Attached files
file | filename |
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EX-32.1 - INNERWORKINGS INC | v192181_ex32-1.htm |
EX-31.1 - INNERWORKINGS INC | v192181_ex31-1.htm |
EX-32.2 - INNERWORKINGS INC | v192181_ex32-2.htm |
EX-31.2 - INNERWORKINGS INC | v192181_ex31-2.htm |
EX-10.1 - INNERWORKINGS INC | v192181_ex10-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the quarterly period ended June 30, 2010
¨
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the transition period from
to
INNERWORKINGS,
INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
20-5997364
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
600
West Chicago Avenue, Suite 850
Chicago,
Illinois 60654
Phone:
(312) 642-3700
(Address
(including zip code) and telephone number (including area code) of registrant’s
principal executive offices)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: x
No: ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes: ¨
No: ¨
Indicate
by check mark whether the Registrant is an a large accelerated filer, an
accelerated filer, or non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check
one:
Large
accelerated filer: ¨
|
|
Accelerated
filer: x
|
Non-accelerated
filer: ¨ (Do not check if
a smaller
reporting
company)
|
|
Smaller reporting company
¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes:
¨
No: x
As of
August 5, 2010, the Registrant had 45,660,547 shares of Common Stock, par value
$0.0001 per share, outstanding.
INNERWORKINGS,
INC.
TABLE
OF CONTENTS
Page
|
|||
PART
I. FINANCIAL INFORMATION
|
|||
Item 1.
|
Consolidated
Financial Statements
|
1
|
|
Consolidated
Statements of Income for the three and six months ended June 30, 2009 and
2010 (Unaudited)
|
1
|
||
Consolidated
Balance Sheets as of December 31, 2009 and June 30, 2010
(Unaudited)
|
2
|
||
Consolidated
Statements of Cash Flows for the six months ended June 30, 2009 and 2010
(Unaudited)
|
3
|
||
Notes
to Consolidated Financial Statements (Unaudited)
|
4
|
||
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
20
|
|
Item 4.
|
Controls
and Procedures
|
20
|
|
PART
II. OTHER INFORMATION
|
|||
Item 1.
|
Legal
Proceedings
|
21
|
|
Item 1A.
|
Risk
Factors
|
21
|
|
|
|||
Item 6.
|
Exhibits
|
22
|
|
SIGNATURES
|
23
|
||
EXHIBIT INDEX
|
24
|
PART
I. FINANCIAL INFORMATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Revenue
|
$ | 100,097,510 | $ | 120,471,286 | $ | 194,374,943 | $ | 232,683,832 | ||||||||
Cost
of goods sold
|
75,358,000 | 91,431,674 | 146,625,277 | 176,711,690 | ||||||||||||
Gross
profit
|
24,739,510 | 29,039,612 | 47,749,666 | 55,972,142 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general, and administrative expenses
|
20,025,090 | 22,172,634 | 40,644,206 | 44,177,058 | ||||||||||||
Depreciation
and amortization
|
2,219,071 | 2,215,219 | 3,714,446 | 4,332,844 | ||||||||||||
Income
from operations
|
2,495,349 | 4,651,759 | 3,391,014 | 7,462,240 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Gain
on sale of investment
|
844,097 | 802,548 | 844,097 | 1,525,930 | ||||||||||||
Interest
income
|
56,529 | 62,099 | 150,968 | 133,016 | ||||||||||||
Interest
expense
|
(304,545 | ) | (543,704 | ) | (746,789 | ) | (784,396 | ) | ||||||||
Other,
net
|
(73,586 | ) | (104,383 | ) | (217,882 | ) | (132,891 | ) | ||||||||
Total
other income
|
522,495 | 216,560 | 30,394 | 741,659 | ||||||||||||
Income
before taxes
|
3,017,844 | 4,868,319 | 3,421,408 | 8,203,899 | ||||||||||||
Income
tax expense
|
870,568 | 1,726,198 | 1,025,721 | 2,893,651 | ||||||||||||
Net
income
|
$ | 2,147,276 | $ | 3,142,121 | $ | 2,395,687 | $ | 5,310,248 | ||||||||
Basic
earnings per share
|
$ | 0.05 | $ | 0.07 | $ | 0.05 | $ | 0.12 | ||||||||
Diluted
earnings per share
|
$ | 0.05 | $ | 0.07 | $ | 0.05 | $ | 0.11 |
See
accompanying notes.
Page
1
InnerWorkings,
Inc.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
December 31,
|
June 30,
|
|||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,903,906 | $ | 3,514,824 | ||||
Short-term
investments
|
23,541,199 | 11,635,715 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $4,634,848 and
$2,060,479, respectively
|
72,565,814 | 81,841,760 | ||||||
Unbilled
revenue
|
20,189,900 | 23,483,014 | ||||||
Inventories
|
8,749,266 | 9,610,466 | ||||||
Prepaid
expenses
|
11,399,560 | 10,418,546 | ||||||
Advances
to related parties
|
36,458 | 66,190 | ||||||
Other
current assets
|
7,355,447 | 5,273,926 | ||||||
Total
current assets
|
146,741,550 | 145,844,441 | ||||||
Property
and equipment, net
|
10,833,712 | 10,747,198 | ||||||
Intangibles
and other assets:
|
||||||||
Goodwill
|
77,905,703 | 82,329,759 | ||||||
Intangible
assets, net of accumulated amortization of $6,802,217 and $8,113,440,
respectively
|
24,364,784 | 23,299,115 | ||||||
Deposits
|
445,575 | 422,996 | ||||||
Deferred
income taxes
|
6,540,933 | 5,917,910 | ||||||
Other
assets
|
325,799 | 209,195 | ||||||
109,582,794 | 112,178,975 | |||||||
Total
assets
|
$ | 267,158,056 | $ | 268,770,614 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 53,915,750 | $ | 54,488,413 | ||||
Advances
from related parties
|
56,940 | 227,311 | ||||||
Current
maturities of capital lease obligations
|
117,582 | 44,622 | ||||||
Due
to seller
|
1,725,000 | 2,672,014 | ||||||
Customer
deposits
|
3,145,329 | 276,786 | ||||||
Other
liabilities
|
7,826,441 | 4,780,037 | ||||||
Deferred
income taxes
|
1,014,372 | 1,148,165 | ||||||
Accrued
expenses
|
2,832,256 | 3,548,052 | ||||||
Total
current liabilities
|
70,633,670 | 67,185,400 | ||||||
Revolving
credit facility
|
46,384,586 | 47,627,164 | ||||||
Capital
lease obligations, less current maturities
|
19,506 | 15,340 | ||||||
Other
long-term liabilities
|
3,070,278 | 1,507,551 | ||||||
Total
liabilities
|
120,108,040 | 116,335,455 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, par value $0.0001 per share, 45,628,685 and 45,660,547 shares were
issued and outstanding as of December 31, 2009 and June 30, 2010,
respectively
|
456 | 456 | ||||||
Additional
paid-in capital
|
170,330,891 | 171,639,441 | ||||||
Treasury
stock at cost
|
(74,307,200 | ) | (74,307,200 | ) | ||||
Accumulated
other comprehensive income
|
5,217,425 | 3,983,770 | ||||||
Retained
earnings
|
45,808,444 | 51,118,692 | ||||||
Total
stockholders' equity
|
147,050,016 | 152,435,159 | ||||||
Total
liabilities and stockholders' equity
|
$ | 267,158,056 | $ | 268,770,614 |
See
accompanying notes.
