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, item 8—financial statements and supplementary data ” in this report . the following discussion and analysis should be read together with our consolidated financial statements , the notes to our consolidated financial statements and the other financial information included elsewhere in this report . in addition to historical information , this discussion and analysis contains forward-looking statements that involve risks , uncertainties , estimates and assumptions that could cause actual results to differ materially from our current expectations . factors that could cause such differences are discussed in the sections entitled “ risk factors ” and “ cautionary note regarding forward-looking statements ” appearing elsewhere in this report . we assume no obligation to update any of these forward-looking statements except to the extent required by applicable law . the following discussion and analysis pertains to our historical results on a consolidated basis . however , because we conduct all of our material business operations through our wholly-owned subsidiary , capstar bank , the following discussion and analysis relates to activities primarily conducted at the subsidiary level . all dollar amounts in the tables in this section are in thousands of dollars , except per share data or when otherwise specifically noted . unless specifically noted in this report , all references in this section to the fiscal years 2018 , 2019 and 2020 mean our fiscal years ended december 31 , 2018 , 2019 , and 2020 , respectively . overview we completed 2020 with net income of $ 24.7 million , or $ 1.22 diluted net income per share , compared to net income of $ 22.4 million , or $ 1.20 diluted net income per share , for 2019. average loans for 2020 were $ 1.70 billion , a 16.8 % increase over 2019 , and average deposits for 2020 were $ 2.26 billion , a 35.2 % increase over 2019. the comparability of our financial condition and performance has been impacted by our acquisitions of fcb and bow discussed below . we acquired fcb and bow on july 1 , 2020. on the acquisition date , the fair market value of the acquired net assets was $ 67.3 million , including $ 294.7 million in loans and $ 442.7 million in deposits . net income for 2020 was reduced by $ 5.4 million of pretax merger related charges related to this acquisition . the fcb and bow acquisitions further expanded our franchise within the tennessee market . the outbreak of a novel coronavirus , covid-19 , has resulted in a global pandemic causing the extended shutdown of certain businesses in the region . the recent developments to contain covid-19 has adversely affected economic conditions in the united states generally and our markets in particular . the company expects the effects of this health crisis , which include disruptions or restrictions in clients ' supply chains , closures of clients ' facilities or decreases in demand for clients ' products and services , to continue to adversely impact economic conditions . also related to the health crisis , the u.s. has been operating under a presidential declared emergency since march 13 , 2020 , with various actions by the u.s. congress and regulatory agencies . as a result of covid-19 , the company experienced the decline of asset prices , reduction in interest rates , widening of credit spreads , borrower credit deterioration and market volatility . although the company is unable to estimate the extent of the impact , the continuing pandemic and related global economic crisis is likely to adversely impact its future operating results . management is actively monitoring the situation and taking necessary actions to adjust operations to protect the health and well-being of employees and clients . despite the uncertainty the company is well positioned to continue delivering on its strategic initiatives in a responsible manner by prioritizing things such as business continuity , liquidity management and maintaining an adequate allowance for loan losses . the company has taken a proactive approach to protecting our team members and their families as a result of covid-19 . the company was an early adopter of a work from home strategy having previously made significant investments in laptops , virtual private network access , and bandwidth . through its business continuity procedures , employees tested remote access the first week of march and all non-financial center employees have been working remotely since march 11 , 2020. management has organized a committee ( “ pandemic committee ” ) which meets regularly to ensure the health of employees , discuss the state of operations , and ensure we are providing the best possible client service and support during this challenging time . additionally , non-essential business travel has been suspended and company-wide cleaning efforts have been enhanced . as of march 23 , 2020 , the company expanded its social distancing practice by modifying the operations of its financial center network to support the efforts of public health authorities and to help curtail the spread of covid-19 . 40 when appropriate t he company has temporarily redirect ed clients to its digital channels , drive-thrus , and atms which can handle most financial transactions . the pandemic is constantly evolving , and the company is making every effort to ensure its response is aligned with its priority to protect the health and safety of employees , clients and the communities we serve . the redirect model for the financial center network was phased out after ongoing monitoring of cdc , state , local covid-19 guidelines and area covid-19 statistics . the reopening of the financial center network was handled in a controlled reopening model at the recommendation of the pandemic committee . the key to this reopening was the implementation of safety protocols in the covid-19 environment for the bank staff and customers based on geographic area results of the state . currently , all financial centers are open to the public . story_separator_special_tag our ratio of tangible common equity to total tangible assets was 10.01 % as of december 31 , 2020 , compared with 11.47 % at december 31 , 2019. see “ non-gaap financial measures ” for a discussion of and reconciliation to the most directly comparable u.s. gaap measure . the following sections provide more details on subjects presented in this overview . critical accounting policies and estimates our consolidated financial statements are prepared based on the application of certain accounting policies , the most significant of which are described in note 1 to our consolidated financial statements