 605-10-S99 (Staff Accounting Bulletin Topic 13, Revenue Recognition). Specifically, iffrom Contracts with Customers. See Note 3, Revenues, for information regarding the Company enters into contracts for the sale of services and software or hardware, then the Company evaluates whether each element should be accounted for separately by considering the following criteria: (1) whether the deliverables have value to the client on a stand-alone basis; and (2) whether delivery or performance of the undelivered item or items is considered probable and substantially in the control of the Company (only if the arrangement includes a general right of return related to the delivered item). Further, for sales of software and services, the Company also evaluates whether the services are essential to the functionality of the software and if it has fair value evidence for each deliverable. If the Company has concluded that the separation criteria are met, then it accounts for each deliverable in the transaction separately, based on the relevantCompany’s revenue recognition accounting policies. Generally, all deliverables of the Company’s multiple element arrangements meet these criteria and are accounted for separately, with the arrangement consideration allocated among the deliverables using vendor specific objective evidence of the selling price. As a result, the Company generally recognizes software and hardware sales upon delivery to the customer and services consistent with the policies described herein.
Further, delivery of software and hardware sales, when sold contemporaneously with services, can generally occur at varying times depending on the specific client project arrangement. Delivery of services generally occurs over a period of time consistent with the timeline as outlined in the client contract.
There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales. Contracts for professional services provide for a general right, to the client or the Company, to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.
The Company may provide multiple services under the terms of an arrangement and is required to assess whether one or more units of accounting are present. Service fees are typically accounted for as one unit of accounting, as fair value evidence for individual tasks or milestones is not available. The Company follows the guidelines discussed above in determining revenues; however, certain judgments and estimates are made and used to determine revenues recognized in any accounting period. If estimates are revised, material differences may result in the amount and timing of revenues recognized for a given period.
Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all software and hardware sales and certain services transactions as appropriate.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is based upon specific identification of likely and probable losses. Each accounting period, accounts receivable is evaluated for risk associated with a client’s inability to make contractual payments, historical experience, and other currently available information.
The fair value of restricted stock awards are based on the value of the Company’s common stock on the date of the grant. Stock-based compensation is accounted for in accordance with ASC Topic 718, Compensation – Stock Compensation. Under this guidance, the Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period, which is generally three years. In addition, pursuant to ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, the Company has continued to electelected to estimate the amount of expected forfeitures when calculating share-based compensation, instead of accounting for forfeitures as they occur. The fair value of restricted stock awards is based on the value of the Company’s common stock on the date of the grant.
The Company accounts for income taxes in accordance with ASC Subtopic 740-10, Income Taxes (“ASC Subtopic 740-10”), and ASC Section 740-10-25, Income Taxes – Recognition (“ASC Section 740-10-25”). ASC Subtopic 740-10 prescribes the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are subject to tests of recoverability. A valuation allowance is provided for such deferred tax assets to the extent realization is not judged to be more likely than not. ASC Section 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Section 740-10-25 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. On December 22,The Tax Cuts and Jobs Act of 2017 the U.S. government enacted the 2017(the “2017 Tax Act. The 2017 Tax ActAct”) significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. See Note 10, 13, Income Taxes, for additional information regarding the 2017 Tax Act.
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances and liquid investments with original maturities of three months or less.
Property and equipment are recorded at cost. Depreciation of property and equipment is computed using the straight-line method over the useful lives of the assets (generally one to seven years). Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life of the assets.
Goodwill and Intangible Assets
Goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed, in a business combination. In accordance with ASC Topic 350, Intangibles – Goodwill and Other (“ASC Topic 350”), the Company performs an annual impairment review in the fourth quarter and more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company has one reporting unit for purposes of the goodwill impairment review. ASC Topic 350 permits an assessment of qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying amount of the Company before applying the quantitative goodwill impairment test. If it is more likely than not that the fair value is less than the carrying amount of the Company, the quantitative goodwill impairment test will be conducted to detect and measure any impairment. Based upon the Company’Company’ s qualitative assessment, it is more likely than not that the fair value of the Company is greater than its carrying amount. NoNaN impairment charges were recorded for 2017, 20162019, 2018 or 2015.2017.
Other intangible assets include customer relationships, non-compete arrangements, trade names, customer backlog, and internally developed software, which are being amortized over the assets’ estimated useful lives using the straight-line method. Estimated useful lives range from less than one year to ten10 years. Amortization of customer relationships, non-compete arrangements, trade names, customer backlog, and internally developed software is considered an operating expense and is included in “Amortization” in the accompanying Consolidated Statements of Operations. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in a lack of recoverability or revised useful life. Other intangible assets are evaluated for impairment upon the occurrence of events or changes in circumstances indicating that the carrying amount of an asset may not be recoverable. No impairment of intangible assets were recorded for 2017, 20162019, 2018 or 2015.2017.
Purchase Accounting and Related Fair Value Measurements
The Company allocates the purchase price, including contingent consideration, of ourits acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Such fair market value assessments are primarily based on third-party valuations using assumptions developed by management that require significant judgments and estimates that can change materially as additional information becomes available. The purchase price allocated to intangibles is based on unobservable factors, including but not limited to, projected revenues, expenses, customer attrition rates, royalty rates, a weighted average cost of capital, among others. The weighted average cost of capital uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows. The approach to valuing the initial contingent consideration associated with the purchase price also uses similar unobservable factors such as;as projected revenues and expenses over the term of the contingent earn-out period, discounted for the period over which the initial contingent considerationsconsideration is measured.measured, and volatility rates. Based upon these assumptions, the contingent consideration is then valued using a Monte Carlo simulation. The Company finalizes the purchase price allocation within 12 months of the acquisition date asonce certain initial accounting valuation estimates are finalized.finalized, and no later than 12 months following the acquisition date.
Cash equivalents, accounts receivable, accounts payable, and other accrued liabilities are stated at amounts which approximate fair value due to the near term maturities of these instruments. The Company’s long-term debt balance approximatesrelated to its 2.375% Convertible Senior Notes Due 2023 (the “Notes”)are carried at their principal amount less unamortized debt discount and issuance costs, and are not carried at fair market value.value at each period end. See Note 12, Long-Term Debt, for information regarding the Company’s convertible debt accounting policies.
The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of foreign currency exchange rate risk. Both the gain or loss on derivatives not designated as hedging instruments and the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. All derivatives are carried at fair value in the consolidated balance sheets. See Note 11, Financial Instruments14, Derivatives, for additional information regarding ourthe Company’s derivative financial instruments.
The Company uses the cost method to account for repurchases of its own stock.
Segment and Geographic Information
The Company operates as one1 reportable operating segment according to ASC Topic 280, Segment Reporting, which establishes standards for the way that business enterprises report information about operating segments. The chief operating decision maker formulates decisions about how to allocate resources and assess performance based on consolidated financial results. The Company also has one reporting unit for purposesDuring each of the goodwill impairment analysis discussed above. Approximatelyyears ended December 31, 2019, 2018 and 2017, approximately 98% of ourthe Company’s revenues were derived from clients in the United States during each ofStates.For the years ended December 31, 2017, 20162019 and 2015. Less than 2%2018, 4% and 1%, respectively, of the Company’s non-current assets were located outside the United States for each of the years ended December 31, 2017 and 2016.States.
Recent Accounting Pronouncements
In May 2014, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (ASC Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. In 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year. In 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations, ASU No. 2016-10, Identifying Performance Obligations and Licensing, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedientsand ASU No. 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, all of which further amended ASU No. 2014-09. The Company adopted the standard on January 1, 2018 using the modified retrospective method which requires a cumulative-effect adjustment to the opening balance of retained earnings within stockholders’ equity, as will be fully presented in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018.equity. The Company has determined that the most significant impact upon adoption iswas to third-party software and hardware revenue, which haswas primarily been recorded on a gross basis as the principal in the transaction through December 31, 2017 and will be presented on a net basis as the agent as of January 1, 2018. HadThe adoption of the Company historically presented third-party software and hardware revenues on a net basis, software and hardware revenues would have been $5.3 million, $6.4 million, and $5.5 million forstandard also resulted in minor changes to the years ended December 31, 2017, 2016, and 2015, respectively.timing of revenue recognition. As the Company adopted ASU No. 2014-09 using the modified retrospective method, the gross versus net presentation will not impact the historical presentation but will impact the 2018 presentation. Additionally, as the agent, revenue from multi-year sales of third-party software and support will beis recognized upfront as the performance obligation is fulfilled, rather than annually as invoiced to the customer. The impact from this timing change is expected to be immaterial. VariableAdditionally, variable consideration related to service contracts, such as volume discounts and holdbacks, may beare recognized earlier under the new standard in certain instances. The impact from these timing changes was immaterial as of January 1, 2018, and therefore, did not result in a cumulative-effect adjustment to the Companyopening balance of retained earnings. The adoption of the standard also resulted in increases to accounts receivable, net and deferred revenue within other current liabilities for those contracts under which the Company’s right to consideration is currently evaluatingunconditional. Additionally, the upfront revenue recognition of multi-year sales of third-party software and support resulted in increases to accounts receivable, net and other non-current assets for the portion of the consideration that had not yet been billed to the client and increases to accounts payable and non-current liabilities for amounts not yet due to the third-party software vendor. Refer to Impacts of ASC Topic 606 Adoption on Current Period Results below for the impact of this changeadopting ASC Topic 606 on contracts that are openthe Consolidated Balance Sheet as of December 31, 2017.2018 and the Consolidated Statement of Operations for the year ended December 31, 2018. There was no material impact on the Consolidated Statement of Cash Flows for the year ended December 31, 2018. The adoption of ASU No. 2014-09 and its amendments will also resultresulted in additional disclosures around the nature and timing of performance obligations, contract costs, and deferred revenue, as well as significant judgments and practical expedients used by the Company. See Note 3, Revenues, for these disclosures.
Impacts of ASC Topic 606 Adoption on Current Period Results
The impacts of ASC Topic 606 adoption on the Consolidated Balance Sheet as of December 31, 2018 are as follows (in thousands):
|
| | | | | | | | | | | |
| | As Reported | | ASC Topic 606 Impact | | Without ASC Topic 606 Adoption |
| Accounts receivable, net | $ | 122,446 |
| | $ | (6,500 | ) | | $ | 115,946 |
|
| Prepaid expenses | 4,663 |
| | 402 |
| | 5,065 |
|
| Other non-current assets | 9,979 |
| | (3,970 | ) | | 6,009 |
|
| Total assets | 570,544 |
| | (10,068 | ) | | 560,476 |
|
| | | | | | |
| Accounts payable | 24,437 |
| | (1,581 | ) | | 22,856 |
|
| Other current liabilities | 50,386 |
| | (4,384 | ) | | 46,002 |
|
| Other non-current liabilities | 21,970 |
| | (3,407 | ) | | 18,563 |
|
| Total liabilities | 216,860 |
| | (9,372 | ) | | 207,488 |
|
| | | | | | |
| Retained earnings | 152,650 |
| | (696 | ) | | 151,954 |
|
| Total stockholders' equity | 353,684 |
| | (696 | ) | | 352,988 |
|
| Total liabilities and stockholders' equity | 570,544 |
| | (10,068 | ) | | 560,476 |
|
The impacts of ASC Topic 606 adoption on the Consolidated Statement of Operations for the year ended December 31, 2018 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | As Reported (Net Presentation) | | ASC Topic 606 Impact | | Without ASC Topic 606 Adoption (Gross Presentation) |
| Revenues | | | | | |
| Services | $ | 494,001 |
| | $ | — |
| | $ | 494,001 |
|
| Software and hardware | 4,374 |
| | 25,037 |
| | 29,411 |
|
| Total revenues | 498,375 |
| | 25,037 |
| | 523,412 |
|
| Cost of revenues | | | | | |
| Cost of services | 319,831 |
| | — |
| | 319,831 |
|
| Software and hardware costs | — |
| | 25,954 |
| | 25,954 |
|
| Total cost of revenues | 319,831 |
| | 25,954 |
| | 345,785 |
|
| Income from operations | 35,944 |
| | (917 | ) | | 35,027 |
|
| Net income | 24,559 |
| | (696 | ) | | 23,863 |
|
In February 2016, the FASB issued ASU No. 2016-02, Leases, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update requiresDuring the year end December 31, 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases – Targeted Improvement, and ASU 2018-20, Leases (Topic 842): Narrow Scope Improvements for Lessors which further amended ASU No. 2016-02. These updates require lessees to recognize a lease liabilityliabilities and a lease assetright of use (“ROU”) assets for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expandsCompany adopted the required quantitative and qualitative disclosures surrounding leases. This update is to become effective for the Company onstandard as of January 1, 2019 with earlier application permitted. This update will be applied using athe modified retrospective transition approachmethod provided by ASU No. 2018-11. The Company elected the package of practical expedients granted by ASU No. 2016-2 and did not reassess whether existing contracts contained a lease, the classification of existing leases, and unamortized indirect costs as of January 1, 2019. The Company also elected the practical expedient related to the combination of lease and non-lease components and included fixed payments related to common area maintenance expense for the Company’s office leases existing at, or entered into after,in the beginningmeasurement of the earliest comparative period presented inCompany’s ROU assets and lease liabilities as of January 1, 2019 and December 31, 2019, respectively. There was no impact on net income or net assets as a result of adoption.
The Company had ROU asset balances of $27.7 million and lease liability balances of $28.6 million on the financial statements. WhileConsolidated Balance Sheet as of December 31, 2019. There was no material impact on the Company is currently assessingConsolidated Statement of Operations and the impactConsolidated Statement of Cash Flows for the year ended December 31, 2019. Refer to Note 16, Leases, for additional disclosures resulting from the adoption of ASU No. 2016-02 will have onand its consolidated financial statements, the Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancellable operating leases on its consolidated balance sheets resulting in the recording of right of use assets and lease obligations. Current minimum commitments under noncancellable operating leases are disclosed in Note 12, Commitments and Contingencies.amendments.
In AugustJune 2016, the FASB issued ASU No. 2016-15, Classification2016-13, which amended the guidance of Certain Cash Receipts and Cash Payments.FASB ASC Topic 326, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires the immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. This update eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU No. 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. This update is to become effective for the Company on January 1, 2018 and requires using a retrospective approach. The Company elected to early adopt this update retrospectively on January 1, 2017 since the Company was already in compliance with the new standard. The adoption of ASU No. 2016-15 did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This update eliminates Step 2 from the goodwill impairment test which compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU No. 2017-04 does not make any changes to the impairment indicators or aspects of the qualitative assessment. This update is to become effective for the Company on January 1, 2020 and requires adoption using a prospectivemodified retrospective approach. EarlyThe Company is currently evaluating the effect that ASU No. 2016-13 will have on its consolidated financial statements and disclosures.