Page
2
InnerWorkings,
Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
|
||||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 2,395,687 | $ | 5,310,248 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Deferred
income taxes
|
2,124,477 | 1,449,153 | ||||||
Stock
compensation expense
|
1,935,598 | 1,397,369 | ||||||
Depreciation
and amortization
|
3,714,446 | 4,332,844 | ||||||
Deferred
financing amortization
|
104,175 | 110,603 | ||||||
Gain
on sale of investment
|
(844,097 | ) | (1,525,930 | ) | ||||
Bad
debt provision
|
98,571 | 1,167,317 | ||||||
Change
in assets, net of acquisitions:
|
||||||||
Accounts
receivable and unbilled revenue
|
9,149,247 | (13,980,574 | ) | |||||
Inventories
|
(627,564 | ) | 394,473 | |||||
Prepaid
expenses and other
|
507,567 | 4,283,216 | ||||||
Change
in liabilities, net of acquisitions:
|
||||||||
Accounts
payable
|
3,054,953 | 654,851 | ||||||
Advances
from related parties
|
9,115 | 140,639 | ||||||
Customer
deposits
|
(3,574,376 | ) | (2,868,543 | ) | ||||
Income
tax payable
|
(9,007,997 | ) | - | |||||
Accrued
expenses and other
|
(1,557,898 | ) | (859,067 | ) | ||||
Net
cash provided by operating activities
|
7,481,904 | 6,599 | ||||||
Cash
flows from investing activities
|
||||||||
Purchases
of property and equipment
|
(4,241,712 | ) | (2,757,864 | ) | ||||
Proceeds
from sale of marketable securities
|
850,000 | 1,533,118 | ||||||
Proceeds
from sale of short-term investments
|
29,975 | 8,997,170 | ||||||
Payments
for acquisitions, net of cash acquired
|
(4,894,420 | ) | (6,040,738 | ) | ||||
Net
cash provided by (used in) investing activities
|
(8,256,157 | ) | 1,731,686 | |||||
Cash
flows from financing activities
|
||||||||
Principal
payments on capital lease obligations
|
(72,251 | ) | (73,656 | ) | ||||
Net
repayments from revolving credit facility and short-term
debt
|
(367,529 | ) | (928,786 | ) | ||||
Issuance
of shares
|
71,749 | - | ||||||
Excess
tax benefit from restricted common shares
|
- | (88,821 | ) | |||||
Tax
benefit of stock options exercised
|
156,222 | - | ||||||
Net
cash used in financing activities
|
(211,809 | ) | (1,091,263 | ) | ||||
Effect
of exchange rate changes on cash and cash equivalents
|
(57,549 | ) | (36,104 | ) | ||||
Increase
(decrease) in cash and cash equivalents
|
(1,043,611 | ) | 610,918 | |||||
Cash
and cash equivalents, beginning of period
|
4,011,855 | 2,903,906 | ||||||
Cash
and cash equivalents, end of period
|
$ | 2,968,244 | $ | 3,514,824 |
See
accompanying notes.
Page
3
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three
and Six Months Ended June 30, 2009 and 2010
1.
|
Summary of Significant Accounting
Policies
|
Basis
of Presentation of Interim Financial Statements
The
accompanying unaudited consolidated financial statements of InnerWorkings, Inc.
and subsidiaries (the Company) included herein have been prepared to conform to
the rules and regulations of the Securities and Exchange Commission (SEC) and
accounting principles generally accepted in the United States for interim
financial information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments considered necessary for a fair presentation of the accompanying
unaudited financial statements have been included, and all adjustments are of a
normal and recurring nature. The operating results for the three and six months
ended June 30, 2010 are not necessarily indicative of the results to be
expected for the full year of 2010. These condensed interim consolidated
financial statements and notes should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes thereto as of December 31, 2009
included in the Company’s Annual Report on Form 10-K filed with the SEC on
March 9, 2010.
Foreign
Currency Translation
The
functional currency for the Company’s foreign operations is the local currency.
Assets and liabilities of these operations are translated into
U.S. currency at the rates of exchange at the balance sheet date. The
resulting translation adjustments are included in accumulated other
comprehensive income, a separate component of stockholders’ equity. Income and
expense items are translated at average monthly rates of exchange. Realized
gains and losses from foreign currency transactions were not material.
Accounting
Pronouncements Recently Adopted
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
ASC 820 by adding required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchase, sales, issuances, and settlements relative to level 3 measurements;
and clarifying, among other things, the existing fair value disclosures about
the level of disaggregation. This ASU is effective for the first quarter of
2010, except for the requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is effective beginning
the first quarter of 2011. Because this standard impacts disclosure requirements
only, its adoption did not have any impact on the Company’s consolidated results
of operations or financial condition.
Goodwill
and Other Intangibles
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with ASC 350, Intangibles – Goodwill and
Other, goodwill is not amortized, but instead is tested for impairment
annually, or more frequently if circumstances indicate a possible impairment may
exist. The Company evaluates the recoverability of goodwill using a two-step
impairment test. For goodwill impairment test purposes, the Company has one
reporting unit. In the first step, the fair value for the Company is compared to
its book value including goodwill. In the case that the fair value is less than
the book value, a second step is performed which compares the implied fair value
of goodwill to the book value of goodwill. The fair value for the goodwill is
determined based on the difference between the fair value of the Company and the
net fair values of the identifiable assets and liabilities. If the implied fair
value of the goodwill is less than the book value, the difference is recognized
as an impairment. Absent any interim indicators of impairment, the Company has
elected to test for goodwill impairment during the fourth quarter of each year,
and as a result of the 2009 analysis performed, no impairment charges were
required.
Page
4
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
increase in goodwill for the six months ended June 30, 2010 is the result of
earn-out payments made or accrued of $3,554,514 and goodwill acquired as a
result of business acquisitions completed during the six months ended June 30,
2010 of $1,049,620, offset by the effect of foreign exchange of $58,851,
decrease in earn-out liabilities of $18,428, decrease in net assets of $59,206
and by adjustments made to 2009 acquisition purchase price allocations based on
updated valuation reports which resulted in an additional $43,593 being
allocated to intangibles, with a corresponding reduction to
goodwill.
In
connection with certain of the Company’s acquisitions, contingent consideration
is payable in cash upon the achievement of certain performance measures over
future periods. For acquisitions prior to December 31, 2008, contingent
consideration payments will be recorded as additional purchase price. The
Company paid $882,500 and $2,607,500 related to these agreements in the three
and six month periods ended June 30, 2010, respectively. Total remaining
potential contingent payments under these agreements amount to $33,817,014 as of
June 30, 2010. For the acquisitions occurring subsequent to January 1,
2009, the Company has estimated and recorded potential contingent consideration
as an increase in purchase price. This amount is $2,204,225, of which $1,507,551
is included in other long-term liabilities on the balance
sheet. Pursuant to the adoption of ASC Topic 805 effective January 1,
2009, any changes to the contingent consideration obligation will be recorded in
operating income. For the period ended June 30, 2010, the Company recorded a
reduction of $1,095,733 to the contingent consideration obligation as a result
of reductions to forecasted financial performance.