for the year ended december 31 , 2020 , which are contained elsewhere in this report . certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may materially and adversely affect our reported results and financial position for the current period or future periods . the use of estimates , assumptions , and judgments are necessary when financial assets and liabilities are required to be recorded at , or adjusted to reflect , fair value . assets carried at fair value inherently result in more financial statement volatility . fair values and information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or are provided by other independent third-party sources , when available . when such information is not available , management estimates valuation adjustments based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances . management evaluates our estimates and assumptions on an ongoing basis . changes in underlying factors , assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations . we have identified the following accounting policies and estimates that , due to the difficult , subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgments and assumptions , are critical to an understanding of our financial condition and results of operations . we believe that the judgments , estimates and assumptions used in the preparation of our financial statements are reasonable and appropriate . allowance for loan losses we record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses . the methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve significant judgments to be made by management . some of the more critical judgments supporting our allowance for loan losses include judgments about the credit-worthiness of borrowers , estimated value of underlying collateral , assumptions about cash flow , determination of loss factors for estimating credit losses , and the impact of current events , conditions , and other factors impacting the level of inherent losses , particularly the impact from the covid-19 pandemic in 2020. under different conditions or using different assumptions , the actual or estimated credit losses ultimately realized by us may be different from our estimates . in determining the allowance , we estimate losses on individual impaired loans and on groups of loans that are not impaired , where the probable loss can be identified and reasonably estimated . on a quarterly basis , we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio , including the internal risk classification of loans , historical loss rates , changes in the nature and volume of the loan portfolio , industry or borrower concentrations , delinquency trends , detailed reviews of significant loans with identified weaknesses , and the impacts of local , regional , and national economic factors on the quality of the loan portfolio . based on this analysis , we may record a provision for loan losses in order to maintain the allowance at appropriate levels . for a more complete discussion of the methodology employed to calculate the allowance for loan losses , see note 1 to our consolidated financial statements for the year ended december 31 , 2020 , which is included elsewhere in this report . 42 investment securities impairment we assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a security with respect to which there is an unrealized loss is impaired on an other-than-temporary basis . in any instance , we would consider many factors , including the severity and duration of the impairment , our intent and ability to hold the security for a period of time sufficient for a recovery in value , recent events specific to the issuer or industry , and , for debt securities , external credit ratings and recent downgrades . securities with respect to which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded in earnings . income taxes deferred income tax assets and liabilities are computed using the asset and liability method , which recognizes a liability or asset representing the tax effects , based on current tax law , of future deductible or taxable amounts attributable to events recognized in the financial statements . a valuation allowance may be established to the extent necessary to reduce the deferred tax asset to a level at which it is “ more likely than not ” that the tax asset or benefit will be realized . realization of tax benefits depends on having sufficient taxable income , available tax loss carrybacks or credits , the reversal of taxable temporary differences and or tax planning strategies within the reversal period , and that current tax law allows for the realization of recorded tax benefits . business combinations assets purchased and liabilities assumed in a business combination are recorded at their fair value . the fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of purchased assets or assumed liabilities .
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results of operations the following is a summary of our results of operations : replace_table_token_4_th return on average assets was 0.94 % , 1.12 % and 0.63 % for 2020 , 2019 and 2018 , respectively . 43 return on average shareholders ' equity was 8 . 08 % , 8 . 49 % and 5 .5 0 % for 20 20 , 201 9 and 201 8 , respectively . the following sections provide a more detailed analysis of significant factors affecting our operating results . net interest income the largest component of our net income is net interest income – the difference between the income earned on loans , investment securities and other interest earning assets and interest expense on deposit accounts and other interest bearing liabilities . net interest income calculated on a tax-equivalent basis divided by total average interest-earning assets represents our net interest margin . the major factors that affect net interest income and net interest margin are changes in volumes , the yield on interest-earning assets and the cost of interest-bearing liabilities . our margin can also be affected by economic conditions , the competitive environment , loan demand and deposit flow . our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and our net interest income . the following table sets forth the amount of our average balances , interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities , net interest spread and net interest margin for the years ended december 31 , 2020 , 2019 and 2018 : replace_table_token_5_th ( 1 ) average loan balances include nonaccrual loans . interest income on loans includes amortization of deferred loan fees , net of deferred loan costs . 44 ( 2 ) taxable investment securities include restricted equity securities .
