Exela Technologies(XELA) - 2018 Q4 - Annual Report

Part I Business Exela Technologies, a global BPA leader, generated $1.586 billion in 2018 revenue across ITPS, HS, and LLPS segments, serving over 4,000 customers - Exela is a business process automation leader serving over 4,000 customers, including over 60% of the Fortune® 100, with revenues of $1.586 billion in fiscal year 2018[19] 2018 Revenue by Business Segment | Segment | Revenue (in millions) | Percentage of Total Revenue | | :--- | :--- | :--- | | Information and Transaction Processing Solutions (ITPS) | $1,273.6 | 80% | | Healthcare Solutions (HS) | $228.0 | 15% | | Legal & Loss Prevention Services (LLPS) | $84.6 | 5% | 2018 Revenue by Geography | Geography | Revenue (in millions) | Percentage of Total Revenue | | :--- | :--- | :--- | | United States | $1,347.5 | 85.0% | | Europe | $211.3 | 13.2% | | Rest of the World | $27.4 | 1.7% | - The company was formed in July 2017 through the business combination of SourceHOV Holdings, Inc. and Novitex Holding, Inc., with SourceHOV being the accounting acquirer[71][72] Our Solutions and Services Exela offers diverse solutions like F&A, EIM, RPA, and Digital Mailroom, with new platforms like 'Exela Smart Office' launching in 2019 - The company offers a wide range of multi-industry solutions such as Finance & Accounting (P2P, O2C), Enterprise Information Management, Robotic Process Automation, Digital Mailroom, and Contract Management[23][24][29][33][34][40] 2018 Revenue Contribution by Industry | Industry | Percentage of 2018 Revenue | | :--- | :--- | | Banking and Financial | ~23% | | Healthcare | ~21% | | Commercial | ~20% | | Insurance | ~16% | | Technology and Manufacturing | ~8% | | Public Sector | ~7% | | Legal | ~6% | - New solutions developed in 2018, including 'Exela Smart Office' (an enterprise IoT platform) and a proprietary human capital management platform, are planned for commercial launch in 2019[47][49] Key Business Strategies Exela's 'Digital Now' strategy focuses on accelerating customer digital transformation, expanding solution penetration, cross-selling, and realizing acquisition synergies - The primary strategy is the 'Digital Now' model, focusing on accelerating customer digital transformation through a single, cloud-hosted platform[75] - A key growth driver is to expand penetration of its 'seven layers of technology enabled solutions and services stack,' moving customers up the value chain from data aggregation to front-end software[76] - The company aims to pursue cross-sell and up-sell opportunities within its existing 4,000+ customer base and leverage its on-site presence of approximately 5,000 employees to deploy its BPA software[77][79] - A significant focus is on realizing cost synergies from the Novitex Business Combination across IT, operations, facilities, and corporate functions[81] Competition, Regulation, and Employees Exela competes with diverse IT and BPO firms, is subject to strict data privacy laws like GDPR, and employed approximately 22,000 globally in 2018 - The competitive landscape includes multi-national IT companies (IBM, Canon), consulting firms (Accenture, Cognizant), platform providers (Workday, Salesforce), and multi-shore BPO companies (Genpact, Conduent)[89][92] - The company's operations are subject to significant data privacy and security laws, including HIPAA, the HITECH Act, the Gramm-Leach-Bliley Act, and the EU's GDPR, which went into effect in May 2018[90][94][96] - As of December 31, 2018, the company had approximately 22,000 employees, with a majority located in the United States and the remainder in Europe, Northern Africa, India, the Philippines, Mexico, and China[98] Risk Factors The company faces risks from economic conditions, cybersecurity, high leverage, customer concentration, foreign operations, and complex regulatory changes - Business operations are sensitive to global economic and political conditions, cybersecurity threats, and potential data breaches which could lead to liability and reputational damage[113][117] - The HGM Group beneficially owns over 50% of the company's Common Stock, giving it significant influence over corporate actions and director nominations[122] - The company has elevated levels of leverage, with approximately $1.3 billion of long-term debt as of December 31, 2018, which could harm its financial condition and limit flexibility[146] - A significant portion of revenues are derived from a small number of customers, with the ten largest customers accounting for approximately 30% of revenues in 2018[172] - Operations are exposed to risks in foreign jurisdictions, particularly India, the Philippines, China, and Mexico, including