As of
June 30, 2010, the potential contingent payments are payable in the years as
follows:
2010
|
$
|
12,561,706
|
||
2011
|
12,997,450
|
|||
2012
|
10,462,083
|
|||
$
|
36,021,239
|
In
accordance with ASC 350,
Intangibles – Goodwill and Other, the Company amortizes its intangible
assets with finite lives over their respective estimated useful lives and
reviews for impairment whenever impairment indicators exist. The Company’s
intangible assets consist of customer lists, noncompete agreements, trade names
and patents. The Company’s customer lists, which have an estimated
weighted-average useful life of fourteen years, are being amortized using the
economic useful life method. The Company’s noncompete agreements, trade names
and patents are being amortized on the straight-line basis over their estimated
weighted-average useful lives of approximately four years, thirteen years and
ten years, respectively.
The
following is a summary of the intangible assets:
|
December 31,
2009
|
June 30,
2010
|
Weighted-
Average Life
|
|||||||
Customer
lists
|
|
$
|
26,589,715
|
|
$
|
27,140,081
|
|
13.9 years
|
||
Noncompete
agreements
|
|
1,077,349
|
|
992,787
|
|
4.0
years
|
||||
Trade
names
|
|
3,467,656
|
|
3,241,232
|
|
12.5
years
|
||||
Patents
|
|
32,281
|
|
38,455
|
|
10.0
years
|
||||
|
||||||||||
|
31,167,001
|
|
31,412,555
|
|
||||||
Less
accumulated amortization
|
|
(6,802,217
|
)
|
(8,113,440
|
)
|
|||||
|
||||||||||
Intangible
assets, net
|
|
$
|
24,364,784
|
|
$
|
23,299,115
|
|
Page
5
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
Amortization
expense related to these intangible assets was $772,237 and $1,311,223 for the
three and six month periods ended June 30, 2010, respectively, and $1,157,752
and $1,604,612 for the three and six month periods ended June 30, 2009,
respectively.
As of
June 30, 2010, the estimated amortization expense for the next five years is as
follows:
2010
|
$
|
1,577,438
|
||
2011
|
2,878,409
|
|||
2012
|
2,670,599
|
|||
2013
|
2,308,817
|
|||
2014
|
2,000,972
|
|||
Thereafter
|
11,792,880
|
|||
$
|
23,229,115
|
Fair
Value of Financial Instruments
The
Company accounts for its financial assets and liabilities that are measured at
fair value within the financial statements in accordance with ASC 820, Fair Value Measurements and
Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. In accordance with this
interpretation, the Company has only applied ASC 820 with respect to its
financial assets and liabilities that are measured at fair value within the
financial statements. The Company’s investments in cash equivalents,
auction-rate securities and available-for-sale securities are carried at fair
value. See Notes 5 and 6 for additional information on fair value
measurements.
In
accordance with ASC 825, Financial Instruments (ASC
825), which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value, the Company has elected to apply the fair value option to a put
option relating to its auction-rate securities (refer to Note 7 for more
information on auction-rate securities).
Stock-Based
Compensation
Since
January 1, 2006, the Company has accounted for nonvested equity awards in
accordance with ASC 718, Compensation -Stock
Compensation. Compensation expense is based on the difference, if any, on
the grant date between the estimated fair value of the Company stock and the
exercise price of the options to purchase that stock. The compensation expense
is then amortized over the vesting period of the stock options. All stock-based
compensation expense is recorded net of an estimated forfeiture rate. The
forfeiture rate is based upon historical activity and is analyzed annually and
as actual forfeitures occur.
During
the six month periods ended June 30, 2010 and 2009, the Company issued 286,877
and 177,872 options, respectively, to various employees of the Company. In
addition, during the six month periods ended June 30, 2010 and 2009, the Company
granted 546,681 and 78,053 restricted common shares, respectively, to employees.
During the six month periods ended June 30, 2010 and 2009, 31,862 and 210,948
options were exercised and restricted common shares vested, 729 and 65,974 of
which were exercised and vested during the three month periods ended June 30,
2010 and 2009, respectively. Using the Black-Scholes option valuation model and
the assumptions listed below, the Company recorded $1,397,369 and $1,935,598 in
compensation expense for the six month periods ended June 30, 2010 and 2009,
respectively.
Page
6
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
following assumptions were utilized in the valuation for options granted in 2009
and 2010:
2009
|
2010
|
|||||||
Dividend
yield
|
— | % | — | % | ||||
Risk-free
interest rate
|
2.42%-3.25 | % | 3.13%-3.25 | % | ||||
Expected
life
|
7 years
|
7 years
|
||||||
Volatility
|
33.5 | % | 47.5 | % |
2.
|
Earnings Per
Share
|
Basic
earnings per common share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated by dividing net income by the weighted average shares outstanding
plus share equivalents that would arise from the exercise of stock options and
vesting of restricted common shares. During the three and six months ended June
30, 2010, respectively, 1,735,394 and 1,760,394 options and restricted common
shares were excluded from the calculation as these options and restricted common
shares were anti-dilutive. During the three and six months ended June 30, 2009,
respectively, 2,955,648 and 2,985,621 options and restricted common shares were
excluded from the calculation as these options and restricted common shares were
anti-dilutive. The computations of basic and diluted earnings per
common share for the three and six months ended June 30, 2009 and 2010 are as
follows:
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income
|
$ | 2,147,276 | $ | 3,142,121 | $ | 2,395,687 | $ | 5,310,248 | ||||||||
Denominator:
|
||||||||||||||||
Denominator
for basic earnings per share—weighted-average shares
|
45,526,074 | 45,659,907 | 45,463,559 | 45,656,230 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Employee
stock options and restricted common shares
|
1,638,667 | 1,916,421 | 1,636,029 | 1,827,816 | ||||||||||||
Denominator
for dilutive earnings per share
|
47,164,741 | 47,576,328 | 47,099,588 | 47,484,046 | ||||||||||||
Basic
earnings per share
|
$ | 0.05 | $ | 0.07 | $ | 0.05 | $ | 0.12 | ||||||||
Diluted
earnings per share
|
$ | 0.05 | $ | 0.07 | $ | 0.05 | $ | 0.11 |
Page
7
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
3.
|
Comprehensive
Income
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Net
income
|
$ | 2,147,276 | $ | 3,142,121 | $ | 2,395,687 | $ | 5,310,248 | ||||||||
Other
comprehensive income:
|
||||||||||||||||
Unrealized
gain (loss) on marketable securities, net of tax
|
— | (677,387 | ) | 25,583 | (991,830 | ) | ||||||||||
Foreign
currency translation adjustment
|
361,365 | (3,073 | ) | 223,595 | (241,825 | ) | ||||||||||
Total
comprehensive income
|
$ | 2,508,641 | $ | 2,461,661 | $ | 2,644,865 | $ | 4,076,593 |
4.
|
Related
Party
|
Investment
in Echo Global Logistics, Inc.