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we operate in the cyclical semiconductor industry where there is seasonal demand for certain products . we are not and will not be immune from current and future industry downturns , but we have targeted product and market areas that we believe have the ability to offer above average industry performance . we work with third parties to manufacture and assemble our integrated circuits ( “ ics ” ) . this has enabled us to limit our capital expenditures and fixed costs , while focusing our engineering and design resources on our core strengths . following the introduction of a product , our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up . typical lead time for orders is fewer than 90 days . these factors , combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer , make the forecasting of our orders and revenue difficult . we derive most of our revenue from sales through distribution arrangements and direct sales to customers in asia , where the products we produce are incorporated into end-user products . our revenue from direct or indirect sales to customers in asia was 91 % and 90 % for the years ended december 31 , 2014 and 2013 , respectively . we derive a majority of our revenue from the sales of our dc to dc converter product family which services the communications , storage and computing , consumer and industrial markets . we believe our ability to achieve revenue growth will depend , in part , on our ability to develop new products , enter new market segments , gain market share , manage litigation risk , diversify our customer base and successfully secure manufacturing capacity . in july 2014 , we completed the acquisition of sensima technology sa ( “ sensima ” ) , a company located in switzerland that develops magnetic sensors for angle measurements as well as three-dimensional magnetic field sensing . the acquisition is expected to create new opportunities with customers by offering enhanced solutions in power management for key industries such as automotive , industrial and cloud computing . the purchase consideration consisted of an upfront cash payment of $ 11.7 million and additional consideration that is contingent upon sensima achieving a new product introduction and certain revenue and direct margin goals in 2016 , with a fair value of $ 2.5 million at the date of acquisition . in addition , key employees received $ 1.7 million of time-based restricted stock units and up to $ 8.0 million of performance-based restricted stock units in connection with the transaction . these equity awards are considered arrangements for post-acquisition services and the related compensation expense is being recognized over the requisite service period . the results of operations of sensima have been included in our consolidated financial statements subsequent to the acquisition date . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with generally accepted accounting principles in the u.s. the preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets , liabilities , revenue and expenses , and related disclosure of contingent assets and liabilities . we evaluate our estimates on an on-going basis , including those related to revenue recognition , stock-based compensation , inventories , income taxes , valuation of goodwill and intangible assets , and contingencies . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . estimates and judgments used in the preparation of our financial statements are , by their nature , uncertain and unpredictable , and depend upon , among other things , many factors outside of our control , such as demand for our products and economic conditions . accordingly , our estimates and judgments may prove to be incorrect and actual results may differ , perhaps significantly , from these estimates . we believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements . 28 revenue recognition we recognize revenue when the following four basic criteria are met : ( 1 ) persuasive evidence of an arrangement exists ; ( 2 ) delivery has occurred or services have been rendered ; ( 3 ) the fee is fixed or determinable ; and ( 4 ) collectability is reasonably assured . determination of criteria ( 3 ) and ( 4 ) are based on management 's judgment regarding the fixed nature of the fees charged for products delivered and the collectability of those fees . the application of these criteria has resulted in us generally recognizing revenue upon shipment ( when title passes ) to customers , including distributors , original equipment manufacturers and electronic manufacturing service providers . our revenue consists primarily of sales of assembled and tested finished goods . we also sell die in wafer form to our customers and value-added resellers , and we receive royalty revenue from third parties and value-added resellers . for the years ended december 31 , 2014 and 2013 , approximately 92 % and 91 % of our distributor sales , respectively , including sales to our value-added resellers , were made through distribution arrangements with third parties . these arrangements do not include any special payment terms ( normal payment terms are 30-45 days for our distributors ) , price protection or exchange rights . returns are limited to our standard product warranty . certain of our large distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous six months ' purchases . story_separator_special_tag our estimates of current and deferred tax assets and liabilities may change based , in part , on added certainty or finality or uncertainty to an anticipated outcome , changes in accounting or tax laws in the u.s. or foreign jurisdictions where we operate , or changes in other facts or circumstances . in addition , we recognize liabilities for potential u.s. and foreign income tax for uncertain income tax positions taken on our tax returns if it has less than a 50 % likelihood of being sustained . if we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment , we may be required to recognize an income tax benefit or additional income tax expense in our financial statements in the period such determination is made . we have calculated our uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing , cost sharing and our international tax structure exposure . as of december 31 , 2014 , and 2013 , we had a valuation allowance of $ 19.1 million and $ 16.7 million , respectively , attributable to management 's determination that it is more likely than not that most of the deferred tax assets in the u.s. will not be realized . should it be determined that additional amounts of the net deferred tax asset will not be realized in the future , an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such determination is made . likewise , in the event we were to determine that it is more likely than not that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount , an adjustment to the valuation allowance for the deferred tax asset would increase income in the period such determination was made . as a result of the cost sharing arrangements with our international subsidiaries ( cost share arrangements ) , relatively small changes in costs that are not subject to sharing under the cost share arrangements can significantly impact the overall profitability of the u.s. entity . because of the u.s. entity 's inconsistent earnings history and uncertainty of future earnings , we have determined that it is more likely than not that the u.s. deferred tax benefits will not be realized . contingencies we are a party to actions and proceedings incident to our business in the ordinary course of business , including litigation regarding our intellectual property , challenges to the enforceability or validity of our intellectual property and claims that our products infringe on the intellectual property rights of others . the pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend . in addition , from time to time , we become aware that we are subject to other contingent liabilities . when this occurs , we will evaluate the appropriate accounting for the potential contingent liabilities to determine whether a contingent liability should be recorded . in making this determination , management may , depending on the nature of the matter , consult with internal and external legal counsel and technical experts . based on the facts and circumstances in each matter , we use our judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated . if we determine a loss is probable and estimable , we record a contingent loss . in determining the amount of a contingent loss , we take into account advice received from experts for each specific matter regarding the status of legal proceedings , settlement negotiations , prior case history and other factors . should the judgments and estimates made by management need to be adjusted as additional information becomes available , we may need to record additional contingent losses that could materially and adversely impact our results of operations . alternatively , if the judgments and estimates made by management are adjusted , for example , if a particular contingent loss does not occur , the contingent loss recorded would be reversed which could result in a favorable impact on our results of operations . 30 stock-based compensation we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award . we use the black-scholes model to estimate the fair value of our options and shares issued under employee stock purchase plan . the fair value of time-based and performance-based restricted stock units is based on the grant date share price . the fair value of market-based restricted stock units is estimated using a monte carlo simulation model . we recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest . this expense is recorded on a straight-line basis over the requisite service period of the entire awards , unless the awards are subject to performance or market conditions , in which case we recognize compensation expense over the requisite service period of each separate vesting tranche . for the performance-based awards , we recognize compensation expense when it becomes probable that the performance criteria set by the board of directors will be achieved . for the market-based awards , compensation expense is not reversed if the market condition is not satisfied . if the actual performance targets achieved differ significantly from those projected by management , additional stock-based compensation expense may be recorded for the performance-based awards , which could have an adverse impact on our results of operations . furthermore , the amount of stock-based compensation that we recognize is based on an expected forfeiture rate .
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results of operations the following table summarizes our results of operations : replace_table_token_5_th revenue the following table summarizes our revenue by product family : replace_table_token_6_th revenue for the year ended december 31 , 2014 was $ 282.5 million , an increase of $ 44.4 million , or 18.7 % , from $ 238.1 million for the year ended december 31 , 2013. this increase was due to higher sales of both dc to dc and lighting control products , as unit shipments increased 37 % due to higher market demand with current customers and additional design wins with new customers , which were offset in part by a 13 % decrease in average sales prices . revenue from our dc to dc products was $ 253.1 million for the year ended december 31 , 2014 , an increase of $ 41.7 million , or 19.8 % , from the same period in 2013. this increase was primarily due to higher sales of our dc to dc converters , offset in part by lower sales of our mini-monsters products . revenue from our lighting control products was $ 29.5 million for the year ended december 31 , 2014 , an increase of $ 2.7 million , or 10.1 % , compared with the same period in 2013. revenue for the year ended december 31 , 2013 was $ 238.1 million , an increase of $ 24.3 million , or 11.4 % , from $ 213.8 million for the year ended december 31 , 2012. this increase was due to higher sales of both dc to dc and lighting control products , as unit shipments increased 18 % due to higher market demand with current customers and additional design wins with new customers , which were offset in part by a 6 % decrease in average sales prices .