regulatory, economic, and political uncertainties, as well as currency fluctuations[191][206] - The Tax Cuts and Jobs Act (TCJA) of 2017 presents uncertainty, with the limitation on interest expense deductions being a key potential impact due to the company's significant leverage[199][200] Properties As of December 31, 2018, Exela's global property portfolio included approximately 4.4 million square feet across 178 leased and 7 owned facilities - The company's global property portfolio covers approximately 4.4 million square feet across 178 leased and 7 owned facilities as of year-end 2018[225] - Owned properties include facilities in India, Alabama, Florida, Michigan, England, and New York[225] Legal Proceedings The company is involved in an appraisal action by former SourceHOV stockholders seeking fair value determination, which it intends to vigorously defend - A petition for appraisal was filed in September 2017 by former SourceHOV stockholders related to the Novitex Business Combination, seeking determination of the fair value of their shares. The company is unable to estimate any potential loss and intends to vigorously defend against the action[227][229] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Exela's Common Stock (XELA) traded between $3.46 and $7.34 in 2018, with no dividends paid and ongoing share repurchases 2018 Quarterly Common Stock Price Range | Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | First Quarter | 6.42 | 5.08 | | Second Quarter | 5.87 | 4.32 | | Third Quarter | 7.34 | 4.65 | | Fourth Quarter | 7.02 | 3.46 | - The company has not paid any cash dividends on its common stock[236] - Under a share buyback program authorized in November 2017 for up to 5 million shares, the company repurchased 2,549,185 shares as of December 31, 2018, with 2,450,815 shares remaining available for repurchase[240][241] Selected Financial Data This section presents a five-year financial summary, highlighting 2018 revenues of $1.586 billion and a net loss of $162.5 million, impacted by acquisitions Selected Historical Financial Data (in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,586,222 | $1,152,324 | $789,926 | $805,232 | $650,918 | | Operating (Loss) Income | $(6,249) | $(99,532) | $50,236 | $40,310 | $(171,246) | | Net Loss | $(162,517) | $(204,285) | $(48,103) | $(44,904) | $(197,635) | | Total Assets | $1,639,782 | $1,714,838 | $969,486 | $960,048 | $1,119,468 | | Long-Term Debt | $1,306,423 | $1,276,094 | $983,502 | $975,142 | $952,071 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A details 2018 revenue growth to $1.586 billion, a narrowed net loss, increased Adjusted EBITDA, and liquidity from operations and credit facilities - The financial data for 2017 is only partially comparable to 2018 and 2016, as it includes SourceHOV's results for the full year but Novitex's results only from July 13, 2017, onwards[253] - In April 2018, Exela acquired Asterion International Group to expand its European business[258] Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Loss | $(162,517) | $(204,285) | $(48,103) | | EBITDA | $144,470 | $(37,152) | $129,163 | | Adjusted EBITDA | $283,845 | $208,825 | $173,237 | - As of December 31, 2018, the company had $43.9 million in cash and cash equivalents (including restricted cash) and $79.4 million available under its senior secured revolving credit facility[316] Results of Operations 2018 revenue increased 37.7% to $1.586 billion, driven by ITPS acquisitions, while net loss improved due to lower one-time professional fees and impairment charges Comparison of Operations: 2018 vs. 2017 (in millions) | Metric | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $1,586.2 | $1,152.3 | 37.7% | | Cost of Revenue | $1,209.9 | $829.1 | 45.9% | | SG&A Expenses | $184.7 | $221.0 | (16.4%) | | Operating Loss | $(6.2) | $(99.5) | 93.8% | | Net Loss | $(162.5) | $(204.3) | 20.5% | - The ITPS segment revenue grew by 54.0% in 2018, primarily due to acquisitions contributing $445.0 million of the increase[272] - SG&A expenses decreased by $36.3 million in 2018, mainly because 2017 included $60.0 million in professional fees related to the Novitex Business Combination[278] - An impairment charge of $48.1 million was recorded in 2018, related to goodwill ($44.4 million) for the LLPS reporting unit and trade names ($3.7 million)[280] Liquidity and Capital Resources Primary liquidity comes from operations and a revolving credit facility, with total debt at approximately $1.34 billion as of December 31, 2018 - In July 2018, the company repriced its senior secured term loans, reducing the applicable interest rates by 100 basis points, and borrowed an additional $30.0 million[315][334] Cash Flow