In
February 2005, the Company acquired 2,000,000 shares of common stock of
Echo Global Logistics, Inc. (Echo), a technology enabled transportation and
logistics business process outsourcing firm, for $125,000. Echo is a related
party to the Company as a majority of the members of the Company’s Board of
Directors have a direct and/or indirect ownership interest in Echo.
On
September 25, 2009, Echo completed a one-for-two reverse stock split of all
outstanding shares of its capital stock and immediately following, recapitalized
all outstanding shares into newly issued shares of common stock on approximately
a one-for-one basis. Echo recapitalized its outstanding capital stock in
connection with its initial public offering. At December 31, 2009,
the Company owned 627,778 shares of Echo’s common stock after the effects of the
one-for-two reverse stock split and sales during the prior periods.
During
the three months ended June 30, 2010, the Company sold 60,000 of its shares
Echo’s common stock for $806,298 and recorded a gain on sale of investment
of $802,548. During the six months ended June 30, 2010, the Company
sold 115,000 of its shares Echo’s common stock for $1,533,118 and recorded
a gain on sale of investment of $1,525,930. Beginning
September 30, 2009, the Company has classified this investment as
“available for sale” and has recorded it at fair value, which is determined
based on quoted market prices (refer to Note 5 for additional information on
these securities). The gain on sale of investment is included
in other income. The Company’s investment in Echo was recorded at
cost prior to the completion of Echo’s initial public offering
Agreements
and Services with Related Parties
In the
ordinary course, the Company provides print procurement services to Echo. The
total amount billed for such print procurement services during the three and six
months ended June 30, 2010 was approximately $16,000 and $24,000,
respectively. For the three and six months ended June 30, 2009, the
company billed approximately $0 and $21,000 respectively. In
addition, Echo has provided transportation services to the Company. As
consideration for these services, Echo billed the Company approximately $1.6
million and $3.2 million for the three and six months ended June 30, 2010,
respectively. For the three and six months ended June 30, 2009, Echo
billed the Company approximately $802,000 and $1.6 million,
respectively. The net amount payable to Echo at June 30, 2010 was
$161,121.
Page
8
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
Company has a supplier rebate program with Echo pursuant to which the
Company receives an annual rebate on all freight expenditures in an amount equal
to 3%, plus an additional 2% if paid within 15 days. Under the supplier
rebate program, the Company received approximately $12,600 and $16,000 in
rebates for the three and six months ended June 30, 2010, respectively, and
approximately $5,600 and $10,500 in rebates for the three and six months ended
June 30, 2009, respectively.
In April
2010, the Company entered into an agreement with Echo pursuant to which it
sub-leases a portion of the Company’s office space in Chicago, and pays $12,000
per month of the Company’s lease payment and overhead expenses related to the
space. Echo paid the Company $36,000 under this agreement for the three and six
months ended June 30, 2010, respectively.
In August
2009, the Company entered into an agreement with Groupon pursuant to which it
sub-leases a portion of the Company’s office space in Chicago, and pays $18,000
per month of the Company’s lease payment and overhead expenses related to the
space. Three members of the Company’s Board of Directors, Eric P. Lefkofsky,
John R. Walter and Peter J. Barris, are also directors of Groupon. In addition,
these members have a direct and/or indirect ownership interest in Groupon.
Groupon paid the Company $54,000 under this agreement for the three months
ended March 31, 2010. The agreement was terminated on March 31,
2010.
During
the quarter, the Company entered into an agreement with Groupon related to
corporate procurement cards. The agreement will allow Groupon to obtain
corporate procurement cards under the Company’s existing credit
arrangement. Under the agreement, the Company will charge an annual commitment
fee of $64,000.
5.
|
Valuation of
Equity Investments
|
As
discussed in Note 1, Fair Value of Financial Instruments, the Company has
applied ASC 820, Fair Value
Measurement and Disclosure (ASC 820), to its financial assets and
liabilities as of January 1, 2008. At June 30, 2010, the Company’s
financial assets include auction-rate securities and available-for-sale
securities and are included in short-term investments. See Note 6 and 7 for
additional information on auction rate securities.
The
Company has classified its investment in Echo Global Logistics (Echo) as
“available for sale” in accordance with ASC 320, Investments – Debt and Equity
Securities in connection with Echo’s initial public offering. The
investment is stated at fair value based on market prices, with any unrealized
gains and losses included as a separate component of stockholders’ equity. Any
realized gains and losses and interest and dividends will be included in other
income. At June 30, 2010, the Company’s investment in Echo, which has a cost
basis of $71,285, was carried at fair value of $6,261,019. The
unrealized gain of $6,189,420 was included in other comprehensive income, net of
tax of $2,211,790.
6.
|
Fair Value
Measurement
|
ASC 820
includes 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 observable or unobservable inputs to valuation techniques
that are used to measure fair value. 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, and 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
that are derived from valuation techniques in which one or more
significant inputs or value drivers are
unobservable.
|
Page
9
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
Company has elected to apply the fair value guidance within ASC 825, Financial Instruments
(ASC 825), as of October 1, 2008 to a put option relating to its
auction-rate securities (refer to Note 7 for more information on
auction-rate securities). The Company’s investments in student loan auction-rate
securities and the related put option are its only Level 3 assets. The fair
values of these securities and related put option are estimated utilizing a
discounted cash flow analysis as of June 30, 2010. This analysis considers,
among other items, the collateral underlying the security investments, the
creditworthiness of the counterparty, the timing of expected future cash flows,
and the expectation of the next time the security is expected to have a
successful auction. These securities were also compared, when possible, to other
observable market data with similar characteristics to the securities held by
the Company.
The
following table sets forth the Company’s financial assets and financial
liabilities measured at fair value on a recurring basis and the basis of
measurement at June 30, 2010:
Total Fair Value
Measurement
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Money
market funds(1)
|
$
|
378,972
|
$
|
378,972
|
$
|
—
|
$
|
—
|
||||||||
Available for sale securities(2) | 6,261,019 | 6,261,019 | ||||||||||||||
Auction
rate securities(2)
|
4,821,601
|
—
|
—
|
4,821,601
|
||||||||||||
Put
option(2)
|
553,095
|
—
|
—
|
553,095
|
||||||||||||
Total
assets
|
$
|
12,014,687
|
$
|
6,639,991
|
$
|
—
|
$
|
5,374,696
|
(1)
|
Included in cash and cash
equivalents on the balance
sheet.
|
(2)
|
Included in short-term
investments on the balance
sheet.
|
The
following table provides a reconciliation of the beginning and ending balances
for the assets measured at fair value using significant unobservable inputs
(Level 3):
Fair Value Measurements at Reporting Date
Using Significant Unobservable Inputs
(Level 3)
|
||||||||||||
Auction-
Rate
Securities
|
Put Option
|
Total
|
||||||||||
Balance
at December 31, 2009
|
$
|
13,818,771
|
$
|
1,755,926
|
$
|
15,574,697
|
||||||
Change
in the value of securities and put option
|
1,202,831
|
(1,202,831
|
)
|
—
|
||||||||
Securities
sold during the period
|
(10,200,001
|
)
|
—
|
(10,200,001
|
)
|
|||||||
Balance
at June 30, 2010
|
$
|
4,821,601
|
$
|
553,095
|
$
|
5,374,696
|
Page
10
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
7.
|
Auction-Rate
Securities
|
At June
30, 2010, the Company’s short-term investments included $4,821,601 in
auction-rate securities (“ARS”) and $553,095 of the related put
option.