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through our automobile contract purchases , we provide indirect financing to the customers of dealers who have limited credit histories , low incomes or past credit problems , who we refer to as sub-prime customers . we serve as an alternative source of financing for dealers , facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources , such as commercial banks , credit unions and the captive finance companies affiliated with major automobile manufacturers . in addition to purchasing installment purchase contracts directly from dealers , we have also ( i ) acquired installment purchase contracts in four merger and acquisition transactions , ( ii ) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders , and ( iii ) directly originated an immaterial amount of vehicle purchase money loans by lending money directly to consumers . in this report , we refer to all of such contracts and loans as `` automobile contracts . '' we were incorporated and began our operations in march 1991. from inception through december 31 , 2017 , we have originated a total of approximately $ 14.3 billion of automobile contracts , primarily by purchasing retail installment sales contracts from dealers , and to a lesser degree , by originating loans secured by automobiles directly with consumers . in addition , we acquired a total of approximately $ 822.3 million of automobile contracts in mergers and acquisitions in 2002 , 2003 , 2004 and , most recently , in september 2011. the september 2011 acquisition consisted of approximately $ 217.8 million of automobile contracts that we purchased from fireside bank of pleasanton , california . in 2004 and 2009 , we were appointed as a third-party servicer for certain portfolios of automobile contracts originated and owned by non-affiliated entities . recent contract purchase volumes and managed portfolio levels are shown in the table below : contract purchases and outstanding managed portfolio replace_table_token_17_th our principal executive offices are in las vegas , nevada . most of our operational and administrative functions take place in irvine , california . credit and underwriting functions are performed primarily in that california branch with certain of these functions also performed in our florida and nevada branches . we service our automobile contracts from our california , nevada , virginia , florida and illinois branches . the programs we offer to dealers and consumers are intended to serve a wide range of sub-prime customers , primarily through franchised new car dealers . we originate automobile contracts with the intention of financing them on a long-term basis through securitizations . securitizations are transactions in which we sell a specified pool of contracts to a special purpose subsidiary of ours , which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us . securitization and warehouse credit facilities throughout the period for which information is presented in this report , we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations , and on an interim basis through warehouse credit facilities . all such financings have involved identification of specific automobile contracts , sale of those automobile contracts ( and associated rights ) to one of our special-purpose subsidiaries , and issuance of asset-backed securities to be purchased by institutional investors . depending on the structure , these transactions may be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings . 26 when structured to be treated as a secured financing for accounting purposes , the subsidiary is consolidated with us . accordingly , the sold automobile contracts and the related debt appear as assets and liabilities , respectively , on our consolidated balance sheet . we then periodically ( i ) recognize interest and fee income on the contracts , ( ii ) recognize interest expense on the securities issued in the transaction and ( iii ) record as expense a provision for credit losses on the contracts . since 1994 we have conducted 76 term securitizations of automobile contracts that we originated . as of december 31 , 2017 , 18 of those securitizations are active and are structured as secured financings . from 1994 through april 2008 we generally utilized financial guarantees for the senior asset-backed notes issued in the securitization . since september 2010 we have utilized senior subordinated structures without any financial guarantees . we have generally conducted our securitizations on a quarterly basis , near the end of each calendar quarter , resulting in four securitizations per calendar year . however , in 2015 , we elected to defer what would have been our december securitization in favor of a securitization in january 2016 , and since that time have generally conducted our securitizations near the beginning of each calendar quarter . our history of term securitizations , over the most recent ten years , is summarized in the table below : recent asset-backed term securitizations replace_table_token_18_th generally , prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities . our current short-term funding capacity is $ 300 million , comprising three credit facilities . the first $ 100 million credit facility was established in may 2012. this facility was renewed in august 2016 , extending the revolving period to august 2018 , and adding an amortization period through august 2019. in april 2015 , we entered into a second $ 100 million facility . this facility was renewed in april 2017 , extending the revolving period to april 2019 , followed by an amortization period to april 2021. in november 2015 , we entered into a third $ 100 million facility . story_separator_special_tag we typically sell these automobile contracts to the trust at face value and without recourse , except that representations and warranties similar to those provided by the dealer to us are provided by us to the trust . one or more investors purchase the asset-backed securities issued by the trust ; the proceeds from the sale of the asset-backed securities are then used to purchase the automobile contracts from us . we may retain or sell subordinated asset-backed securities issued by the trust or by a related entity . 