3. Revenues
Prior to January 1, 2018, the Company recognized revenue under ASC Subtopic 985-605, Software - Revenue Recognition, ASC Subtopic 605-25, Revenue Recognition - Multiple-Element Arrangements, and ASC Section 605-10-S99 (Staff Accounting Bulletin Topic 13, Revenue Recognition). On January 1, 2018, the Company adopted ASC Topic 606, which replaced most existing revenue recognition guidance. The most significant impact upon adoption was to third-party software and hardware revenue, which was primarily recorded on a gross basis as the principal in the transaction through December 31, 2017 and presented on a net basis as the agent as of January 1, 2018. Refer to Note 2, Summary of Significant Accounting Policies, for additional information on the impact of adoption.
The following discussion relates to the Company’s revenue recognition policy, effective January 1, 2018, under ASC Topic 606.
The Company’s revenues consist of services and software and hardware sales and is permitted beginningrecognized in accordance with interimASC Topic 606. Under this guidance, revenues are recognized when control of these services or annual goodwill impairment testsgoods are transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.
Service Revenues
Services revenues are primarily comprised of professional services that include developing, implementing, automating and extending business processes, technology infrastructure, and software applications. The Company’s professional services span multiple industries, platforms and solutions; however, the Company has remained relatively diversified and does not believe that it has significant revenue concentration within any single industry, platform or solution.
Professional services revenues are recognized over time as services are rendered. Most projects are performed on testing datesa time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee or after January 1, 2017. The Company elected to early adopt this update prospectively on January 1, 2017. The adoption of ASU No. 2017-04 did not have an impact on the Company’s consolidated financial statements.
3. Net Income Per Share
Basic earnings per share is computedfixed fee percent complete basis. For time and material contracts, revenues are generally recognized and invoiced by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares outstanding andmultiplying the number of equivalent shareshours expended in the performance of the contract by the hourly rates. For fixed fee contracts, revenues are generally recognized and invoiced by multiplying the fixed rate per time period established in the contract by the number of time periods elapsed. For fixed fee percent complete contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours, and the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract.
Clients are typically billed monthly for services provided during that month, but can be billed on a more or less frequent basis as determined by the contract. If the time is worked and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as revenue once the Company verifies all other revenue recognition criteria have been met, and the amount is classified as a receivable as the right to consideration is unconditional at that point. Amounts invoiced in excess of revenues recognized are contract liabilities, which are classified as deferred revenues in the Consolidated Balance Sheet. The term between invoicing and payment due date is not significant. Contracts for professional services provide for a general right, to the client or the Company, to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract. Certain contracts may include volume discounts or holdbacks, which are accounted for as variable consideration, but are not typically significant. The Company estimates variable consideration based on historical experience and forecasted sales and includes the variable consideration in the transaction price.
Other services revenues are comprised of hosting fees, partner referral fees, maintenance agreements, training and internally developed software-as-a-service (“SaaS”) sales. Revenues from hosting fees, maintenance agreements, training and internally developed SaaS sales are generally recognized over time using a time-based measure of progress as services are rendered. Partner referral fees are recorded at a point in time upon meeting specified requirements set by each partner to earn the respective fee.
On many professional service projects, the Company is also reimbursed for out-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of the transaction price of the respective professional services contract and are invoiced as the expenses are incurred. The Company structures its professional services arrangements to recover the cost of reimbursable expenses without a markup.
Software and Hardware Revenues
Software and hardware revenues are comprised of third-party software and hardware resales, in which the Company is considered the agent, and sales of internally developed software, in which the Company is considered the principal. Third-party software and hardware revenues are recognized and invoiced when the Company fulfills its obligation to arrange the sale, which occurs when the purchase order with the vendor is executed and the customer has access to the software or the hardware has been shipped to the customer. Internally developed software revenues are recognized and invoiced when control is transferred to the customer, which occurs when the software has been made available to the customer and the license term has commenced. Revenues from third-party software and hardware sales are recorded on a net basis, while revenues from internally developed software sales are recorded on a gross basis. There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales, and the term between invoicing and payment due date is not significant.
Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all software and hardware sales and certain services transactions as appropriate.
Arrangements with Multiple Performance Obligations
Arrangements with clients may contain multiple promises such as delivery of software, hardware, professional services or post-contract support services. These promises are accounted for as separate performance obligations if they are distinct. For arrangements with clients that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on estimated relative standalone selling price, which is estimated by the expected cost plus a margin approach, taking into consideration market conditions and competitive factors. Since the duration of contracts that contain multiple performance obligations is typically short given contract cancellation provisions, the allocation of the transaction price to the separate performance obligations is not considered a significant estimate.
Contract Costs
In accordance with the terms of the Company’s sales commission plan, commissions are not earned until the related revenue is recognized. Therefore, sales commissions are expensed as they are earned. Certain sales incentives are accrued based on achievement of specified bookings goals. For these incentives, the Company applies the practical expedient that allows the Company to expense the incentives as incurred, since the amortization period would be issuedhave been one year or less.
Deferred Revenue
The Company’s deferred revenue balance as of December 31, 2019 and 2018 was $7.7 million and $8.1 million, respectively. Substantially all of the December 31, 2018 deferred revenue balance was recognized in revenue during the year ended December 31, 2019.
Transaction Price Allocated to Remaining Performance Obligations
Due to the ability of the client or the Company to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ notice is required), the majority of the Company’s contracts have a term of less than one year. Perficient does not disclose the value of unsatisfied performance obligations for contracts with an original maturity date of one year or less or time and materials contracts for which the Company has the right to invoice for services performed. Revenue related to the stock options, unvested restricted stock, and warrants using the treasury method, unless such additional equivalent shares are anti-dilutive.unsatisfied performance obligations for remaining contracts as of December 31, 2019 was immaterial.
Disaggregation of Revenue
The following table presents the calculationrevenue disaggregated by revenue source and pattern of basic and diluted net income per sharerevenue recognition (in thousands, except per share information)thousands):
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Net income | | $ | 18,581 | | | $ | 20,459 | | | $ | 23,007 | |
| Basic: | | | | | | | | | | | | |
| Weighted-average shares of common stock outstanding | | | 33,016 | | | | 34,023 | | | | 33,408 | |
| Shares used in computing basic net income per share | | | 33,016 | | | | 34,023 | | | | 33,408 | |
| | | | | | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Restricted stock subject to vesting | | | 488 | | | | 493 | | | | 466 | |
| Contingently issuable shares (1) | | | - | | | | 2 | | | | 2 | |
| Shares issuable for acquisition consideration (2) | | | 562 | | | | 483 | | | | 448 | |
| Shares used in computing diluted net income per share | | | 34,066 | | | | 35,001 | | | | 34,324 | |
| | | | | | | | | | | | | |
| Basic net income per share | | $ | 0.56 | | | $ | 0.60 | | | $ | 0.69 | |
| Diluted net income per share | | $ | 0.55 | | | $ | 0.58 | | | $ | 0.67 | |
| | | | | | | | | | | | | |
| Anti-dilutive options and restricted stock not included in the calculation of diluted net income per share | | | 88 | | | | - | | | | 28 | |
(1) | For the year ended December 31, 2016, this represents the shares issued to Zeon Solutions Incorporated and certain related entities (collectively, “Zeon”) pursuant to the Asset Purchase Agreement. For the year ended December 31, 2015, this represents the Company’s estimate of shares to be issued to Zeon pursuant to the Asset Purchase Agreement. |
(2) | For the year ended December 31, 2017, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with BioPharm Systems, Inc. (“BioPharm”); (ii) the Asset Purchase Agreement with Zeon; (iii) the Asset Purchase Agreement with The Pup Group, Inc. d/b/a Enlighten (“Enlighten”); (iv) the Asset Purchase Agreement with RAS & Associates, LLC (“RAS”); and (v) the Asset Purchase Agreement with Clarity Consulting, Inc. and Truth Labs, LLC (together, “Clarity”), as part of the consideration. For the year ended December 31, 2016, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with BioPharm; (ii) the Asset Purchase Agreement with Zeon; (iii) the Stock Purchase Agreement for Market Street Solutions, Inc. (“Market Street”); and (iv) the Asset Purchase Agreement with Enlighten as part of the consideration. For the year ended December 31, 2015, this represents the shares held in escrow pursuant to: (i) the Agreement and Plan of Merger with ForwardThink Group Inc. (“ForwardThink”); (ii) the Asset Purchase Agreement with BioPharm; (iii) the Asset Purchase Agreement with Trifecta Technologies, Inc. and Trifecta Technologies Canada, Limited (together “Trifecta”); (iv) the Asset Purchase Agreement with Zeon; (v) the Stock Purchase Agreement for Market Street and (vi) the Asset Purchase Agreement with Enlighten as part of the consideration. |
|
| | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Over Time | | Point In Time | | Total Revenues |
| Time and materials contracts | $ | 384,422 |
| | $ | — |
| | $ | 384,422 |
|
| Fixed fee percent complete contracts | 41,484 |
| | — |
| | 41,484 |
|
| Fixed fee contracts | 104,056 |
| | — |
| | 104,056 |
|
| Reimbursable expenses | 15,474 |
| | — |
| | 15,474 |
|
| Total professional services fees | 545,436 |
| | — |
| | 545,436 |
|
| Other services revenue* | 13,604 |
| | 2,878 |
| | 16,482 |
|
| Total services | 559,040 |
| | 2,878 |
| | 561,918 |
|
| Software and hardware | — |
| | 3,609 |
| | 3,609 |
|
| Total revenues | $ | 559,040 |
| | $ | 6,487 |
| | $ | 565,527 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Over Time | | Point In Time | | Total Revenues |
| Time and materials contracts | $ | 339,708 |
| | $ | — |
| | $ | 339,708 |
|
| Fixed fee percent complete contracts | 38,234 |
| | — |
| | 38,234 |
|
| Fixed fee contracts | 84,374 |
| | — |
| | 84,374 |
|
| Reimbursable expenses | 13,348 |
| | — |
| | 13,348 |
|
| Total professional services fees | 475,664 |
| | — |
| | 475,664 |
|
| Other services revenue* | 14,814 |
| | 3,523 |
| | 18,337 |
|
| Total services | 490,478 |
| | 3,523 |
| | 494,001 |
|
| Software and hardware | — |
| | 4,374 |
| | 4,374 |
|
| Total revenues | $ | 490,478 |
| | $ | 7,897 |
| | $ | 498,375 |
|
* Other services revenue primarily consists of hosting fees, maintenance, training, internally developed SaaS and partner referral fees.
The following table presents revenue disaggregated by geographic area, as determined by the billing address of customers (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| United States | $ | 552,357 |
| | $ | 487,849 |
|
| Canada | 3,477 |
| | 3,481 |
|
| Other countries | 9,693 |
| | 7,045 |
|
| Total revenues | $ | 565,527 |
| | $ | 498,375 |
|
4. Concentration of Credit Risk and Significant Customers
Cash and accounts receivable potentially expose the Company to concentrations of credit risk. Cash is placed with highly rated financial institutions. The Company provides credit, in the normal course of business, to its customers. The Company generally does not require collateral or up-front payments. The Company performs periodic credit evaluations of its customers and maintains allowances for potential credit losses. Customers can be denied access to services in the event of non-payment. During 2017,2019, a substantial portion of the services the Company provided were built on IBM, Adobe, Oracle, and Microsoft platforms, among others, and a significant number of the Company’s clients are identified through joint selling opportunities conducted with and through sales leads obtained from the relationships with these vendors. Due to the Company’s significant fixed operating expenses, the loss of sales to any significant customer could negatively impact net income and cash flow from operations. However, the
Company has remained relatively diversified, with its largest customer only representing approximately 5%of total revenues excluding reimbursable expensesfor the years ended December 31, 2019, 2018 and 2017.
5. Stock-Based Compensation
Stock Plans
The Company’s Second Amended and Restated Perficient, Inc. 2012 Long Term Incentive Plan (as amended, the “Incentive Plan”) allows for the granting of various types of stock awards to eligible individuals. The Compensation Committee of the Board of Directors administers the Incentive Plan and determines the terms of all stock awards made under the Incentive Plan. The Company may issue stock awards of up to 7.0 million shares of Common Stock pursuant to the Incentive Plan. As of December 31, 2019, there were 2.0 million shares of Common Stock available for issuance under the Incentive Plan.
Restricted stock activity for the year ended December 31, 2019 was as follows (in thousands, except fair value information):
|
| | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
| Restricted stock awards outstanding at December 31, 2018 | 1,410 |
| | $ | 20.95 |
|
| Awards granted (1) | 527 |
| | $ | 33.38 |
|
| Awards vested (2) | (692 | ) | | $ | 20.00 |
|
| Awards forfeited | (148 | ) | | $ | 21.84 |
|
| Restricted stock awards outstanding at December 31, 2019 | 1,097 |
| | $ | 27.14 |
|
| |
| (1) | The weighted average grant date fair value of shares granted during 2018 and 2017 was $23.62 and $18.68, respectively. |
| |
| (2) | The total fair value of restricted shares vested during the years ended December 31, 2019, 2018 and 2017 was $23.3 million, $15.8 million and $12.0 million, respectively. |
The Company recognized $17.9 million, $16.4 million and $14.7 million of share-based compensation expense during 2019, 2018 and 2017, approximately 6%respectively, which included $3.2 million, $2.7 million and $2.5 million of expense for retirement savings plan contributions, respectively. The associated current and future income tax benefit recognized during 2019, 2018 and 2017 was $3.5 million, $3.3 million and $4.6 million, respectively. As of December 31, 2019, there was $23.3 million of total revenues excluding reimbursable expenses forunrecognized compensation cost, net of estimated forfeitures, related to non-vested share-based awards. This cost is expected to be recognized over a weighted-average period of two years. Generally restricted stock awards vest over a three-year service period.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) is a broadly-based stock purchase plan in which any eligible employee may elect to participate by authorizing the year ended December 31,2016, and approximately 4%Company to make payroll deductions in a specific amount or designated percentage to pay the exercise price of total revenues excluding reimbursable expenses foran option. In no event will the ESPP permit an employee to purchase common stock with a fair market value in excess of $25,000 in any calendar year. During the year ended December 31, 2015.2019, approximately 6,329 shares were purchased under the ESPP.