The
Company has elected the fair value measurement option under ASC 825, Financial Instruments
(ASC 825), for this asset. At June 30, 2010, the Company’s ARS portfolio,
which has a par value of $5,425,000, was carried at fair value of $4,821,601,
while the related put option was carried at fair value of
$553,095. The Company received proceeds for the remaining $5,374,696
in July of 2010 related to the redemption of auction rate securities and
settlement of the put option.
8.
|
Revolving Credit
Facility
|
On
May 21, 2008, the Company entered into a Credit Agreement with JPMorgan
Chase, N.A. that matures on May 21, 2011. The Credit Agreement provides for
a senior secured revolving credit facility in an initial aggregate principal
amount of up to $75.0 million. Outstanding borrowings under the revolving
credit facility are guaranteed by the Company’s material domestic subsidiaries.
The Company’s obligations under the Credit Agreement and such domestic
subsidiaries’ guaranty obligations are secured by substantially all of their
respective assets. Interest is payable at the adjusted LIBOR rate or the
alternate base rate, as elected by the Company. The terms of the revolving
credit facility include various covenants, including covenants that require the
Company to maintain a maximum leverage ratio and a minimum interest coverage
ratio. As of June 30, 2010, the Company was not in violation of any of these
various covenants. The borrowings may be used for general corporate and working
capital purposes of the Company and its subsidiaries in the ordinary course of
business, for permitted acquisitions, for capital expenditures and for
restricted payments, including the repurchase of shares of the Company’s common
stock, as permitted pursuant to the terms of the agreement. As of June 30, 2010,
the Company had outstanding borrowings of $47.6 million under this
facility. On
August 2, 2010, this agreement was terminated and replaced with a credit
agreement with Bank of America, N.A., described in Note 10.
Page
11
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
9.
|
Income
Taxes
|
The
following table shows the Company’s effective income tax rate for the three and
six months ended June 30, 2009 and 2010:
Three months ended June 30,
|
Six
months ended June 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Income
before taxes
|
|
$
|
3,017,844
|
|
$
|
4,868,319
|
|
$
|
3,421,408
|
|
$
|
8,203,899
|
|
|||
Income
tax expense
|
|
870,568
|
|
1,726,198
|
|
1,025,721
|
|
2,893,651
|
|
|||||||
Effective
tax rate
|
|
28.8
|
%
|
35.5
|
%
|
30.0
|
%
|
35.3
|
%
|
The
Company’s effective tax rate increased from 28.8% to 35.5% and from 30.0% to
35.3% for the three and six months ended June 30, 2009 and 2010, respectively.
The increase in the effective tax rate for both periods is due to the
recognition of a research and development (R&D) tax credit resulting from
the Company’s capitalized internal developed software costs during the second
quarter of 2009. During the three months ended June 30, 2009, the
Company recognized a $300,000 tax credit for R&D activities for the year
ended December 31, 2008 and six months ended June 30, 2009.
10.
|
Subsequent
Event
|
On August
2, 2010, the Company entered into a new Credit Agreement with Bank of America,
N.A. that matures on August 2, 2014. The new agreement replaces the
Company’s current credit agreement with JPMorgan Chase Bank N.A. and provides
for a senior secured revolving credit facility in an initial aggregate principal
amount of up to $100.0 million. Outstanding borrowings under the revolving
credit facility are guaranteed by the Company’s material domestic subsidiaries.
The Company’s obligations under the Credit Agreement and such domestic
subsidiaries’ guaranty obligations are secured by substantially all of their
respective assets. Interest is payable at the adjusted LIBOR rate or the
alternate base rate, as elected by the Company. The terms of the revolving
credit facility include various covenants, including covenants that require the
Company to maintain a maximum leverage ratio, a minimum interest coverage ratio
and a minimum net worth. The borrowings may be used for general corporate and
working capital purposes of the Company and its subsidiaries in the ordinary
course of business, for permitted acquisitions, for capital expenditures and for
restricted payments, including the repurchase of shares of the Company’s common
stock, as permitted pursuant to the terms of the agreement.
Page
12
Item 2.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
Overview
We are a
leading provider of print and promotional procurement solutions to corporate
clients across a wide range of industries. We combine the talent of our
employees with our proprietary technology, extensive supplier base and domain
expertise to procure, manage and deliver printed products as part of a
comprehensive outsourced enterprise solution. Our technology is designed to
capitalize on excess manufacturing capacity and other inefficiencies in the
traditional print supply chain to obtain favorable pricing and to deliver
high-quality products and services for our clients.
Our
proprietary software applications and database, PPM4™, create a fully-integrated
solution that stores, analyzes and tracks the production capabilities of our
supplier network, as well as quote and price data for each bid we receive and
print job we execute. As a result, we believe PPM4™ contains one of the largest
independent repositories of equipment profiles and price data for print
suppliers in the United States. We leverage our technology to match each print
job with the supplier that is optimally suited to meet the client’s needs at a
highly competitive price. Our procurement managers use PPM4™ to manage the print
procurement process from end-to-end.
Through
our supplier base of over 8,000 suppliers, we offer a full range of print,
fulfillment and logistics services that allows us to procure printed products on
virtually any substrate. The breadth of our product offerings and services and
the depth of our supplier network enable us to fulfill all of the print
procurement needs of our clients. By leveraging our technology platform, our
clients are able to reduce overhead costs, redeploy internal resources and
obtain favorable pricing and service terms. In addition, our ability to track
individual transactions and provide customized reports detailing print
procurement activity on an enterprise-wide basis provides our clients with
greater visibility and control of their print expenditures.
We
maintain sales offices in Illinois, New York, New Jersey, California, Hawaii,
Michigan, Minnesota, Ohio, Texas, Pennsylvania, Georgia, Wisconsin, Missouri and
the United Kingdom. We believe the opportunity exists to expand our business
into new geographic markets. Our objective is to continue to increase our sales
in the major print markets in the United States and Europe. We intend to hire or
acquire more account executives within close proximity to these large markets.
In addition, given that the print industry is a global business, over time we
intend to evaluate opportunities to access attractive markets outside the United
States and Europe.
Revenue
We
generate revenue through the sale of printed products to our clients. Our
revenue was $232.7 million and $194.4 million during the six months ended June
30, 2010 and 2009, respectively. Our revenue is generated from two different
types of clients: enterprise and transactional. Enterprise jobs usually involve
higher dollar amounts and volume than transactional jobs. We categorize a client
as an enterprise client if we have a contract with the client for the provision
of printing services on a recurring basis; if the client has signed an
open-ended purchase order, or a series of related purchase orders; or if the
client has enrolled in our e-stores program, which enables the client to make
online purchases of printing services on a recurring basis. We categorize all
other clients as transactional. We enter into contracts with our enterprise
clients to provide some or a substantial portion of their printed products on a
recurring basis. Our contracts with enterprise clients generally have an
open-ended term subject to termination by either party upon prior notice ranging
from 90 days to twelve months. Several of our larger enterprise clients
have outsourced substantially all of their recurring print needs to us. We
provide printed products to our transactional clients on an order-by-order
basis. As of June 30, 2010, we had 185 enterprise clients. During the
six months ended June 30, 2010, enterprise clients accounted for 71% of our
revenue, while transactional clients accounted for 29% of our
revenue.