Summary (in thousands) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating Activities | $30,457 | $23,455 | $72,147 | | Investing Activities | $(66,304) | $(452,374) | $(31,602) | | Financing Activities | $(1,910) | $475,727 | $(43,255) | - The decrease in cash used in investing activities in 2018 was primarily due to the significant cash paid for the Novitex Business Combination in 2017[323] Critical Accounting Policies and Estimates Key accounting estimates include goodwill and intangible asset impairment, outsourced contract costs, revenue recognition (ASC 606), and income taxes - Key estimates involve goodwill and intangible asset valuation, outsourced contract costs, revenue recognition, and income taxes[338] - Goodwill and indefinite-lived intangible assets are tested for impairment annually on October 1st. In 2018, this resulted in a $44.4 million goodwill impairment for the LLPS unit and a $3.7 million impairment of trade names[343][345] - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective approach, which did not have a material impact on financial results[347][484] Quantitative and Qualitative Disclosure About Market Risk Exela is exposed to interest rate and foreign currency risks, with an interest rate swap hedging a portion of its $1.338 billion debt - The company's main market risks are interest rate risk and foreign currency risk[367] - As of December 31, 2018, the company had $1.338 billion of debt outstanding. A 1% change in the weighted average interest rate would impact annual interest expense by approximately $13.3 million[364] - To hedge interest rate risk, the company entered into a three-year interest rate swap in November 2017 on a notional amount of $347.8 million, swapping floating LIBOR for a fixed rate of 1.9275%[364] Financial Statements and Supplementary Data This section presents consolidated financial statements and KPMG's audit report, which issued an adverse opinion on internal controls due to material weaknesses - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements[370] - KPMG LLP issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018, due to identified material weaknesses[371][376] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Current Assets | $355,901 | $347,711 | | Goodwill | $708,258 | $747,325 | | Total Assets | $1,639,782 | $1,714,838 | | Total Current Liabilities | $432,722 | $373,760 | | Long-Term Debt | $1,306,423 | $1,276,094 | | Total Liabilities | $1,820,788 | $1,724,844 | | Total Stockholders' Deficit | $(181,006) | $(10,006) | Consolidated Statement of Operations Highlights (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Revenue | $1,586,222 | $1,152,324 | $789,926 | | Operating (Loss) Income | $(6,249) | $(99,532) | $50,236 | | Net Loss | $(162,517) | $(204,285) | $(48,103) | | Loss Per Share (Basic & Diluted) | $(1.09) | $(2.08) | $(0.75) | Controls and Procedures Management concluded disclosure controls were not effective as of December 31, 2018, due to material weaknesses in internal controls, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018, due to material weaknesses in internal control over financial reporting[643][649] - Material weaknesses were identified across all five components of the COSO 2013 Framework: Control Environment, Risk Assessment, Information and Communication, Monitoring Activities, and Control Activities[650][652][653][654][655] - Specific control deficiencies were cited in the financial statement close process, general IT controls (GITCs) for systems managed by service organizations, and controls over revenue, procurement, payroll, and leases[657][658][660] - A remediation plan is in progress, which includes hiring additional resources, enhancing training on the COSO framework, strengthening GITCs, and designing improved review policies and procedures[671][674] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for these items is incorporated by reference from the company's upcoming 2019 Proxy Statement - Information required for Item 10 (Directors, Executive Officers, and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership), Item 13 (Certain Relationships and Related Transactions), and Item 14 (Principal Accounting Fees and Services) is incorporated by reference from the company's upcoming 2019 Proxy Statement[678][679][680][682][683] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and key exhibits, including corporate governance documents and SOX certifications - This section provides a list of all financial statements and exhibits filed with the annual report[685] - Key filed exhibits include corporate governance documents, debt agreements, and certifications required by the Sarbanes-Oxley Act[686][687]