There are four three-month offering periods in each calendar year beginning on January 1, April 1, July 1, and October 1, respectively. The purchase price of shares offered under the ESPP is an amount equal to 95% of the fair market value of the common stock on the date of purchase (occurring on, respectively, March 31, June 30, September 30, and December 31). The ESPP is designed to comply with Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”), and thus is eligible for the favorable tax treatment afforded by Section 423.
6. Net Income Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares outstanding and the number of equivalent shares which would be issued related to the stock options, unvested restricted stock, and warrants using the treasury method, unless such additional equivalent shares are anti-dilutive.
5.The following table presents the calculation of basic and diluted net income per share (in thousands, except per share information):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 37,125 |
| | $ | 24,559 |
| | $ | 18,581 |
|
| Basic: | | | | | |
| Weighted-average shares of common stock outstanding | 31,344 |
| | 32,415 |
| | 33,016 |
|
| Shares used in computing basic net income per share | 31,344 |
| | 32,415 |
| | 33,016 |
|
| | | | | | |
| Effect of dilutive securities: | |
| | |
| | |
|
| Restricted stock subject to vesting | 673 |
| | 672 |
| | 488 |
|
| Shares issuable for acquisition consideration (1) | 226 |
| | 415 |
| | 562 |
|
| Shares used in computing diluted net income per share | 32,243 |
| | 33,502 |
| | 34,066 |
|
| | | | | | |
| Basic net income per share | $ | 1.18 |
| | $ | 0.76 |
| | $ | 0.56 |
|
| Diluted net income per share | $ | 1.15 |
| | $ | 0.73 |
| | $ | 0.55 |
|
| |
| (1) | For the year ended December 31, 2019,this represents the shares held in escrow pursuant to:(i) the Asset Purchase Agreement with Zeon Solutions Incorporated and certain related entities (collectively, “Zeon”); (ii) the Asset Purchase Agreement with RAS & Associates, LLC (“RAS”); (iii) the Asset Purchase Agreement with Southport Services Group, LLC (“Southport”); (iv) the Asset Purchase Agreement with Stone Temple Consulting Corporation (“Stone Temple”); (v) the Agreement and Plan of Merger with Elixiter, Inc. (“Elixiter”); and (vi) the Asset Purchase Agreement with Sundog Interactive, Inc. (“Sundog”), as part of the consideration. For the year ended December 31, 2018, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with BioPharm Systems, Inc. (“BioPharm”); (ii) the Asset Purchase Agreement with Zeon; (iii) the Asset Purchase Agreement with RAS; (iv) the Asset Purchase Agreement with Clarity Consulting, Inc. and Truth Labs, LLC (together, “Clarity”); (v) the Asset Purchase Agreement with Southport; (vi) the Asset Purchase Agreement with Stone Temple; and (vii) the Agreement and Plan of Merger with Elixiter, as part of the consideration. For the year ended December 31, 2017, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with BioPharm; (ii) the Asset Purchase Agreement with Zeon; (iii) the Asset Purchase Agreement with The Pup Group, Inc. d/b/a Enlighten (“Enlighten”); (iv) the Asset Purchase Agreement with RAS; and (v) the Asset Purchase Agreement with Clarity, as part of the consideration. |
The number of anti-dilutive securities not included in the calculation of diluted net income per share were as follows (in thousands):
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Restricted stock subject to vesting | 26 |
| | 31 |
| | 88 |
|
| Convertible senior notes | 3,823 |
| | 3,823 |
| | — |
|
| Warrants related to the issuance of convertible senior notes | 3,823 |
| | 3,823 |
| | — |
|
| Total anti-dilutive securities | 7,672 |
| | 7,677 |
| | 88 |
|
See Note 12, Long-term Debt for further information on the convertible senior notes and warrants related to the issuance of convertible notes.
Prior to 2019, the Company’s Board of Directors authorized the repurchase of up to $235.0 million of Company common stock. OnOctober 29, 2019, the Board of Directors authorized the expansion of the stock repurchase program by authorizing the repurchase of up to an additional $30.0 million of Company common stock for a total repurchase program of $265.0 million and extended the expiration date of the program from December 31, 2019 to June 30, 2021.The program could be suspended or discontinued at any time, based on market, economic, or business conditions. The timing and amount of repurchase transactions will be determined by management based on its evaluation of market conditions, share price, and other factors.
Since the program’s inception on August 11, 2008, the Company has repurchased approximately $220.0 million (15.4 million shares) of its outstanding common stock through December 31, 2019.
7. Balance Sheet Components
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| | (In thousands) |
| Accounts receivable: | | | |
| Billed accounts receivable, net | $ | 87,021 |
| | $ | 87,347 |
|
| Unbilled revenues, net | 42,097 |
| | 35,099 |
|
| Total | $ | 129,118 |
| | $ | 122,446 |
|
|
| | | | | | | |
| Property and Equipment: | | | |
| Computer hardware (useful life of 3 years) | $ | 12,995 |
| | $ | 14,160 |
|
| Furniture and fixtures (useful life of 5 years) | 3,883 |
| | 4,653 |
|
| Leasehold improvements (useful life of 5 years) | 5,674 |
| | 3,396 |
|
| Software (useful life of 1 to 7 years) | 5,272 |
| | 5,042 |
|
| Less: Accumulated depreciation | (15,654 | ) | | (20,574 | ) |
| Total | $ | 12,170 |
| | $ | 6,677 |
|
|
| | | | | | | |
| Other current liabilities: | | | |
| Accrued variable compensation | $ | 27,030 |
| | $ | 22,258 |
|
| Deferred revenues | 7,733 |
| | 8,111 |
|
| Estimated fair value of contingent consideration liability (Note 9) | 4,196 |
| | 7,156 |
|
| Current operating lease liabilities | 8,992 |
| | — |
|
| Payroll related costs | 3,716 |
| | 3,064 |
|
| Professional fees | 1,758 |
| | 1,782 |
|
| Accrued medical claims expense | 1,905 |
| | 1,431 |
|
| Accrued subcontractor fees | 332 |
| | 563 |
|
| Other current liabilities | 5,841 |
| | 6,021 |
|
| Total | $ | 61,503 |
| | $ | 50,386 |
|
|
| | | | | | | |
| Other non-current liabilities: | | | |
| Deferred income taxes | $ | 11,108 |
| | $ | 9,253 |
|
| Other non-current liabilities | 8,680 |
| | 5,032 |
|
| Non-current software accrual | 5,226 |
| | 3,407 |
|
| Deferred compensation liability | 5,566 |
| | 4,278 |
|
| Total | $ | 30,580 |
| | $ | 21,970 |
|
8. Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is summarized as follows for the years presented (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Balance, beginning of year | $ | 810 |
| | $ | 1,272 |
| | $ | 1,277 |
|
| Charges to expense | 428 |
| | 393 |
| | 919 |
|
| Uncollected balances written off, net of recoveries | (774 | ) | | (855 | ) | | (924 | ) |
| Balance, end of year | $ | 464 |
| | $ | 810 |
| | $ | 1,272 |
|
9. Business Combinations
2019 Acquisitions
Acquisition of Sundog
On May 22, 2019, the Company acquired substantially all of the assets of Sundog, pursuant to the terms of an Asset Purchase Agreement. The acquisition of Sundog expands the Company’s strategic marketing and technical delivery services.
The Company’s total allocable purchase price consideration was $14.1 million, comprised of $10.3 million in cash paid and $1.3 million in Company common stock issued at closing, increased by $0.6 million for a net working capital adjustment due to the seller. The purchase price also included $1.9 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, which may be realized by the seller 12 months after the closing date of the acquisition with a maximum cash payout of $3.6 million. As of December 31, 2019, the Company’s best estimate of the fair value of the contingent consideration was $2.8 million. As a result, the Company recorded a pre-tax adjustment in “Adjustment to fair value of contingent consideration” on the Consolidated Statements of Operations of $0.9 million during the year ended December 31, 2019. The Company incurred approximately $0.6 million in transaction costs, which were expensed when incurred.
The Company allocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):
|
| | | |
| | |
| Acquired tangible assets | $ | 6.4 |
|
| Identified intangible assets | 4.8 |
|
| Liabilities assumed | (4.8 | ) |
| Goodwill | 7.7 |
|
| Total purchase price | $ | 14.1 |
|
The amount of goodwill expected to be deductible for tax purposes, excluding contingent consideration, is$5.5 million.
The following table presents details of the intangible assets acquired during the year ended December 31, 2019 (dollars in millions).
|
| | | | | | | |
| | Weighted Average Useful Life | | Estimated Useful Life | | Aggregate Acquisitions |
| Customer relationships | 7 years | | 7 years | | $ | 3.9 |
|
| Customer backlog | 9 months | | 9 months | | 0.4 |
|
| Non-compete agreements | 5 years | | 5 years | | 0.1 |
|
| Trade name | 1 year | | 1 year | | 0.1 |
|
| Developed software | 3 years | | 3 years | | 0.3 |
|
| Total acquired intangible assets | | | | | $ | 4.8 |
|
2018 Acquisitions
Acquisition of Southport
On April 2, 2018, the Company acquired substantially all of the assets of Southport, pursuant to the terms of an Asset Purchase Agreement. The Company’s total allocable purchase price consideration was $18.6 million. The purchase price was comprised of $11.3 million in cash paid and $2.7 million in Company common stock issued at closing, increased by $0.3 million as a result of the net working capital adjustment paid to Southport in the first quarter of 2019. The purchase price also included $4.3 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration with a maximum cash payout of $6.6 million. Southport achieved a portion of the maximum cash payout pursuant to the Purchase Agreement, and as a result, the Company paid $5.2 million in contingent consideration in the third quarter of 2019. The amount of goodwill deductible for tax purposes is $12.3 million.
Acquisition of Stone Temple
On July 16, 2018, the Company acquired substantially all of the assets of Stone Temple, pursuant to the terms of an Asset Purchase Agreement. The Company’s total allocable purchase price consideration was $12.3 million. The purchase price was comprised of $9.9 million in cash paid and $1.1 million in Company common stock issued at closing, increased by $0.1 million as a result of the net working capital adjustment paid to Stone Temple in the third quarter of 2019. The purchase price also included $1.2 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, which was not realized by Stone Temple. As a result, the Company recorded a pre-tax adjustment in “Adjustment to fair value of contingent consideration” on the Consolidated Statements of Operations of $1.3 million during the year ended December 31, 2019. The amount of goodwill deductible for tax purposes is $5.4 million.
Acquisition of Elixiter
On October 29, 2018, the Company acquired Elixiter pursuant to the terms of an Agreement and Plan of Merger. The Company’s total allocable purchase price consideration was $8.1 million. The purchase price was comprised of $5.4 million in cash paid (net of cash acquired) and $1.4 million in Company common stock issued at closing, increased by $0.4 million as a result of the net working capital adjustment paid to the sellers in the third quarter of 2019. The purchase price also included $0.9 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, with a maximum cash payout of $1.8 million. The Company recorded a pre-tax adjustment in “Adjustment to fair value of contingent consideration” on the Consolidated Statements of Operations of $0.4 million during the year ended December 31, 2019. Elixiter achieved a portion of the maximum cash payout pursuant to the Agreement and Plan of Merger, and as a result, the Company has accrued$1.3 millionof contingent consideration as of December 31, 2019. The goodwill is non-deductible for tax purposes.
The following table presents details of the intangible assets acquired during the year ended December 31, 2018 (dollars in millions).
|
| | | | | | | |
| | Weighted Average Useful Life | | Estimated Useful Life | | Aggregate Acquisitions |
| Customer relationships | 5 years | | 5 - 6 years | | $ | 10.6 |
|
| Customer backlog | 1 year | | 1 - 1.5 years | | 1.5 |
|
| Non-compete agreements | 5 years | | 4 - 5 years | | 0.3 |
|
| Trade name | 1 year | | 1 year | | 0.1 |
|
| Developed software | 3 years | | 3 years | | 0.4 |
|
| Total acquired intangible assets | | |
| | $ | 12.9 |
|
The results of the 2018 and 2019 acquisitions’ operations have been included in the Company’s consolidated financial statements since the respective acquisition dates.
The aggregate amounts of revenue and net income of the Sundog acquisition included in the Company’s Consolidated Statements of Operations from the acquisition date to December 31, 2019 are as follows (in thousands):
|
| | | |
| | Acquisition Date to December 31, 2019 |
| Revenues | $ | 7,997 |
|
| Net income | $ | 780 |
|
Pro-forma Results of Operations (Unaudited)
The following presents the unaudited pro-forma combined results of operations of the Company with the 2019 and 2018 acquisitions for the years ended December 31, 2019 and 2018 , after giving effect to certain pro-forma adjustments and assuming the 2019 acquisitions were acquired as of the beginning of 2018 and assuming the 2018 acquisitions were acquired as of the beginning of 2017.