Our
revenue consists of the prices paid by our clients for printed products. These
prices, in turn, reflect the amounts charged to us by our suppliers plus our
gross profit. Our gross profit margin, in the case of some of our enterprise
clients, is fixed by contract or, in the case of transactional clients, is
negotiated on a job-by-job basis. Once either type of client accepts
our pricing terms, the selling price is established and we procure the product
for our own account in order to re-sell it to the client. We take full title and
risk of loss for the product upon shipment. The finished product is typically
shipped directly from the supplier to a destination specified by the client.
Upon shipment, our supplier invoices us for its production costs and we invoice
our client.
Page
13
Our
revenue from enterprise clients tends to generate lower gross profit margins
than our revenue from transactional clients because the gross profit margins
established in our contracts with large enterprise clients are generally lower
than the gross profit margins we typically realize in our transactional
business.
The print
industry has historically been subject to seasonal sales fluctuations because a
substantial number of print orders are placed for the year-end holiday season.
We have historically experienced seasonal client buying patterns with a higher
percentage of our revenue being earned in our third and fourth
quarters. However, as a result of the recent addition of new
enterprise accounts that are expected to
generate revenue concentrated during the first half of the
year, we expect to alter this historical seasonality such that revenue will
be more consistent across the quarters.
Cost
of Goods Sold and Gross Profit
Our cost
of goods sold consists primarily of the price at which we purchase products from
our suppliers. Our selling price, including our gross profit, in the case of
some of our enterprise jobs, is based on a fixed gross margin established by
contract or, in the case of transactional jobs, is determined at the discretion
of the account executive or procurement manager within predetermined parameters.
Our gross margins on our enterprise jobs are typically lower than our gross
margins on our transactional jobs. As a result, our cost of goods sold as a
percentage of revenue for our enterprise jobs is typically higher than it is for
our transactional jobs. Our gross profit for the six months ended June 30, 2010
and 2009 was $56.0 million, or 24.1% of revenue, and $47.7 million, or 24.6% of
revenue, respectively. With the
recent mix of enterprise and transactional revenue, we expect our gross profit
margins for the second half of the year will be consistent with the first
half.
Operating
Expenses and Income from Operations
Our
selling, general and administrative expenses consist of commissions paid to our
account executives, compensation costs for our management team and procurement
managers as well as compensation costs for our finance and support employees,
public company expenses, corporate systems, legal and accounting, facilities and
travel and entertainment expenses. Selling, general and administrative expenses
as a percentage of revenue were 19.0% and 20.9% for the six months ended June
30, 2010 and 2009, respectively.
We accrue
for commissions when we recognize the related revenue. Some of our account
executives receive a monthly draw to provide them with a more consistent income
stream. The cash paid to our account executives in advance of commissions earned
is reflected as a prepaid expense on our balance sheet. As our account
executives earn commissions, a portion of their commission payment is withheld
and offset against their prepaid commission balance, if any. Our prepaid
commission balance, net of accrued earned commissions not yet paid, increased to
$4.1 million as of June 30, 2010 from $3.8 million as of June 30,
2009.
We agree
to provide our clients with printed products that conform to the industry
standard of a “commercially reasonable quality,” and our suppliers in turn agree
to provide us with products of the same quality. In addition, the quotes we
provide our clients include customary industry terms and conditions that limit
the amount of our liability for product defects. Product defects have not had a
material adverse effect on our results of operations.
Our
income from operations for the six months ended June 30, 2010 and 2009 was $7.5
million and $3.4 million, respectively.
Comparison
of three months ended June 30, 2010 and 2009
Revenue
Our
revenue increased by $20.4 million, or 20.4%, from $100.1 million during the
three months ended June 30, 2009 to $120.5 million during the three months ended
June 30, 2010. The revenue growth reflects an increase in the number of
enterprise clients. Our revenue from enterprise clients increased by $21.9
million, or 33.9%, from $64.6 million during the three months ended June 30,
2009 to $86.5 million during the three months ended June 30, 2010. As of June
30, 2010, we had 185 enterprise clients compared to 159 enterprise clients under
contract as of June 30, 2009.
Page
14
Cost
of goods sold
Our cost
of goods sold increased by $16.1 million, or 21.3%, from $75.4 million during
the three months ended June 30, 2009 to $91.4 million during the three months
ended June 30, 2010. The increase is a result of the revenue growth during the
three months ended June 30, 2010. Our cost of goods sold as a percentage of
revenue increased slightly from 75.3% during the three months ended June 30,
2009 to 75.9% during the three months ended June 30, 2010.
Gross
Profit
Our gross
profit as a percentage of revenue, which we refer to as gross margin, decreased
from 24.7% during the three months ended June 30, 2009 to 24.1% during the three
months ended June 30, 2010. The decrease is primarily the result of a higher
concentration of our business coming from enterprise clients, which generate
lower gross margins.
Selling,
general and administrative expenses
Selling,
general and administrative expenses increased by $2.1 million, or 10.7%, from
$20.0 million during the three months ended June 30, 2009 to $22.2 million
during the three months ended June 30, 2010. As a percentage of revenue,
selling, general and administrative expenses decreased from 20.0% for the three
months ended June 30, 2009 to 18.4% for the three months ended June 30, 2010.
The increase in selling, general and administrative expenses is primarily due to
incremental sales commission and cost of procurement staff to secure new
enterprise accounts since the second quarter of 2009, offset by changes to the
contingent consideration obligation related to acquisitions made subsequent to
December 31, 2008. The decrease in selling, general and
administrative expenses as a percentage of revenue is primarily the result of
increased leverage from higher revenue.
Depreciation
and amortization
Depreciation
and amortization expense remained constant at $2.2 million for the three months
ended June 30, 2009 and June 30, 2010.
Income
from operations
Income
from operations increased by $2.2 million, or 86.4%, from $2.5 million during
the three months ended June 30, 2009 to $4.7 million during the three months
ended June 30, 2010. As a percentage of revenue, income from operations
increased from 2.5% during the three months ended June 30, 2009 to 3.9% during
the three months ended June 30, 2010. The increase in income from operations as
a percentage of revenue is a result of our decrease in selling and
administrative expenses as a percentage of revenue.
Other
income and expense
Other
income decreased by $306,000, or 58.6%, from $523,000 for the three months ended
June 30, 2009 to $216,000 during the three months ended June 30, 2010. The
decrease is primarily due to an increase in interest expense of
$239,000.
Income
tax expense
Income
tax expense increased by $856,000 from $871,000 during the three months ended
June 30, 2009 to $1.7 million during the three months ended June 30, 2010. Our
effective tax rate was 28.8% and 35.5% for the three month periods ended June
30, 2009 and 2010, respectively. The increase in the effective tax rate for the
three month period ended June 30, 2010 is primarily due the recognition of a
$300,000 research and development tax credit related to 2008 during the three
months ended June 30, 2009.