These unaudited pro-forma results are presented in compliance with the adoption of ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, and are not necessarily indicative
of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2018 or January 1, 2017 or of future results of operations of the consolidated entities (in thousands except per share data):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Revenues | $ | 571,025 |
| | $ | 526,664 |
|
| Net income | $ | 38,712 |
| | $ | 25,383 |
|
| Basic net income per share | $ | 1.23 |
| | $ | 0.78 |
|
| Diluted net income per share | $ | 1.20 |
| | $ | 0.75 |
|
| Shares used in computing basic net income per share | 31,497 |
| | 32,608 |
|
| Shares used in computing diluted net income per share | 32,264 |
| | 33,674 |
|
10. Goodwill and Intangible Assets
Goodwill
Activity related to goodwill consisted of the following (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Balance, beginning of year | $ | 327,992 |
| | $ | 305,238 |
|
| Purchase price allocations for acquisitions (Note 9) | 7,654 |
| | 23,120 |
|
| Effect of foreign currency translation adjustments | (82 | ) | | (366 | ) |
| Balance, end of year | $ | 335,564 |
| | $ | 327,992 |
|
Intangible Assets with Definite Lives
Following is a summary of the Company’s intangible assets that are subject to amortization (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer relationships | $ | 82,431 |
| | $ | (49,716 | ) | | $ | 32,715 |
| | $ | 82,478 |
| | $ | (40,946 | ) | | $ | 41,532 |
|
| Non-compete agreements | 1,264 |
| | (601 | ) | | 663 |
| | 1,536 |
| | (735 | ) | | 801 |
|
| Customer backlog | 1,102 |
| | (987 | ) | | 115 |
| | 1,535 |
| | (736 | ) | | 799 |
|
| Trade name | 60 |
| | (37 | ) | | 23 |
| | 140 |
| | (76 | ) | | 64 |
|
| Developed software | 10,984 |
| | (6,547 | ) | | 4,437 |
| | 10,929 |
| | (6,033 | ) | | 4,896 |
|
| Total | $ | 95,841 |
| | $ | (57,888 | ) | | $ | 37,953 |
| | $ | 96,618 |
| | $ | (48,526 | ) | | $ | 48,092 |
|
The estimated useful lives of identifiable intangible assets are as follows:
|
| |
| Customer relationships | 5 - 10 years |
| Non-compete agreements | 4 - 5 years |
| Customer backlog | 9 months - 1.5 years |
| Trade name | 1 year |
| Developed software | 1 - 7 years |
Total amortization expense for the years ended December 31, 2019, 2018 and 2017 was $16.2 million, $16.4 million and $15.0 million, respectively.
Estimated annual amortization expense for the next five years ended December 31 and thereafter is as follows (in thousands):
|
| | | |
| 2020 | $ | 12,642 |
|
| 2021 | $ | 10,226 |
|
| 2022 | $ | 8,704 |
|
| 2023 | $ | 4,248 |
|
| 2024 | $ | 1,359 |
|
| Thereafter | $ | 774 |
|
11. Employee Benefit Plans
The Company has a qualified 401(k) profit sharing plan available to full-time employees who meet the plan’s eligibility requirements. This defined contribution plan permits employees to make contributions up to maximum limits allowed by the Internal Revenue Code of 1986, as amended (the “Code”).Code. The Company, at its discretion, matches a portion of the employee’s contribution under a predetermined formula based on the level of contribution and years of service. For 2017,2019, the Company made matching contributions of 50% (25% in cash and 25% in Company stock) of the first 6% of eligible compensation deferred by the participant. The Company recognized $4.9$6.7 million, $4.8$5.6 million and $4.6$4.9 million of expense for the matching cash and Company stock contribution in 2017, 2016,2019, 2018 and 2015,2017, respectively. All matching contributions vest over a three-year period of service.
The Company has a nonqualified deferred compensation plan for certain U.S. personnel. The plan is designed to allow eligible participants to accumulate additional income through elective deferrals of compensation which will be paid in the future. As of December 31, 20172019 and 2016,2018, the deferred compensation liability balance was $4.7$5.7 million and $3.9$4.5 million, respectively. The Company funds the deferred compensation plan through company-owned life insurance (“COLI”) policies. During the year endedAs of December 31, 2016,2019 and 2018, the Company settled its current COLI policiesasset balance was $5.6 million and funded new COLI policies with a different insurance provider.$4.3 million, respectively.
In accordance with Indian law, the Company provides certain defined benefit plans covering substantially all of its Indian employees. The gratuity plan provides a lump-sum payment to vested employees upon retirement or termination of employment in an amount based on each employee’s salary and duration of employment with the Company. The leave encashment plan requires the Company to pay employees leaving the Company a specific formula taking into account earned leaves up to a certain maximum and the employee’s most recent salary. The annual projected cost of these defined benefit plans is actuarially determined. As of December 31, 20172019 and 2016, the 2018, thedefined benefit plan liability, which is unfunded, was immaterial.
6. Business Combinations
Revolving Credit Facility
2016 Acquisition
Acquisition of Bluetube
On October 12, 2016, the Company acquired substantially all of the assets of Bluetube, LLC, a Georgia limited liability company (“Bluetube”), pursuant to the terms of an Asset Purchase Agreement. Bluetube was a digital marketing agency specializing in the development, implementation, integration and support of custom website and enterprise mobile solutions. The acquisition of Bluetube enhanced and expanded the Company’s digital strategy, creative services, mobile and marketing expertise.
The Company’s total allocable purchase price consideration was $9.1 million. The purchase price was comprised of $7.2 million in cash paid increased by $1.9 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration. Bluetube realized the maximum cash payout pursuant to the Asset Purchase Agreement and, as a result, the Company recorded a pre-tax adjustment of $0.8 million in “Adjustment to fair value of contingent consideration” on the Consolidated Statements of Operations during the year ended December 31, 2017 and paid $2.7 million in contingent consideration in August 2017. The Company incurred approximately $0.5 million in transaction costs, which were expensed when incurred.
The Company allocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):
| Acquired tangible assets | | $ | 0.9 | |
| Acquired intangible assets | | | 3.1 | |
| Liabilities assumed | | | (0.6 | ) |
| Goodwill | | | 5.7 | |
| Total purchase price | | $ | 9.1 | |
The amount of goodwill expected to be deductible for tax purposes is $6.7 million.
The following table presents details of the intangible assets acquired during the year ended December 31, 2016 (dollars in millions).
| | | Weighted Average Useful Life | | Estimated Useful Life | | Aggregate Acquisitions |
| Customer relationships | | 5 years | | 5 years | | $ | 2.5 |
| Customer backlog | | 6 months | | 6 months | | | 0.4 |
| Non-compete agreements | | 5 years | | 5 years | | | 0.2 |
| Trade name | | 1 year | | 1 year | | | - |
| Total acquired intangible assets | | | | | | $ | 3.1 |
2017 Acquisitions
Acquisition of RAS
On January 3, 2017, the Company acquired substantially all of the assets of RAS through a wholly-owned subsidiary of the Company, pursuant to the terms of an Asset Purchase Agreement. The acquisition of RAS expands the Company’s expertise in management consulting offerings with additional strategy, operations and business process optimization.
The Company’s total allocable purchase price consideration was $10.4 million. The purchase price was comprised of $7.1 million in cash paid and $2.1 million in Company common stock issued at closing reduced by $0.6 million as a result of a net working capital adjustment settled in Company common stock surrendered by RAS in September 2017. The purchase price also included $1.8 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, which may be realized by the seller twelve months after the closing date of the acquisition with a maximum cash payout of $3.8 million. As of December 31, 2017, the Company’s best estimate of the fair value of the contingent consideration is zero. As a result, the Company recorded a pre-tax adjustment in “Adjustment to fair value of contingent consideration” on the Consolidated Statements of Operations of $1.8 million during year ended December 31, 2017. The Company incurred approximately $0.5 million in transaction costs, which were expensed when incurred.
The Company allocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):
| Acquired tangible assets | | $ | 0.9 | |
| Acquired intangible assets | | | 5.1 | |
| Liabilities assumed | | | (1.0 | ) |
| Goodwill | | | 5.4 | |
| Total purchase price | | $ | 10.4 | |
The amount of goodwill expected to be deductible for tax purposes, excluding contingent consideration, is $3.7 million.
On June 22, 2017, the Company acquired substantially all of the assets of Clarity, pursuant to the terms of an Asset Purchase Agreement. The acquisition of Clarity enhanced and expanded the Company’s management consultancy in custom development, cloud implementation, and digital experience design on Microsoft platforms and devices and enabled us to deepen our penetration in the Chicago, Illinois market.
The Company’s total allocable purchase price consideration was $41.7 million. The purchase price was comprised of $30.7 million in cash paid and $7.3 million in Company common stock issued at closing reduced by $0.4 million for an estimated net working capital settlement due from the seller. The purchase price also included $4.1 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, which may be realized by the seller twelve months after the closing date of the acquisition with a maximum cash payout of $9.2 million. As of December 31, 2017, the Company’s best estimate of the fair value of the contingent consideration is $8.1 million. As a result, the Company recorded a pre-tax adjustment in “Adjustment to fair value of contingent consideration” on the Consolidated Statements of Operations of $4.0 million during year ended December 31, 2017. The Company incurred approximately $0.9 million in transaction costs, which were expensed when incurred.
As part of the consideration paid for the acquisition of Clarity, the Company issued common stock to owners of Clarity who are continuing with the Company with restrictions that limit the ability to sell the common stock and that lapse over a certain service period, or over an accelerated period upon meeting specified employment milestones. As such, $0.9 million of the common stock value was attributed to future compensation and recorded as an asset within “Other current assets” and “Other non-current assets” in the Consolidated Balance Sheet as of December 31, 2017, to be amortized over the requisite service period.
The Company allocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):
| Acquired tangible assets | | $ | 6.0 | |
| Acquired intangible assets | | | 15.0 | |
| Liabilities assumed | | | (3.6 | ) |
| Goodwill | | | 24.3 | |
| Total purchase price | | $ | 41.7 | |
The amount of goodwill expected to be deductible for tax purposes, excluding contingent consideration, is $22.1 million.
The following table presents details of the intangible assets acquired during the year ended December 31, 2017 (dollars in millions).
| | | Weighted Average Useful Life | | Estimated Useful Life | | Aggregate Acquisitions |
| Customer relationships | | 6 years | | 6 years | | $ | 16.8 |
| Customer backlog | | 1 year | | 3 months - 1 year | | | 1.9 |
| Non-compete agreements | | 5 years | | 2 - 5 years | | | 0.7 |
| Trade name | | 1 year | | 1 year | | | 0.1 |
| Internally developed software | | 4 years | | 4 years | | | 0.6 |
| Total acquired intangible assets | | | | | | $ | 20.1 |
The results of the 2016 and 2017 acquisitions’ operations have been included in the Company’s consolidated financial statements since the respective acquisition dates.
The aggregate amounts of revenue and net income of the RAS and Clarity acquisitions included in the Company’s Consolidated Statements of Operations from the acquisition date to December 31, 2017 are as follows (in thousands):
| | | Acquisition Date to December 31, 2017 | |
| Revenues | | $ | 26,733 | |
| Net income | | $ | 2,634 | |
Pro-forma Results of Operations (Unaudited)
The following presents the unaudited pro-forma combined results of operations of the Company with the 2017 acquisitions for the year ended December 31, 2017 and the 2016 and 2017 acquisitions for the year ended December 31, 2016, after giving effect to certain pro-forma adjustments and assuming the 2017 acquisitions were acquired as of the beginning of 2016 and assuming the 2016 acquisitions were acquired as of the beginning of 2015.
These unaudited pro-forma results are presented in compliance with the adoption of ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, and are not necessarily indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2016 or January 1, 2015 or of future results of operations of the consolidated entities (in thousands except per share data):
| | | December 31, | |
| | | 2017 | | | 2016 | |
| Revenues | | $ | 500,436 | | | $ | 525,915 | |
| Net income | | $ | 23,899 | | | $ | 19,203 | |
| Basic net income per share | | $ | 0.71 | | | $ | 0.56 | |
| Diluted net income per share | | $ | 0.70 | | | $ | 0.54 | |
| Shares used in computing basic net income per share | | | 33,455 | | | | 34,271 | |
| Shares used in computing diluted net income per share | | | 34,298 | | | | 35,676 | |
7. Goodwill and Intangible Assets
Goodwill
Activity related to goodwill consisted of the following (in thousands):
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Balance, beginning of year | | $ | 275,205 | | | $ | 269,383 | |
| Purchase price allocations for acquisitions (Note 6) | | | 29,756 | | | | 5,716 | |
| Purchase accounting adjustments | | | - | | | | 195 | |
| Effect of foreign currency translation adjustments | | | 277 | | | | (89 | ) |
| Balance, end of year | | $ | 305,238 | | | $ | 275,205 | |
Intangible Assets with Definite Lives
Following is a summary of the Company’s intangible assets that are subject to amortization (in thousands):
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
| Customer relationships | | $ | 75,407 | | | $ | (32,307 | ) | | $ | 43,100 | | | $ | 67,648 | | | $ | (30,458 | ) | | $ | 37,190 | |
| Non-compete agreements | | | 1,556 | | | | (707 | ) | | | 849 | | | | 1,018 | | | | (557 | ) | | | 461 | |
| Customer backlog | | | 1,650 | | | | (866 | ) | | | 784 | | | | 390 | | | | (195 | ) | | | 195 | |
| Trade name | | | 100 | | | | (53 | ) | | | 47 | | | | 30 | | | | (7 | ) | | | 23 | |
| Internally developed software | | | 11,325 | | | | (5,039 | ) | | | 6,286 | | | | 11,342 | | | | (4,096 | ) | | | 7,246 | |
| Total | | $ | 90,038 | | | $ | (38,972 | ) | | $ | 51,066 | | | $ | 80,428 | | | $ | (35,313 | ) | | $ | 45,115 | |
The estimated useful lives of identifiable intangible assets are as follows:
Customer relationships | 5 – 10 years |
Non-compete agreements | 2 – 5 years |
Customer backlog | 6 – 12 months |
Trade name | 1 year |
Internally developed software | 1 – 7 years |
Total amortization expense for the years ended December 31, 2017, 2016, and 2015 was approximately $15.0 million, $13.4 million, and $13.8 million, respectively.
Estimated annual amortization expense for the next five years ended December 31 and thereafter is as follows (in thousands):
| 2018 | | $ | 14,180 | |
| 2019 | | $ | 12,317 | |
| 2020 | | $ | 9,236 | |
| 2021 | | $ | 7,098 | |
| 2022 | | $ | 5,752 | |
| Thereafter | | $ | 2,483 | |
8. Stock-Based Compensation
Stock Plans
The Company’s Second Amended and Restated Perficient, Inc. 2012 Long Term Incentive Plan (as amended, the “Incentive Plan”) allows for the granting of various types of stock awards to eligible individuals. The Compensation Committee of the Board of Directors administers the Incentive Plan and determines the terms of all stock awards made under the Incentive Plan. The Incentive Plan was increased by 2.0 million shares on June 14, 2017 after the Company’s stockholders approved the increase at the Company’s 2017 annual meeting of stockholders. Following the increase, the Company may issue stock awards of up to 7.0 million shares of Common Stock pursuant to the Incentive Plan. As of December 31, 2017, there were 2.9 million shares of Common Stock available for issuance under the Incentive Plan.
Restricted stock activity for the year ended December 31, 2017 was as follows (in thousands, except fair value information):
| | | Shares | | | Weighted-Average Grant Date Fair Value | |
| Restricted stock awards outstanding at December 31, 2016 | | | 1,403 | | | $ | 17.52 | |
| Awards granted (1) | | | 831 | | | $ | 18.68 | |
| Awards vested (2) | | | (651 | ) | | $ | 18.00 | |
| Awards forfeited | | | (147 | ) | | $ | 16.16 | |
| Restricted stock awards outstanding at December 31, 2017 | | | 1,436 | | | $ | 18.12 | |
(1) | The weighted average grant date fair value of shares granted during 2016 and 2015 was $16.79 and $18.49, respectively. |
(2) | The total fair value of restricted shares vested during the years ended December 31, 2017, 2016 and 2015 was $12.0 million, $10.8 million and $14.2 million, respectively. |
The Company recognized $14.7 million, $14.2 million, and $13.5 million of share-based compensation expense during 2017, 2016 and 2015, respectively, which included $2.5 million, $2.4 million, and $2.2 million of expense for retirement savings plan contributions, respectively. The associated current and future income tax benefit recognized during 2017, 2016 and 2015 was $4.6 million, $4.3 million, and $4.2 million, respectively. As of December 31, 2017, there was $19.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested share-based awards. This cost is expected to be recognized over a weighted-average period of two years. Generally restricted stock awards vest over a three year service period.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) is a broadly-based stock purchase plan in which any eligible employee may elect to participate by authorizing the Company to make payroll deductions in a specific amount or designated percentage to pay the exercise price of an option. In no event will the ESPP permit an employee to purchase common stock with a fair market value in excess of $25,000 in any calendar year and the Compensation Committee of the Company has set the current annual participation limit at $12,500. During the year ended December 31, 2017, approximately 7,681 shares were purchased under the ESPP.
There are four three-month offering periods in each calendar year beginning on January 1, April 1, July 1, and October 1, respectively. The purchase price of shares offered under the ESPP is an amount equal to 95% of the fair market value of the common stock on the date of purchase (occurring on, respectively, March 31, June 30, September 30, and December 31). The ESPP is designed to comply with Section 423 of the Code and thus is eligible for the favorable tax treatment afforded by Section 423.
9. Line of Credit
On June 9, 2017, the Company entered into a Credit Agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank, National Association, as administrative agent and the other lenders parties thereto. The Credit Agreement replaces the Second Amended and Restated Credit Agreement dated as of July 31, 2013 between the Company, Silicon Valley Bank and the other lenders and signatories thereto (the “Prior Credit Agreement”). The new credit facility was used to repay amounts due under the Prior Credit Agreement and will be used for working capital and general corporate purposes. In connection with the new agreement, the Company wrote off $0.2 million in unamortized credit facility fees associated with the Prior Credit Agreement, which was included in “Net interest expense” on the Consolidated Statements of Operations during the year ended December 31, 2017. The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $125.0 million, subject to a commitment increase of $75.0 million. All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of June 9, 2022.2022.
The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $10.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. As of December 31, 2017,2019, the Company had one1 outstanding letter of credit for $0.3$0.2 million. Substantially all of the Company’s assets are pledged to secure the credit facility.
Borrowings under the Credit Agreement bear interest at the Company’s option of the prime rate (4.50%(4.75% on December 31, 2017)2019) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (1.56%(1.76% on December 31, 2017)2019) plus a margin ranging from 1.00% to 1.75%. The Company incurs an annual commitment fee of 0.15% to 0.20% on the unused portion of the line of credit. The additional margin amount and annual commitment fee are dependent on the level of outstanding borrowings. As of December 31, 2017,2019, the Company had $69.7$124.8 million of unused borrowing capacity.
The Company is required to comply with various financial covenants under the Credit Agreement. Specifically, the Company is required to maintain a ratio of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) plus stock compensation to interest expense for the previous four consecutive fiscal quarters of not less than 3.00 to 1.00 and a ratio of
indebtedness to EBITDA plus stock compensation (“Leverage Ratio”) of not more than 3.00 to 1.00. Additionally, the Credit Agreement currently restricts the payment of dividends that would result in a pro-forma Leverage Ratio of more than 2.00 to 1.00.
At December 31, 2017,2019, the Company was in compliance with all covenants under the Credit Agreement.
Convertible Senior Notes due 2023
On September 11, 2018, the Company issued $143.8 million aggregate principal amount of the Notes in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the offerings, after deducting the initial purchasers’ discount and issuance costs of $4.4 million, were $139.4 million. The Company used (i) $49.0 million of the net proceeds to pay down the Company’s revolving credit facility, (ii) $38.8 million of the net proceeds to repurchase 1.3 million shares of the Company’s common stock concurrently with the pricing of the Notes offering in privately negotiated transactions and (iii) $8.6 million of the net proceeds to fund the cost of entering into the Notes Hedges (as defined below), after such cost was partially offset by the proceeds that the Company received from entering into the Notes Warrants (as defined below). The remaining proceeds were used for working capital or other general corporate purposes.
The Notes bear interest at a rate of 2.375% per year. Interest is payable in cash on March 15 and September 15 of each year. The Notes mature on September 15, 2023, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. The initial conversion rate is 26.5957 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $37.60 per share of common stock. After consideration of the Notes Hedges and Notes Warrants, the conversion rate is effectively hedged to a price of $46.62 per share of common stock. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the Notes (the “Indenture”). The Company may settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate(s). If a “make-whole fundamental change” (as defined in the Indenture) occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. The Company’s intent is to settle the principal amount of the Notes in cash upon conversion.
A Note may be converted at the holder’s option prior to the close of business on the business day immediately preceding September 15, 2023, but only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on December 31, 2018, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;
upon the occurrence of certain corporate events or distributions on the Company’s common stock described in the Indenture; and
at any time from, and including, March 15, 2023 until the close of business on the second scheduled trading day immediately before the maturity date.
The Company may not redeem the Notes at its option before maturity. If a “fundamental change” (as defined in the Indenture) occurs, then, except as described in the Indenture, noteholders may require the Company to repurchase their notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
As of December 31, 2019, none of the conditions permitting holders to convert their Notes had been satisfied and no shares of the Company’s common stock had been issued in connection with any conversions of the Notes.
In accordance with accounting for debt with conversion and other options, the Company bifurcated the principal amount of the Notes into liability and equity components. The initial liability component of the Notes was valued at $122.9 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.7%. The equity component representing the conversion option and calculated as the residual amount of the proceeds was recorded as an increase in additional paid-in capital within stockholders’ equity of $20.9 million, partially offset by the associated deferred tax effect of $5.4 million. The amount recorded within additional paid-in capital is not to be remeasured as long as it continues to meet the conditions for equity classification. The resulting debt discount of $20.9 million is being amortized
36
to interest expense using the effective interest method with an effective interest rate of 5.7% over the period from the issuance date through the contractual maturity date of September 15, 2023. The Company utilizes the treasury stock method to calculate the effects of the Notes on diluted earnings per share.
Issuance costs totaling $4.8 million were allocated pro rata based on the relative fair values of the liability and equity components. Issuance costs of $4.1 million attributable to the liability component were recorded as a direct deduction from the carrying value of the Notes and are being amortized to interest expense using the effective interest method over the term of the Notes. Issuance costs of $0.7 million attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders’ equity, partially offset by the associated deferred tax effect of $0.2 million.
The liability and equity components of the Notes consisted of the following (in thousands): |
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Liability component: | | | |
| Principal | $ | 143,750 |
| | $ | 143,750 |
|
| Less: Unamortized debt discount | (16,033 | ) | | (19,806 | ) |
| Unamortized debt issuance costs | (3,053 | ) | | (3,877 | ) |
| Net carrying amount | $ | 124,664 |
| | $ | 120,067 |
|
| | | | |
| Equity component: | | | |
| Debt discount for conversion option, net of taxes | $ | 15,547 |
| | $ | 15,547 |
|
| Less: Issuance costs, net of taxes | (523 | ) | | (523 | ) |
| Net carrying amount | $ | 15,024 |
| | $ | 15,024 |
|
Interest expense for the years ended December 31, 2019 and 2018 related to the Notes consisted of the following (in thousands):
10. |
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Coupon interest | $ | 3,414 |
| | $ | 1,043 |
|
| Amortization of debt discount | 3,773 |
| | 1,111 |
|
| Amortization of debt issuance costs | 824 |
| | 252 |
|
| Total interest expense recognized | $ | 8,011 |
| | $ | 2,406 |
|
2023 Convertible Notes Hedges
In connection with the issuance of the Notes, the Company entered into privately negotiated convertible note hedge transactions (the “Notes Hedges”) with certain of the initial purchasers or their respective affiliates and/or other financial institutions (the “Option Counterparties”). The Notes Hedges provide the Company with the option to acquire, on a net settlement basis, approximately 3.8 million shares of common stock at a strike price of $37.60, which is equal to the number of shares of common stock that notionally underlie the Notes and corresponds to the conversion price of the Notes. If the Company elects cash settlement and exercises the Notes Hedges, the aggregate amount of cash received from the Option Counterparties will cover the aggregate amount of cash that the Company would be required to pay to the holders of the Notes, less the principal amount thereof. The Notes Hedges do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock and are accounted for as freestanding financial instruments. The Notes Hedges were recorded as a reduction in additional paid-in capital within stockholders’ equity of $20.7 million, partially offset by the deferred tax effect of $5.3 million.
2023 Convertible Notes Warrants
In connection with the issuance of the Notes, the Company also sold net-share-settled warrants (the “Notes Warrants”) in privately negotiated transactions with the Option Counterparties. The strike price of the Notes Warrants was approximately $46.62 per share, and is subject to certain adjustments under the terms of the Notes Warrants. As a result of the Notes Warrants and related transactions, the Company is required to recognize incremental dilution of earnings per share to the extent the average
share price is over $46.62 for any fiscal quarter. The Notes Warrants expire over a period of 100 trading days commencing on December 15, 2023 and may be settled in net shares of common stock or net cash at the Company’s election. The Notes Warrants were recorded as an increase in additional paid-in capital within stockholders’ equity of $12.1 million.
13. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (the “IRS”) has completed examinations of the Company’s U.S. income tax returns or the statute of limitations has passed on returns for the years through 2010.2015. The Company’s 2011 through 20152016 and 2017 U.S. income tax returns are currently under examination by the IRS. The IRS has sought to disallow research credits in the total amount of $2.5$5.7 million on the Company’s 2011 2012 and 2013through 2015 U.S. income tax returns. The Company has exhausted all administrative appeals and formal mediation and has filed suit to resolve this dispute. The Company is awaiting a court date to be set by the U.S. Tax Court.Court for the 2011 through 2013 returns. The Company believes the research credits taken are appropriate and intends to vigorously defend its position. An amount of adjustment, if any, and the timing of such adjustment are not reasonably possible to estimate at this time. The total amount of research credits taken or expected to be taken in the Company’s income tax returns for 2011 through December 31, 20172019 is $8.9$15.6 million.
As of December 31, 2017,2019, the Company had U.S. federal tax gross net operating loss carry forwards of approximately $1.9$1.1 million that will begin to expire in 2023 if not utilized. Utilization of net operating losses may be subject to an annual limitation due to the “change in ownership” provisions of the Code. The annual limitation may result in the expiration of net operating losses before utilization.
Significant components of the provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | 5,000 |
| | $ | 4,030 |
| | $ | 9,095 |
|
| State | 2,724 |
| | 1,222 |
| | 1,262 |
|
| Foreign | 1,051 |
| | 1,183 |
| | 2,345 |
|
| Total current | 8,775 |
| | 6,435 |
| | 12,702 |
|
| | | | | | |
| Deferred: | | | | | |
| Federal | 1,570 |
| | 835 |
| | (3,726 | ) |
| State | 467 |
| | 250 |
| | (684 | ) |
| Foreign | 4 |
| | 293 |
| | 270 |
|
| Total deferred | 2,041 |
| | 1,378 |
| | (4,140 | ) |
| Total provision for income taxes | $ | 10,816 |
| | $ | 7,813 |
| | $ | 8,562 |
|
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Current: | | | | | | | | | |
| Federal | | $ | 9,095 | | | $ | 3,733 | | | $ | 6,394 | |
| State | | | 1,262 | | | | 720 | | | | 772 | |
| Foreign | | | 2,345 | | | | 1,207 | | | | 1,165 | |
| Total current | | | 12,702 | | | | 5,660 | | | | 8,331 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | (3,726 | ) | | | 3,487 | | | | 1,057 | |
| State | | | (684 | ) | | | 642 | | | | 170 | |
| Foreign | | | 270 | | | | 261 | | | | 270 | |
| Total deferred | | | (4,140 | ) | | | 4,390 | | | | 1,497 | |
| Total provision for income taxes | | $ | 8,562 | | | $ | 10,050 | | | $ | 9,828 | |
The components of pretax income for the years ended December 31, 2017, 20162019, 2018 and 20152017 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Domestic | $ | 43,330 |
| | $ | 27,613 |
| | $ | 21,285 |
|
| Foreign | 4,611 |
| | 4,759 |
| | 5,858 |
|
| Total | $ | 47,941 |
| | $ | 32,372 |
| | $ | 27,143 |
|
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Domestic | | $ | 21,285 | | | $ | 24,564 | | | $ | 26,958 | |
| Foreign | | | 5,858 | | | | 5,945 | | | | 5,877 | |
| Total | | $ | 27,143 | | | $ | 30,509 | | | $ | 32,835 | |
For the years ended December 31, 2017, 2016,2019, 2018 and 20152017 foreign operations included India, China, Canada and the United Kingdom.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31, 20172019 and 20162018 are as follows (in thousands):
| | | December 31, | |
| | | 2017 | | | 2016 | |
| Deferred tax assets: | | | | | | |
| Accrued liabilities | | $ | 2,027 | | | $ | 1,710 | |
| Bad debt reserve | | | 328 | | | | 497 | |
| Net operating losses | | | 483 | | | | 893 | |
| Deferred compensation | | | 2,579 | | | | 3,851 | |
| Intangibles | | | 4,097 | | | | 3,624 | |
| Total deferred tax assets | | | 9,514 | | | | 10,575 | |
| Deferred tax liabilities: | | | | | | | | |
| Prepaid expenses | | | 902 | | | | 965 | |
| Accounting method change | | | 1,366 | | | | 3,096 | |
| Goodwill and intangibles | | | 13,975 | | | | 18,172 | |
| Fixed assets | | | 631 | | | | 1,195 | |
| Total deferred tax liabilities | | | 16,874 | | | | 23,428 | |
| Net deferred tax liability | | $ | 7,360 | | | $ | 12,853 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Accrued liabilities | $ | 1,545 |
| | $ | 1,617 |
|
| Operating lease liabilities | 5,060 |
| | — |
|
| Allowance for doubtful accounts | 119 |
| | 208 |
|
| Net operating losses | 287 |
| | 375 |
|
| Deferred compensation liability | 2,324 |
| | 2,443 |
|
| Intangible assets | 7,946 |
| | 5,769 |
|
| Total deferred tax assets | 17,281 |
| | 10,412 |
|
| Deferred tax liabilities: | | | |
| Prepaid expenses | 1,044 |
| | 933 |
|
| Accounting method change | 20 |
| | 711 |
|
| Operating lease right-of-use assets | 4,798 |
| | — |
|
| Goodwill and intangible assets | 20,999 |
| | 17,170 |
|
| Property and equipment | 1,528 |
| | 851 |
|
| Total deferred tax liabilities | 28,389 |
| | 19,665 |
|
| Net deferred tax liability | $ | 11,108 |
| | $ | 9,253 |
|
Management regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. Management believes it is more likely than not that the Company will generate sufficient taxable income in future years to realize the benefits of its deferred tax assets.