Page
15
Net
income
Net
income increased by $995,000, or 46.3%, from $2.1 million during the three
months ended June 30, 2009 to $3.1 million during the three months ended June
30, 2010. Net income as a percentage of revenue increased from 2.1% during the
three months ended June 30, 2009 to 2.6% during the three months ended June 30,
2010. The increase in net income as a percentage of revenue is due to our
decrease in selling, general and administrative expenses as a percentage of
revenue.
Comparison
of six months ended June 30, 2010 and 2009
Revenue
Our
revenue increased by $38.3 million, or 19.7%, from $194.4 million during the six
months ended June 30, 2009 to $232.7 million during the six months ended
June 30, 2010. Our revenue from enterprise clients increased by $39.0
million, or 31.0%, from $125.9 million during the six months ended June 30,
2009 to $164.9 million during the six months ended June 30, 2010. As of
June 30, 2010 we had 185 enterprise clients compared to 159 enterprise
clients as of June 30, 2009. Revenue from transactional clients decreased
by $689,000, or 1.0%, from $68.4 million during the six months ended
June 30, 2009 to $67.7 million during the six months ended June 30,
2010.
Cost
of goods sold
Our cost
of goods sold increased by $30.1 million, or 20.5%, from $146.6 million during
the six months ended June 30, 2009 to $176.7 million during the six months
ended June 30, 2010. The increase reflects the revenue growth during the
six months ended June 30, 2010. Our cost of goods sold as a percentage of
revenue increased slightly from 75.4% during the six months ended June 30,
2009 to $75.9% during the six months ended June 30, 2010.
Gross
Profit
Our gross
profit as a percentage of revenue, which we refer to as gross margin, decreased
from 24.6% during the six months ended June 30, 2009 to 24.1% during the six
months ended June 30, 2010. The
decrease is primarily the result of a higher concentration of our business
coming from enterprise clients, which generate lower gross
margins.
Selling,
general and administrative expenses
Selling,
general and administrative expenses increased by $3.5 million, or 8.7%,
from $40.6 million during the six months ended June 30, 2009 to
$44.2 million during the six months ended June 30, 2010. As a
percentage of revenue, selling, general and administrative expenses decreased
from 20.9% for the six months ended June 30, 2009 to 19.0% for the six
months ended June 30, 2010. The
increase in selling, general and administrative expenses is primarily due to
incremental sales commission and cost of procurement staff to secure new
enterprise accounts since the second quarter of 2009, offset by changes to the
contingent consideration obligation related to acquisitions made subsequent to
December 31, 2008. The decrease in selling, general and administrative expenses
as a percentage of revenue is primarily the result of increased leverage from
higher revenue.
Depreciation
and amortization
Depreciation
and amortization expense increased by $618,000, or 16.6%, from $3.7 million
during the six months ended June 30, 2009 to $4.3 million during the
six months ended June 30, 2010. The increase in depreciation expense is
primarily attributable to additions of computer hardware and software, equipment
and furniture and fixtures as well as amortization of the capitalized costs of
internal use software.
Income
from operations
Income
from operations increased by $4.1 million, or 120.1%, from $3.4 million during
the six months ended June 30, 2009 to $7.5 million during the six months
ended June 30, 2010. As a percentage of revenue, income from operations
increased from 1.7% during the six months ended June 30, 2009 to 3.2%
during the six months ended June 30, 2010. The increase in income from
operations as a percentage of revenue is a result of a decrease in our selling,
general and administrative expenses as a percentage of revenue.
Other
income and expense
Other
income and expense increased by $711,000 from $30,000 during the six months
ended June 30, 2009 to $742,000 during the six months ended June 30,
2010. During both periods, we sold shares of Echo common stock. The increase is
due to a larger gain on sale of Echo shares during the six months
ended June 30, 2010.
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16
Income
tax expense
Income
tax expense increased by $1.9 million from $1.0 million during the six months
ended June 30, 2009 to $2.9 million during the six months ended
June 30, 2010. Our effective tax rate was 30.0% and 35.3% for the six month
periods ended June 30, 2009 and 2010, respectively. The increase in the
effective tax rate for the six month period ended June 30, 2010 is due to
the recognition of a $300,000 research and development tax credit during the six
month period ended June 30, 2009.
Net
income
Net
income increased by $2.9 million, or 121.7%, from $2.4 million during the six
months ended June 30, 2009 to $5.3 million during the six months ended
June 30, 2010. Net income as a percentage of revenue increased from 1.2%
during the six months ended June 30, 2009 to 2.3% during the six months
ended June 30, 2010. The increase in net income as a percentage of revenue
is due to the decrease in our selling, general and administrative expenses as a
percentage of revenue.
Liquidity
and Capital Resources
At June
30, 2010, we had $3.5 million of cash and cash equivalents and $11.6 million in
short-term investments, which includes approximately $6.3 million in
available-for-sale securities and $5.4 million in auction-rate securities. In
October 2008, we entered into an agreement with UBS regarding our outstanding
auction-rate securities. Under the agreement, we have the right to sell all our
outstanding auction-rate securities back to UBS at their par value. The
agreement allows us to exercise this right starting June 30, 2010, and the right
will expire June 30, 2012. As a result of this agreement, our auction-rate
securities are classified as short-term investments at June 30,
2010. All cash related to the selling of these investments was
received subsequent to June 30, 2010.
Operating Activities. Cash
provided by operating activities primarily consists of net income adjusted for
certain non-cash items, including depreciation and amortization, and the effect
of changes in working capital and other activities.
Cash provided by operating activities for the six months ended
June 30, 2010 was $6,600 and primarily consisted of net income of $5.3 million,
$6.9 million of non-cash items, offset by $12.2 million used by working capital
and other activities. The most significant impact on working capital and other
activities consisted of an increase in accounts receivable and unbilled revenue
of $14.0 million, offset by a decrease in customer deposits of $2.9
million.
Cash
provided by operating activities for the six months ended June 30, 2009 was
$7.5 million and primarily consisted of net income of $2.4 million, $7.1 million
of non-cash items, offset by $2.0 million used by working capital and other
activities. The most significant impact on working capital and other activities
consisted of a decrease in accounts receivable and unbilled revenue of $9.1
million and increase in accounts payable of $3.1 million, offset by a decrease
in customer deposits of $3.6 million and decrease in income tax payable of $9.0
million.
Investing Activities. Cash
provided by investing activities in the six months ended June 30, 2010 of $1.7
million was attributable to the proceeds on sale of marketable securities of
$9.0 million and proceeds on sale of Echo shares of $1.5 million, offset by
a $6.0 million in payments made in connection with acquisitions and capital
expenditures of $2.8 million.
Cash used
in investing activities in the six months ended June 30, 2009 of $8.3
million was attributable to capital expenditures of $4.2 million, $4.9 million
in payments made in connection with acquisitions, offset by an $850,000 gain on
sale of Echo shares.
Financing Activities. Cash
used in financing activities in the six months ended June 30, 2010 of $1.1
million was primarily attributable to the $929,000 in repayments of borrowings
under the revolving credit facility and short-term debt, $89,000 in excess tax
benefit from restricted common shares and $74,000 in principal payments made on
capital leases.