The federal corporate statutory tax rate is reconciled to the Company’s effective income tax rate as follows:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Federal statutory rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State taxes, net of federal benefit | 4.3 |
| | 4.5 |
| | 3.3 |
|
| Effect of foreign operations | 0.2 |
| | 1.5 |
| | 1.9 |
|
| Foreign toll charge - U.S. tax reform | — |
| | — |
| | 4.1 |
|
| Stock compensation | (1.0 | ) | | 2.0 |
| | 1.9 |
|
| Non-deductible acquisition costs | 0.2 |
| | 0.2 |
| | — |
|
| Research and development tax credit | (1.8 | ) | | (5.0 | ) | | (1.0 | ) |
| U.S. domestic production deduction | (0.1 | ) | | (0.1 | ) | | (1.6 | ) |
| Adjustment to deferred tax rate - U.S. tax reform | — |
| | — |
| | (12.3 | ) |
| Other | (0.2 | ) | | — |
| | 0.2 |
|
| Effective tax rate | 22.6 | % | | 24.1 | % | | 31.5 | % |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State taxes, net of federal benefit | | | 3.3 | | | | 3.9 | | | | 4.0 | |
| Effect of foreign operations | | | 1.9 | | | | (2.1 | ) | | | (2.6 | ) |
| Foreign toll charge - U.S. tax reform | | | 4.1 | | | | 0.0 | | | | 0.0 | |
| Stock compensation | | | 1.9 | | | | 2.4 | | | | 3.4 | |
| Non-deductible acquisition costs | | | 0.0 | | | | 0.0 | | | | 0.3 | |
| Research and development tax credit | | | (1.0 | ) | | | (5.0 | ) | | | (9.0 | ) |
| U.S. domestic production deduction | | | (1.6 | ) | | | (1.4 | ) | | | (1.0 | ) |
| Adjustment to deferred tax rate - U.S. tax reform | | | (12.3 | ) | | | 0.0 | | | | 0.0 | |
| Other | | | 0.2 | | | | 0.1 | | | | (0.2 | ) |
| Effective tax rate | | | 31.5 | % | | | 32.9 | % | | | 29.9 | % |
The effective income tax rate decreased to 31.5%22.6% for the year ended December 31, 20172019 from 32.9%24.1% for the year ended December 31, 2016. 2018 primarily due to the increase in tax benefits recognized related to share-based compensation deductions compared to the prior year.The effective rate for the year ended December 31, 2017 included the effects of certain foreign withholding taxes, a foreign toll charge on historic foreign earnings, and a revaluation of ending deferred income taxes caused by passage of the 2017 Tax Act.Act.
In general, it is the Company’s practice and intention to reinvest the earnings of the Company’s foreign subsidiaries in those operations. However, during the second quarter of 2017, the Company determined that as a result of changes in the business and macroeconomic environment, the foreign earnings of the Company’s Chinese subsidiary were no longer permanently reinvested, and thereinvested. The Company repatriated $4.8 million of cash in June 2017 and an additional $4.8 million of cash in July 2017. A provision for the expected current and deferred taxes on repatriation of thesemay repatriate available earnings was recorded as a discrete item in the amount of $2.5 million during the second quarter of 2017. Approximately $1.6 million of this provision was reversed during the fourth quarter of 2017 duefrom time to the adoption of the 2017 Tax Act.time. Management intends to continue to permanently reinvest all other remaining current and prior earnings in its other foreign subsidiaries.
Excluding China, foreign unremitted earnings of entities not included in the United States tax return have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. Under current applicable tax laws, if the Company elects to remit some or all of the funds it has designated as indefinitely reinvested outside the United States, the amount remitted would be subject to applicable non-U.S. withholding taxes. As of December 31, 2017,2019, the aggregate unremitted earnings of the Company’s foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $4.9$11.7 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.2$0.4 million.
Under the provisions of the ASC Section 740-10-25, Income Taxes - Recognition, the Company had an unrecognized tax benefit of $2.7$4.7 million (excluding $0.6 million of interest) and $1.2$3.2 million (excluding $0.3 million of interest) as of December 31, 20172019 and 2016,2018, respectively. If the Company’s assessment of unrecognized tax benefits is not representative of actual outcomes, the Company’s consolidated financial statements could be significantly impacted in the period of settlement or when the statute of limitations expires.
The following table is a reconciliation of beginning and ending balances of total amounts of gross unrecognized tax benefits (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Balance at beginning of year | $ | 3,165 |
| | $ | 2,680 |
|
| Additions based on tax positions related to current year | 753 |
| | 554 |
|
| Additions based on tax positions related to prior years | 747 |
| | — |
|
| Reductions for tax positions of prior years | — |
| | (69 | ) |
| Balance at end of year | $ | 4,665 |
| | $ | 3,165 |
|
| | | December 31, | |
| | | 2017 | | | 2016 | |
| Balance at beginning of year | | $ | 1,164 | | | $ | 957 | |
| Additions based on tax positions related to current year | | | 464 | | | | - | |
| Additions based on tax positions related to prior years | | | 1,151 | | | | 207 | |
| Reductions for tax positions of prior years | | | (99 | ) | | | - | |
| Balance at end of year | | $ | 2,680 | | | $ | 1,164 | |
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted the 2017 Tax Act. The 2017 Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system.
There arewere certain transitional impacts of the 2017 Tax Act which affected the Company’s tax provision during the fourth quarter of 2017. As part of the transition to the new territorial tax system, the 2017 Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries, which produced a $1.1 million tax expense payable over eight years. As a result, a $0.1 million current liability and a $1.0 million non-current liability were recorded in the Company’s consolidated financial statements during the fourth quarter of 2017. The reduction of the U.S. corporate tax rate caused the Company to adjust its U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. The reduction in the corporate tax rate resulted in a provisional net tax credit of $3.3 million for the fourth quarter of 2017. In addition, as a result of the 2017 Tax Act, changes to the net tax cost of certain China dividends repatriated during 2017 created a $1.6 million tax credit during the fourth quarter of 2017.
The changes included in the 2017 Tax Act are broad and complex. The final transition impacts of the 2017 Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Tax Act, any legislative action to address questions that arise because of the 2017 Tax Act, any changes in the accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. There were no specific impacts of the 2017 Tax Act that could not be reasonably estimated which the Company accounted for under prior tax law. However, the SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period. We currently anticipate finalizing and recording any resulting adjustments within a year of the enactment date.
14. Derivatives
11. Financial Instruments
In the normal course of business, the Company uses derivative financial instruments to manage foreign currency exchange rate risk. Currency exposure is monitored and managed by the Company as part of its risk management program which seeks to reduce the potentially adverse effects that market volatility could have on operating results. The Company’s derivative financial instruments consist of non-deliverable foreign currency forward contracts. Derivative financial instruments are neither held nor issued by the Company for trading purposes.
Derivatives Not Designated as Hedging Instruments
Both the gain or loss on the derivatives not designated as hedging instruments and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. Realized gains or losses and changes in the estimated fair value of foreign currency forward contracts that have not been designated as hedges were a net gainimmaterial during each of $0.1 million during the yearyears ended December 31, 2017. A net loss of $0.3 million was recognized during the year ended December 31, 2016.2019 and 2018. Gains and losses on these contracts are recorded in net other income (expense)expense (income) and net interest expense in the Consolidated Statements of Operations and are offset by losses and gains on the related hedged items.
The notional amounts of the Company’s derivative instruments outstanding were as follows (in thousands):
| | | December 31, | |
| | | 2017 | | | 2016 | |
| Derivatives not designated as hedges | | | | | | |
| Foreign exchange contracts | | $ | 3,979 | | | $ | 4,541 | |
| Total derivatives not designated as hedges | | $ | 3,979 | | | $ | 4,541 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Derivatives not designated as hedges | | | |
| Foreign exchange contracts | $ | 2,523 |
| | $ | 3,195 |
|
| Total derivatives not designated as hedges | $ | 2,523 |
| | $ | 3,195 |
|
Derivatives may give rise to credit risks from the possible non-performance by counterparties. Credit risk is generally limited to the fair value of those contracts that are favorable to the Company. The Company has limited its credit risk by entering into derivative transactions only with highly-rated global financial institutions, limiting the amount of credit exposure with any one financial institution and conducting ongoing evaluation of the creditworthiness of the financial institutions with which the Company does business.
The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction obligations and for the set-off of certain obligations in the event of an insolvency of one of the parties to the transaction. Within the Consolidated Balance Sheets, the Company records derivative assets and liabilities at fair value.
15. Fair Value of Derivative InstrumentsMeasurements
The authoritative guidance defines fair value as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions.
The fair value hierarchy consists of the following three levels:
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments.
All highly liquid investments with maturities at date of purchase of three months or less are considered to be cash equivalents. Based on their short-term nature, the carrying value of cash equivalents approximate their fair value.As of December 31, 2019, $64.2 million of the Company’s cash and cash equivalents balance related to money-market fund investments and $3.0 million related to fixed time deposits. As of December 31, 2018, $37.7 million of the Company’s cash and cash equivalents balance related to money-market fund investments.These short-term money-market funds and fixed time deposits are considered Level 1 investments.
The Company has a deferred compensation plan, which is funded through COLI policies. The COLI asset is carried at fair value derived from quoted market prices of investments within the COLI policies, which are considered Level 2 inputs. Refer to Note 11, Employee Benefit Plans, for the fair value of the COLI asset as of December 31, 2019 and 2018.
The Company estimates the fair value of each foreign exchange forward contract by using the present value of expected cash flows. This considersThe estimate takes into account the difference between the current market forward price and contracted forward price for each foreign exchange contract and applies the difference in the rates to each outstanding contract. Valuations for all derivatives fall within Level 2 of the GAAP valuation hierarchy. The fair value of the Company’s derivative instruments outstanding as of December 31, 20172019 was immaterial.
Derivatives may give riseThe Company has contingent consideration liabilities related to credit risks fromacquisitions which are measured on a recurring basis and recorded at fair value, determined using the possible non-performance by counterparties. Credit risk is generally limiteddiscounted cash flow method. The inputs used to calculate the fair value of those contractsthe contingent consideration liabilities are considered to be Level 3 inputs due to the lack of relevant market activity and significant
management judgment. An increase in future cash flows may result in a higher estimated fair value while a decrease in future cash flows may result in a lower estimated fair value of the contingent consideration liabilities. Remeasurements to fair value are recorded in adjustment to fair value of contingent consideration in the Consolidated Statements of Operations. Refer to Note 7, Balance Sheet Components, for the estimated fair value of the contingent consideration liabilities as of December 31, 2019 and 2018.
The fair value of the Notes is measured using quoted price inputs. The Notes are not actively traded, and thus the price inputs represent a Level 2 measurement. As the quoted price inputs are highly variable from day to day, the fair value estimates could significantly increase or decrease.
The Notes are carried at their principal amount less unamortized debt discount and issuance costs, and are not carried at fair value at each period end. The original debt discount was calculated at a market interest rate for nonconvertible debt at the time of issuance, which represented a Level 3 fair value measurement. The approximate fair value of the Notes as of December 31, 2019 and 2018 was $195.4 million and $128.3 million, respectively, which is estimated on the basis of inputs that are favorable to us. observable in the market and is considered a Level 2 fair value measurement.
16. Leases
The Company has limited its credit risk by entering into derivative transactions only with highly-rated global financial institutions, limiting the amountleases office space under various operating lease agreements, which have remaining lease terms of credit exposure with any one financial institution and conducting ongoing evaluation of the creditworthiness of the financial institutions with whichyear to six years. Prior to January 1, 2019, the Company does business.accounted for leases under ASC Topic 840. On January 1, 2019, the Company adopted ASC Topic 842, which replaced ASC Topic 840. The most significant impact upon adoption was the recognition of lease liabilities and ROU assets for all operating leases with a term greater than 12 months on its balance sheet. Refer to Note 2, Summary of Significant Accounting Policies, for additional information on the impact of adoption.
The following discussion relates to the Company’s lease accounting policy, effective January 1, 2019, under ASC Topic 842 for the year ended December 31, 2019.
The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction obligations and for the set-off of certain obligationsdetermines if an arrangement is a lease at inception. Operating leases are included in the event of an insolvency of one of the parties to the transaction. Within the Consolidated Balance Sheets, the Company records derivativeoperating lease ROU assets, and liabilities at fair value.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable,other current liabilities, and operating lease liabilities on the revolving line of credit approximate fairconsolidated balance sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value because of the short maturityfuture minimum lease payments over the lease term at commencement date. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. In determining the expected lease term, the majority of these instruments.the Company’s renewal options are not reasonably certain based on conditions of the Company’s existing leases and its overall business strategies. The Company will periodically reassess expected lease terms based on significant triggering events or compelling economic reasons to exercise renewal options. The Company utilizes its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease and non-lease components as a single lease component.
Supplemental balance sheet information related to leases was as follows (in thousands):
|
| | | |
| | December 31, 2019 |
| Other current liabilities | $ | 8,992 |
|
| Operating lease liabilities | 19,649 |
|
| Total | $ | 28,641 |
|
Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows (in thousands):
12. |
| | | |
| | December 31, 2019 |
| 2020 | $ | 8,627 |
|
| 2021 | 7,375 |
|
| 2022 | 5,429 |
|
| 2023 | 4,646 |
|
| 2024 | 3,479 |
|
| Thereafter | 2,151 |
|
| Total future lease payments | 31,707 |
|
| Less implied interest | (3,066 | ) |
| Total | $ | 28,641 |
|
Operating lease expense for the year ended December 31, 2019 was $9.9 million, of which $1.3 million related to variable lease payments. Short term lease payments were immaterial for the year ended December 31, 2019. Operating cash flows for amounts included in the measurement of the Company’s operating lease liabilities for the year ended December 31, 2019 were $8.3 million. ROU assets obtained in exchange for lease liabilities during the year ended December 31, 2019 were $12.7 million. The weighted average remaining lease term of the Company’s operating leases as of December 31, 2019 was 4 years and the weighted average incremental borrowing rate was 4.6% as of December 31, 2019.
The following discussion relates to the Company’s lease accounting policy under ASC Topic 840 for the year ended December 31, 2018.
Future minimum commitments under these lease agreements as of December 31, 2018 were as follows (in thousands):
|
| | | |
| | December 31, 2018 |
| 2019 | $ | 7,375 |
|
| 2020 | 6,777 |
|
| 2021 | 5,071 |
|
| 2022 | 3,288 |
|
| 2023 | 2,189 |
|
| Thereafter | 1,420 |
|
| Total minimum lease payments | $ | 26,120 |
|
Rent expense for the years ended December 31, 2018 and 2017 was $8.3 million and $7.9 million, respectively.
17. Commitments and Contingencies
From time to time the Company is involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in the ordinary course of business. Although the Company cannot predict the outcome of such matters, currently the Company has no reason to believe the disposition of any current matter could reasonably be expected to have a material adverse impact on the Company’s financial position, results of operations or the ability to carry on any of its business activities.
In June 2016,During 2019, the Company entered into an agreementagreements to purchase internal use software licenses for internal use payable over a two-year period.multiple years. As a result, the Company has recorded $0.8$1.7 million in “Other current“Current liabilities” and $1.9 million in “Non-current liabilities” in the Consolidated Balance Sheet as of December 31, 2017.2019.
Certain of the Company’s operating leases contain predetermined fixed escalations of minimum rentals during the original lease terms. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as accrued rent expense.
The Company leases office space and certain equipment under various operating lease agreements. The Company has the option to extend the term of certain lease agreements. Future minimum commitments under these lease agreements as of December 31, 2017 are as follows (in thousands):
| | | Operating Leases | |
| 2018 | | $ | 6,535 | |
| 2019 | | | 6,539 | |
| 2020 | | | 6,072 | |
| 2021 | | | 4,595 | |
| 2022 | | | 2,773 | |
| Thereafter | | | 2,970 | |
| Total minimum lease payments | | $ | 29,484 | |
Rent expense for the years ended December 31, 2017, 2016, and 2015 was approximately $7.9 million, $7.5 million, and $6.5 million, respectively.
13. Balance Sheet Components
| | | December 31, | |
| | | 2017 | | | 2016 | |
| | | (In thousands) | |
| Accounts receivable: | | | | | | |
| Accounts receivable | | $ | 82,603 | | | $ | 80,461 | |
| Unbilled revenues | | | 30,863 | | | | 24,518 | |
| Allowance for doubtful accounts | | | (1,272 | ) | | | (1,277 | ) |
| Total | | $ | 112,194 | | | $ | 103,702 | |
| Property and Equipment: | | | | | | |
| Computer hardware (useful life of 3 years) | | $ | 13,110 | | | $ | 12,191 | |
| Furniture and fixtures (useful life of 5 years) | | | 3,772 | | | | 3,306 | |
| Leasehold improvements (useful life of 5 years) | | | 2,836 | | | | 1,958 | |
| Software (useful life of 1 to 7 years) | | | 5,159 | | | | 9,186 | |
| Less: Accumulated depreciation | | | (17,732 | ) | | | (17,753 | ) |
| Total | | $ | 7,145 | | | $ | 8,888 | |
| Other current liabilities: | | | | | | |
| Accrued variable compensation | | $ | 16,842 | | | $ | 10,979 | |
| Deferred revenues | | | 3,278 | | | | 3,138 | |
| Payroll related costs | | | 2,971 | | | | 2,607 | |
| Accrued subcontractor fees | | | 469 | | | | 1,049 | |
| Accrued medical claims expense | | | 2,133 | | | | 1,859 | |
| Professional fees | | | 357 | | | | 420 | |
| Estimated fair value of contingent consideration liability (Note 6) | | | 8,148 | | | | 3,384 | |
| Net working capital settlements | | | - | | | | 62 | |
| Other current liabilities | | | 3,879 | | | | 4,139 | |
| Total | | $ | 38,077 | | | $ | 27,637 | |
| Other non-current liabilities: | | | | | | |
| Deferred compensation liability | | $ | 4,409 | | | $ | 3,662 | |
| Deferred income taxes | | | 7,360 | | | | 12,853 | |
| Other non-current liabilities | | | 4,667 | | | | 2,543 | |
| Total | | $ | 16,436 | | | $ | 19,058 | |
14. Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is summarized as follows for the years presented (in thousands):
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Balance, beginning of year | | $ | 1,277 | | | $ | 749 | | | $ | 911 | |
| Charges to expense | | | 919 | | | | 1,251 | | | | 455 | |
| Uncollected balances written off, net of recoveries | | | (924 | ) | | | (723 | ) | | | (617 | ) |
| Balance, end of year | | $ | 1,272 | | | $ | 1,277 | | | $ | 749 | |
15.18. Quarterly Financial Results (Unaudited)
The following tables set forth certain unaudited supplemental quarterly financial information for the years ended December 31, 20172019 and 2016.2018. The quarterly operating results are not necessarily indicative of future results of operations (in thousands except per share data).
| | | Three Months Ended, | |
| | | March 31, 2017 | | | June 30, 2017 | | | September 30, 2017 | | | December 31, 2017 | |
| | | (Unaudited) | |
| Total revenues | | $ | 111,019 | | | $ | 117,026 | | | $ | 123,738 | | | $ | 133,478 | |
| Total cost of revenues | | | 74,944 | | | | 77,635 | | | | 81,139 | | | | 90,030 | |
| Income from operations | | | 4,859 | | | | 8,225 | | | | 10,957 | | | | 4,939 | |
| Income before income taxes | | | 4,530 | | | | 7,619 | | | | 10,532 | | | | 4,462 | |
| Net income (1) | | | 2,709 | | | | 2,409 | | | | 7,027 | | | | 6,436 | |
| Basic net income per share | | | 0.08 | | | | 0.07 | | | | 0.22 | | | | 0.20 | |
| Diluted net income per share | | | 0.08 | | | | 0.07 | | | | 0.21 | | | | 0.19 | |
(1) See Note 10, Income Taxes, |
| | | | | | | | | | | | | | | |
| | Three Months Ended, |
| | March 31, 2019 | | June 30, 2019 | | September 30, 2019 | | December 31, 2019 |
| | (Unaudited) |
| Total revenues | $ | 133,815 |
| | $ | 141,869 |
| | $ | 144,684 |
| | $ | 145,159 |
|
| Total cost of revenues | 86,071 |
| | 89,515 |
| | 89,235 |
| | 89,392 |
|
| Income from operations | 10,530 |
| | 13,381 |
| | 15,808 |
| | 15,613 |
|
| Income before income taxes | 8,772 |
| | 11,527 |
| | 13,903 |
| | 13,739 |
|
| Net income | 7,026 |
| | 8,528 |
| | 9,779 |
| | 11,792 |
|
| Basic net income per share | 0.22 |
| | 0.27 |
| | 0.31 |
| | 0.38 |
|
| Diluted net income per share | 0.22 |
| | 0.27 |
| | 0.30 |
| | 0.36 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended, |
| | March 31, 2018 | | June 30, 2018 | | September 30, 2018 | | December 31, 2018 |
| | (Unaudited) |
| Total revenues | $ | 120,942 |
| | $ | 121,798 |
| | $ | 123,933 |
| | $ | 131,702 |
|
| Total cost of revenues | 79,227 |
| | 79,595 |
| | 79,183 |
| | 81,826 |
|
| Income from operations | 6,791 |
| | 8,491 |
| | 9,261 |
| | 11,401 |
|
| Income before income taxes | 6,419 |
| | 7,926 |
| | 8,436 |
| | 9,591 |
|
| Net income | 4,928 |
| | 5,849 |
| | 6,305 |
| | 7,477 |
|
| Basic net income per share | 0.15 |
| | 0.18 |
| | 0.19 |
| | 0.24 |
|
| Diluted net income per share | 0.15 |
| | 0.17 |
| | 0.19 |
| | 0.23 |
|
19. Subsequent Event
Acquisition of MedTouch LLC
On January 6, 2020, the Company acquired substantially all of the assets of of MedTouch LLC, a Massachusetts limited liability company (“MedTouch”), pursuant to the terms of an Asset Purchase Agreement. The Asset Purchase Agreement provided for approximately $13.9 million of cash to be paid at closing, subject to a net working capital adjustment, approximately 55,514 shares of Company common stock to be issued at closing and a maximum potential payout for additional information regardingrevenue and earnings-based contingent consideration of $10.2 million, which may be realized by the 2017 Tax Actseller 12 months after the closing date of the acquisition. The acquisition of MedTouch expands the Company’s healthcare consulting and its impactdigital marketing capabilities.
Goodwill and intangible assets are expected to be recorded on the fourth quarterConsolidated Balance Sheet from the acquisition of 2017.MedTouch. As of February 25, 2020, the initial accounting for the business combination has not been completed, including the measurement of certain intangible assets and goodwill. Acquisition costs related to the purchase of MedTouch for the year ended December 31, 2019 were immaterial.
| | | Three Months Ended, | |
| | | March 31, 2016 | | | June 30, 2016 | | | September 30, 2016 | | | December 31, 2016 | |
| | | (Unaudited) | |
| Total revenues | | $ | 123,843 | | | $ | 124,396 | | | $ | 119,153 | | | $ | 119,590 | |
| Total cost of revenues | | | 83,619 | | | | 86,076 | | | | 82,741 | | | | 83,266 | |
| Income from operations | | | 8,472 | | | | 9,237 | | | | 8,014 | | | | 6,482 | |
| Income before income taxes | | | 7,849 | | | | 8,867 | | | | 7,590 | | | | 6,203 | |
| Net income | | | 5,406 | | | | 5,815 | | | | 5,545 | | | | 3,693 | |
| Basic net income per share | | | 0.16 | | | | 0.17 | | | | 0.16 | | | | 0.11 | |
| Diluted net income per share | | | 0.16 | | | | 0.17 | | | | 0.16 | | | | 0.11 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Perficient, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Perficient, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2019, and the related notes (collectively, the “consolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control –- Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the CompanyPerficient, Inc. and subsidiaries as of December 31, 20172019 and 2016,2018, and the results of itstheir operations and itstheir cash flows for each of the years in the three-year period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019 based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired substantially all of the assets of Clarity Consulting,Sundog Interactive, Inc. and Truth Labs, LLC (together, “Clarity”)(the Acquired Business) in June 2017,May 2019, and management excluded the Acquired Business from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, Clarity’s internal control over financial reporting associated with 9%2019. The Acquired Business represented 3% and 4%1% of the Company’s total assets and total revenues, respectively, included in the consolidated financial statements of the Company as of and for the year ended December 31, 2017.2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Clarity.the Acquired Business.
Adoption of New Accounting Pronouncements
As discussed in Notes 2 and 16 to the consolidated financial statements, on January 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases, and as discussed in Notes 2 and 3 to the consolidated financial statements, on January 1, 2018, the Company changed its method of accounting for revenues due to the adoption of ASC Topic 606, Revenue from Contracts with Customers.
Basis for OpinionOpinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal ControlControls over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of fixed fee percent complete project revenue recognition
As discussed in Notes 2 and 3 to the consolidated financial statements, revenue recognized from fixed fee percent complete projects was $41.5 million for the year-ended December 31, 2019. Revenue is recognized for these projects over time using an input method based on the ratio of hours expended to total estimated hours.
We identified the evaluation of fixed fee percent complete project revenue recognition as a critical audit matter. Evaluating the Company’s estimate of hours to complete each project requires subjective auditor judgment as changes in the total estimated hours by project could have an impact on revenue recognized.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to determine fixed fee percent complete revenue recognition, including total estimated hours by project. We evaluated the Company’s estimate of total project hours for a sample of contracts by:
Comparing the Company’s prior period total estimated hours by project to revised forecasts or the final amount of total hours by project to assess the Company’s ability to accurately estimate hours;
Interviewing operational personnel of the Company to evaluate progress to date and factors impacting the estimated hours to complete the project; and
Inspecting correspondence between the Company and the customer to assess project progress.
Evaluation of the fair value of the customer relationship intangible asset and contingent consideration liability related
to the Acquired Business
As discussed in Notes 2 and 9 to the consolidated financial statements, the Company makes certain assumptions and judgments in determining fair value measurements for business acquisitions. During the year ended December 31, 2019, the Company consummated one business acquisition. This acquisition resulted in the recognition of a customer relationship intangible asset of $3.9 million and a contingent consideration liability of $1.9 million.
We identified the evaluation of the fair value of the customer relationship intangible asset and contingent consideration liability related to the Acquired Business as a critical audit matter. Evaluating the fair value involved a high degree of subjective auditor judgment related to use of certain assumptions in the specific valuation models. The key assumptions used within the valuation models included forecasts of projected revenues, customer attrition rate, and volatility rates. In addition, changes in these assumptions could have a significant impact on the fair value of the customer relationship intangible asset or contingent consideration liability.
The primary procedures we performed to address this critical audit matter included the following. We tested certain controls over the Company’s process for determining the fair value of the customer relationship intangible asset and contingent consideration liability related to the Acquired Business, specifically related to the determination of the key assumptions. We evaluated the forecasts of projected revenues and customer attrition rate assumptions used by the Company by comparing the assumptions to the acquiree’s historical performance and to the growth rates of peer companies. We also compared the forecasts of projected revenues assumption to industry data. We also involved a valuation professional with specialized skills and knowledge who assisted in evaluating:
Certain forecasts of projected revenues used by the Company to value the customer relationship intangible asset as compared to industry and macro-economic trend data; and
Volatility rates used to value the contingent consideration liability by independently developing these rates based on publicly available market data and comparing the results to the rates used by the Company.