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17
Cash used
in financing activities in the six months ended June 30, 2009 of $212,000
was primarily attributable to the 368,000 of payments made on the revolving
credit facility, offset by the tax benefit of stock options exercised of
$156,000.
We had
a $75.0 million revolving credit facility with JPMorgan Chase Bank, N.A.,
that was scheduled to mature on May 21, 2011. We had $47.6 million in
outstanding borrowings under this facility as of June 30, 2010. Outstanding
borrowings under the revolving credit facility were guaranteed by our
material domestic subsidiaries and interest were payable at the adjusted
LIBOR rate or the alternate base rate, as elected by us. The terms of the
revolving credit facility included various covenants, including covenants that
required us to maintain a maximum leverage ratio and a minimum interest coverage
ratio. As of June 30, 2010, we were not in violation of any of these various
covenants.
On August
2, 2010, the Company entered into a new Credit Agreement with Bank of America,
N.A. that matures on August 2, 2014. The new agreement replaces the
Company’s current credit agreement with JPMorgan Chase Bank, N.A., and provides
for a senior secured revolving credit facility in an initial aggregate principal
amount of up to $100.0 million. Outstanding borrowings under the revolving
credit facility are guaranteed by the Company’s material domestic subsidiaries.
The Company’s obligations under the Credit Agreement and such domestic
subsidiaries’ guaranty obligations are secured by substantially all of their
respective assets. Interest is payable at the adjusted LIBOR rate or the
alternate base rate, as elected by the Company. The terms of the revolving
credit facility include various covenants, including covenants that require the
Company to maintain a maximum leverage ratio, a minimum interest coverage ratio
and a minimum net worth. The borrowings may be used for general corporate and
working capital purposes of the Company and its subsidiaries in the ordinary
course of business, for permitted acquisitions, for capital expenditures and for
restricted payments, including the repurchase of shares of the Company’s common
stock, as permitted pursuant to the terms of the agreement.
Although
we can provide no assurances, we believe that our available cash and cash
equivalents and amounts available under our revolving credit facility should be
sufficient to meet our working capital and operating expenditure requirements
for the foreseeable future. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at
all.
Off-Balance
Sheet Obligations
We do not
have any off-balance sheet arrangements.
Contractual
Obligations
With the
exception of the contingent consideration in connection with our business
acquisitions discussed in Note 1 in the Notes to the Consolidated Financial
Statements, there have been no material changes outside the normal course of
business in the contractual obligations disclosed in Item 7 to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, under the caption
“Contractual Obligations.”
Critical
Accounting Policies and Estimates
As of
June 30, 2010, there were no material changes to the Company’s critical
accounting policies and estimates disclosed in its Form 10-K for the year ended
December 31, 2009.
Page
18
Recent
Accounting Pronouncements
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
ASC 820 by adding required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchase, sales, issuances, and settlements relative to level 3 measurements;
and clarifying, among other things, the existing fair value disclosures about
the level of disaggregation. This ASU is effective for the first quarter of
2010, except for the requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is effective beginning
the first quarter of 2011. Because this standard impacts disclosure requirements
only, its adoption did not have any impact on our consolidated results of
operations or financial condition.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains words such as “may,”
“will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,”
“estimate” and “objective” or the negative thereof or similar terminology
concerning the Company’s future financial performance, business strategy, plans,
goals and objectives. These expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include information concerning our possible or
assumed future performance or results of operations and are not guarantees.
While these statements are based on assumptions and judgments that management
has made in light of industry experience as well as perceptions of historical
trends, current conditions, expected future developments and other factors
believed to be appropriate under the circumstances, they are subject to risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different. Some of the factors that would cause
future results to differ from the recent results or those projected in
forward-looking statements include, but are not limited to, the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2009.
Additional
Information
We make
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, other reports and information filed with the SEC and amendments to
those reports available, free of charge, through our Internet website (http://www.inwk.com) as soon
as reasonably practical after we electronically files or furnishes such
materials to the SEC. All of our filings may be read or copied at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information
on the operation of the Public Filing Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically.
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19
Commodity
Risk
We are
dependent upon the availability of paper, and paper prices represent a
substantial portion of the cost of our products. The supply and price of paper
depend on a variety of factors over which we have no control, including
environmental and conservation regulations, natural disasters and weather. We
believe a 10% increase in the price of paper would not have a significant effect
on our consolidated statements of income or cash flows, as these costs are
generally passed through to our clients.
Interest
Rate Risk
We have
exposure to changes in interest rates on our revolving credit facility. Interest
is payable at the adjusted LIBOR rate or the alternate base. Assuming our $75.0
million revolving credit facility was fully drawn, a 1.0% increase in the
interest rate would increase our annual interest expense by $750,000. The terms
of the revolving credit facility include various covenants, including covenants
that require us to maintain a maximum leverage ratio and a minimum interest
coverage ratio. Outstanding borrowings may be used for general corporate and
working capital purposes in the ordinary course of business, for permitted
acquisitions, for capital expenditures and for restricted payments, including
the repurchase of shares of our common stock, as permitted pursuant to the terms
of the revolving credit facility.
Our
interest income is sensitive to changes in the general level of US interest
rates, in particular because all of our investments are in cash equivalents and
marketable securities.
Foreign
Currency Risk
A portion
of our sales and earnings are attributable to operations conducted outside of
the US. The US dollar value of sales and earnings of these operations
varies with currency exchange rate fluctuations. We believe a 10% fluctuation in
the currency exchange rate would not have a significant effect on the Company’s
consolidated statements of income or cash flows.
We do not
use derivative financial instruments.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2010. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of June 30, 2010, our
chief executive officer and chief financial officer concluded that, as of such
date, the Company’s disclosure controls and procedures were effective at the
reasonable assurance level.
No
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the second
quarter ended June 30, 2010 that has materially affected or is reasonably likely
to materially affect, our internal control over financial reporting.
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20
PART
II. OTHER INFORMATION
We are
not a party to any legal proceedings that we believe would have a material
adverse effect on our business, financial condition or operating
results.
There
have been no material changes in the risk factors described in Item 1A (“Risk
Factors”) of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009.
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21
Item 6.
Exhibits
Exhibit No
|
|
Description of Exhibit
|
10.1 | Credit Agreement, dated August 2, 2010, by and among InnerWorkings, Inc., as borrower, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, PNC Bank, National Association, as documentation agent, Bank of America Securities LLC, as sole lead arranger and book manager, and certain financial institutions that are or may from time to time become parties thereto. | |
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Page
22
SIGNATURES
Pursuant
to the requirements 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.
INNERWORKINGS,
INC.
|
||
Date:
August 6, 2010
|
By:
|
/s/ Eric D.
Belcher
|
Eric
D. Belcher
Chief
Executive Officer
|
||
Date:
August 6, 2010
|
By:
|
/s/ Joseph M.
Busky
|
Joseph
M. Busky
Chief
Financial Officer
|
Page
23
EXHIBIT
INDEX
Number
|
|
Description
|
10.1
|
Credit Agreement, dated August 2, 2010, by and among InnerWorkings, Inc., as borrower, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, PNC Bank, National Association, as documentation agent, Bank of America Securities LLC, as sole lead arranger and book manager, and certain financial institutions that are or may from time to time become parties thereto. | |
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Page
24