/s/ KPMG LLP
We have served as the Company’s auditor since 2007.
St. Louis, Missouri
March 1, 2018February 25, 2020
|
| |
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
|
| |
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer of the Company, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Company’s principal executive and principal financial officers have determined that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under those criteria, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.2019.
The Company acquired substantially all of the assets of Clarity Consulting, Inc. and Truth Labs, LLC (together, “Clarity”)Sundog in June 2017. As permitted by SEC guidance, managementMay 2019 (the “Acquired Business”). Management excluded Claritythe Acquired Business from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. Clarity2019. The Acquired Business represented 9%3% and 4%1% of the Company’s total assets and total revenues, respectively, as of and for the year ended December 31, 2017. Excluding identifiable intangible assets and goodwill recorded in the business combination, Clarity represented 1% of the Company’s total assets as of December 31, 2017.2019.
KPMG LLP, our independent registered public accounting firm, has audited our consolidated financial statements as of and for the year ended December 31, 20172019 included in this Annual Report on Form 10-K, and has issued its report on the effectiveness of internal control over financial reporting as of December 31, 2017,2019, which is included herein.
Changes in Internal Control Over Financial Reporting
As part of the adoption of ASC Topic 842, the Company implemented changes to our control activities related to lease accounting to ensure adequate evaluation of our contracts and proper assessment of the impact of the new accounting standard. There waswere no changesignificant changes in the Company’s internal control over financial reporting due to the adoption of the new standard, and no other changes in our internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarteryear ended December 31, 2017,2019, that has materially affected, or is reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
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| Item 9B. | Other Information. |
OnFebruary 23, 2018, as a result of the one-time benefit the Company received under the 2017 Tax Act and to facilitate retention of the Company’s executive employees, the Compensation Committee of the Board of Directors of the Company approved the payment of supplemental bonuses in the aggregate amount of $2.8 million to employees of the Company that are eligible to participate under the Company’s Executive Bonus Plan, as generally described in the Company’s proxy statement of its annual meeting of stockholders held on June 14, 2017. The bonus recipients included, among others, Jeffrey S. Davis, the Company’s President, Chief Executive Officer and Chairman, Kathryn J. Henely, the Company’s Chief Operating Officer, and Paul E. Martin, the Company’s Chief Financial Officer, Treasurer and Secretary. Messrs. Davis and Martin and Ms. Henely were awarded bonuses in the amounts of $300,000, $70,000, and $98,750, respectively. Such bonuses are to be paid by March 15, 2018.None
PART III
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| Item 10. | Directors, Executive Officers and Corporate Governance. |
Our executive officers, including their ages as of the date of this filing are as follows:
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| Name | | Age | | Position |
| Jeffrey S. Davis | | 5355 | | Chairman of the Board, President and Chief Executive Officer |
KathrynThomas J. HenelyHogan | | 5343 | | Chief Operating Officer |
| Paul E. Martin | | 5759 | | Chief Financial Officer, Treasurer and Secretary |
Jeffrey S. Davis became the Chief Executive Officer and a member of the Board in 2009 and was elected Chairman of the Board in February 2017. He previously served as the Chief Operating Officer of the Company following its acquisition of Vertecon in April 2002, and was named the Company’s President in 2004. He served the same role of Chief Operating Officer at Vertecon from October 1999 to its acquisition by the Company. Before Vertecon, Mr. Davis was a Senior Manager and member of the leadership team in Arthur Andersen’s Business Consulting Practice, where he was responsible for defining and managing internal processes, while managing business development and delivery of all products, services and solutions to a number of large accounts. Mr. Davis also served in a leadership position at Ernst & Young LLP in the Management Consulting practice and in industry at Boeing, Inc. and Mallinckrodt, Inc.Mr. Davis is an active volunteer member of the board of directors of the Cystic Fibrosis Foundation of St. Louis and a member of the University of Missouri Trulaske College of Business advisory board.Mr. Davis has a M.B.A. from Washington University and a B.S. degree in Electrical Engineering from the University of Missouri.
KathrynThomas J. HenelyHogan was appointed as the Company’s Chief Operating Officer in 2009. Ms. Henely2018. Mr. Hogan joined the Company in January 2008 and has served the St. Louis office following its acquisitionCompany in several capacities, including Vice President of Vertecon in 2002. Ms. Henely was theField Operations, General Manager, Director of the St. Louis officeBusiness Development, and the Vice President for the Company’s largest business group, which included several local and national business units along with the Company’s offshore development center in China.Engagement Director. Prior to her appointment to Chief Operating Officer she actively participatedjoining the Company, Mr. Hogan served in the due diligencebusiness development and integration of several acquisitions within her business group. Additionally, she led the establishment of the Strategic Advisory Teamleadership positions with Creative Metrics, PreVisor, and Corporate Recruiting organization. Ms. HenelyTEKsystems. Mr. Hogan received her M.S. in Computer Sciencehis M.B.A from the Kellogg School of Management at Northwestern University and a B.A. degree from Saint Mary’s University of Missouri-Rolla and her B.S. in Computer Science from the University of Iowa.Minnesota.
Paul E. Martin joined the Company in August 2006 as Chief Financial Officer, Treasurer and Secretary. From August 2004 until February 2006, Mr. Martin was the Interim co-Chief Financial Officer and Interim Chief Financial Officer of Charter Communications, Inc. (“Charter”), a publicly traded multi-billion dollar revenue domestic cable television multi-system operator. From April 2002 through April 2006, Mr. Martin was the Senior Vice President, Principal Accounting Officer and Corporate Controller of Charter, and was Charter’s Vice President and Corporate Controller from March 2000 to April 2002. Prior to Charter, Mr. Martin was Vice President and Controller for Operations and Logistics for Fort James Corporation, a manufacturer of paper products with multi-billion dollar revenue. From 1995 to February 1999, Mr. Martin was Chief Financial Officer of Rawlings Sporting Goods Company, Inc., a publicly traded multi-million dollar revenue sporting goods manufacturer and distributor. Mr. Martin received a B.S. degree with honors in accounting from the University of Missouri –- St. Louis. Mr. Martin is also a member of the board of the St. Louis chapter of Autism Speaks.
Additional information with respect to Directors and Executive Officers of the Company is incorporated by reference to the Company’s proxy statement to be used in connection with the 20182020 Annual Meeting of Stockholders (the “Proxy Statement”) under the captions “Directors and Executive Officers,” and “Composition and Meetings of the Board of Directors and Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance.Committees.” The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company’s fiscal year.
Codes of Conduct and Ethics
Information on this subject is found in the Proxy Statement under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference.
The Company has adopted a Corporate Code of Business Conduct and Ethics that applies to all employees and directors of the Company while acting on the Company’s behalf and has adopted a Financial Code of Ethics applicable to the chief executive officer, the chief financial officer, and other senior financial officials. These policies are available on the Company’s website at www.perficient.com. Any amendment to, or waiver of, the Financial Code of Ethics will be disclosed by the Company on its website at www.perficient.com.
Audit Committee of the Board of Directors
Information on this subject is found in the Proxy Statement under the caption “Composition and Meetings of the Board of Directors and Committees” and is incorporated herein by reference.
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| Item 11. | Executive Compensation. |
Information on this subject is found in the Proxy Statement under the captions “Compensation of Directors,” “Compensation of Executive Officers,” “Directors and Executive Officers,” “Compensation Committee Report,” and “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by reference.
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information on this subject is found in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management,” “Directors and Executive Officers,” and “Equity Compensation Plan Information” and is incorporated herein by reference.
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information on this subject is found in the Proxy Statement under the caption “Certain Relationships and Related Transactions” and incorporated herein by reference.
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| Item 14. | Principal Accounting Fees and Services. |
Information on this subject is found in the Proxy Statement under the caption “Principal Accounting Firm Fees and Services” and incorporated herein by reference.
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PART IV
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| Item 15. | Exhibits, Financial Statement Schedules. |
The following consolidated statements are included in Part III, Item 8 under the following captions:
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| 2. | Financial Statement Schedules |
No financial statement schedules are required to be filed by Items 8 and 15(b) because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto.
See Index to Exhibits.
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| Item 16. | Form 10-K Summary. |
None.
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|
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| Exhibit Number | | Description |
| 2.1 | | Asset Purchase Agreement, dated as of December 18, 2014, by and among Perficient, Inc., Zeon Solutions Incorporated, Grand River Interactive LLC and Rupesh Agrawal, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K filed on December 19, 2014 and incorporated herein by reference |
| 3.1 | | Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Registration Statement on Form SB-2 (File No. 333-78337) declared effective on July 28, 1999 by the Securities and Exchange Commission and incorporated herein by reference |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
| 4.1 | | |
| 4.2 | | |
| 4.3 | | Indenture, dated September 11, 2018, between Perficient, Inc. and U.S. Bank National Association, as trustee, relating to the Company’s 2.375% Convertible Senior Notes due 2023, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K filed September 11, 2018 and incorporated herein by reference |
| 4.4 | | |
| 10.1† | | |
10.2 | | Second Amended and Restated Credit Agreement by and among Silicon Valley Bank, Bank of America, N.A., and US Bank, N.A., and Perficient, Inc. dated effective as of July 31, 2013, previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on Form 10-Q filed on August 1, 2013 and incorporated herein by reference |
10.3†10.2† | | |
10.4†10.3† | | |
10.510.4† | | Amendment No. 1 to Second Amended and Restated Credit Agreement, dated May 7, 2014, by and among Perficient, Inc., the Lenders party thereto and Silicon Valley Bank, as Lead Arranger, Book Manager, Swingline Lender and as Administrative Agent for the Lenders, previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on Form 10-Q filed on May 8, 2014 and incorporated herein by reference |
10.6† | | |
10.7†10.5† | | |
10.8†10.6† | | |
10.9†10.7† | | |
10.10†10.8† | | |
10.1110.9† | | Amendment No. 2 and Consent to Second Amended and Restated CreditEmployment Agreement, dated January 2, 2015, by and among with Chief Operating Officer of Perficient, Inc., the Lenders party thereto and Silicon Valley Bank,effective as Lead Arranger, Book Manager, Swingline Lender and as Administrative Agent for the Lenders, previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference |
10.12 | | Amendment No. 3 and Consent to Second Amended and Restated Credit Agreement, dated September 22, 2015, by and among Perficient, Inc., the Lenders party thereto and Silicon Valley Bank, as Lead Arranger, Book Manager, Swingline Lender and as Administrative Agent for the Lenders,of November 1, 2018, previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on Form 10-Q filed on November 5, 20151, 2018 and incorporated herein by reference |
|
10.13 | | |
| 10.10 | | Amendment No. 4 to Second Amended and Restated Credit Agreement, dated June 24, 2016, by and among Perficient, Inc., the Lenders party thereto and Silicon Valley Bank, as Lead Arranger, Book Manager, Swingline Lender and as Administrative Agent for the Lenders, previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on Form 10-Q filed on June 27, 2016 and incorporated herein by reference |
10.14 | | Credit Agreement by and among Wells Fargo Bank, National Association, Bank of America, N.A., U.S. Bank National Association, Fifth Third Bank and Perficient, Inc. dated as of June 9, 2017, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K filed on June 12, 2017 and incorporated herein by reference |
| 10.11 | | First Amendment to Credit Agreement, dated as of February 16, 2018, by and among Perficient, Inc. the Subsidiary Guarantors, the Lenders, and Wells Fargo Bank, National Association, previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference |
| 10.12 | | Purchase Agreement, dated September 5, 2018, among Perficient, Inc., Jefferies LLC and Nomura Securities International, Inc., as representatives of the initial purchasers named therein, relating to the Company’s 2.375% Convertible Senior Notes due 2023, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K filed September 11, 2018 and incorporated herein by reference |
| 10.13 | | |
| 10.14 | | Form of Warrant Transaction Confirmation, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K filed September 11, 2018 and incorporated herein by reference |
| 10.15† | | |
| 10.16† | | |
| 10.17† | | |
10.18*10.18†* | | |
| 10.19†* | | |
| 10.20†* | | |
| 21.1* | | |
| 23.1* | | |
| 24.1* | | Power of Attorney (included on the signature page hereto) |
| 31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 101* | | The following financial information from Perficient, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017,2019, formatted in XBRL (eXtensibleiXBRL (inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 20172019 and 2016,2018, (ii) Consolidated Statements of Operations for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, (iv) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, and (vi) the Notes to Consolidated Financial Statements |
| 104 | | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) |
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| † | Identifies an Exhibit that consists of or includes a management contract or compensatory plan or arrangement. |
* | Filed herewith. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | |
| | | PERFICIENT, INC. |
| | | | |
| | By: | /s/ Paul E. Martin |
Date: March 1, 2018 | February 25, 2020 | | Paul E. Martin |
| | | | Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer) |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey S. Davis and Paul E. Martin, and each of them (with full power to each of them to act alone), his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign on his or her behalf individually and in each capacity stated below any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ Jeffrey S. Davis | | Chairman of the Board, President and Chief Executive Officer | | March 1, 2018February 25, 2020 |
| Jeffrey S. Davis | | (Principal Executive Officer) | | |
| | | | | |
/s/ Paul E. Martin | | Chief Financial Officer | | March 1, 2018February 25, 2020 |
| Paul E. Martin | | (Principal Financial Officer and Principal Accounting Officer) | | |
| | | | | |
/s/ Ralph C. Derrickson | | Director | | March 1, 2018February 25, 2020 |
| Ralph C. Derrickson | | | | |
| | | | | |
/s/ James R. Kackley | | Director | | March 1, 2018February 25, 2020 |
| James R. Kackley | | | | |
| | | | | |
/s/ David S. Lundeen | | Director | | March 1, 2018February 25, 2020 |
| David S. Lundeen | | | | |
| | | | | |
/s/ Brian L. Matthews | | Director | | March 1, 2018February 25, 2020 |
| Brian L. Matthews | | | | |
| | | | | |
| /s/ Gary M. Wimberly | | Director | | February 25, 2020 |
| Gary M. Wimberly | | | | |
| | | | |
47