28 we structure our securitizations to include internal credit enhancement for the benefit the investors ( i ) in the form of an initial cash deposit to an account ( `` spread account `` ) held by the trust , ( ii ) in the form of overcollateralization of the senior asset-backed securities , where the principal balance of the senior asset-backed securities issued is less than the principal balance of the automobile contracts , ( iii ) in the form of subordinated asset-backed securities , or ( iv ) some combination of such internal credit enhancements . the agreements governing the securitization transactions require that the initial level of internal credit enhancement be supplemented by a portion of collections from the automobile contracts until the level of internal credit enhancement reaches specified levels , which are then maintained . the specified levels are generally computed as a percentage of the principal amount remaining unpaid under the related automobile contracts . the specified levels at which the internal credit enhancement is to be maintained will vary depending on the performance of the portfolios of automobile contracts held by the trusts and on other conditions , and may also be varied by agreement among us , our special purpose subsidiary , the insurance company , if any , and the trustee . such levels have increased and decreased from time to time based on performance of the various portfolios , and have also varied from one transaction to another . the agreements governing the securitizations generally grant us the option to repurchase the sold automobile contracts from the trust when the aggregate outstanding balance of the automobile contracts has amortized to a specified percentage of the initial aggregate balance . our warehouse credit facility structures are similar to the above , except that ( i ) our special-purpose subsidiaries that purchase the automobile contracts pledge the automobile contracts to secure promissory notes that they issue , and ( ii ) no increase in the required amount of internal credit enhancement is contemplated . our current maximum revolving warehouse financing capacity is $ 300 million . upon each transfer of automobile contracts in a transaction structured as a secured financing for financial accounting purposes , whether a term securitization or a warehouse financing , we retain on our consolidated balance sheet the related automobile contracts as assets and record the asset-backed notes or loans issued in the transaction as indebtedness . we receive periodic base servicing fees for the servicing and collection of the automobile contracts . under our securitization structures treated as secured financings for financial accounting purposes , such servicing fees are included in interest income from the automobile contracts . in addition , we are entitled to the cash flows from the trusts that represent collections on the automobile contracts in excess of the amounts required to pay principal and interest on the asset-backed securities , base servicing fees , and certain other fees and expenses ( such as trustee and custodial fees ) . required principal payments on the asset-backed notes are generally defined as the payments sufficient to keep the principal balance of such notes equal to the aggregate principal balance of the related automobile contracts ( excluding those automobile contracts that have been charged off ) , or a pre-determined percentage of such balance . where that percentage is less than 100 % , the related securitization agreements require accelerated payment of principal until the principal balance of the asset-backed securities is reduced to the specified percentage . such accelerated principal payment is said to create overcollateralization of the asset-backed notes . if the amount of cash required for payment of fees , expenses , interest and principal on the senior asset-backed notes exceeds the amount collected during the collection period , the shortfall is withdrawn from the spread account , if any . if the cash collected during the period exceeds the amount necessary for the above allocations plus required principal payments on the subordinated asset-backed notes , and there is no shortfall in the related spread account or the required overcollateralization level , the excess is released to us . if the spread account and overcollateralization is not at the required level , then the excess cash collected is retained in the trust until the specified level is achieved . although spread account balances are held by the trusts on behalf of our special-purpose subsidiaries as the owner of the residual interests ( in the case of securitization transactions structured as sales for financial accounting purposes ) or the trusts ( in the case of securitization transactions structured as secured financings for financial accounting purposes ) , we are restricted in use of the cash in the spread accounts . cash held in the various spread accounts is invested in high quality , liquid investment securities , as specified in the securitization agreements . the interest rate payable on the automobile contracts is significantly greater than the interest rate on the asset-backed notes . as a result , the residual interests described above historically have been a significant asset of ours . in all of our term securitizations and warehouse credit facilities , whether treated as secured financings or as sales , we have sold the automobile contracts ( through a subsidiary ) to the securitization entity . the difference between the two structures is that in securitizations that are treated as secured financings we report the assets and liabilities of the securitization trust on our consolidated balance sheet .
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results of operations comparison of operating results for the year ended december 31 , 2017 with the year ended december 31 , 2016 revenues . during the year ended december 31 , 2017 , our revenues were $ 434.4 million , an increase of $ 12.1 million , or 2.9 % , from the prior year revenues of $ 422.3 million . the primary reason for the increase in revenues is an increase in interest income . interest income for the year ended december 31 , 2017 increased $ 15.2 million , or 3.7 % , to $ 424.2 million from $ 409.0 million in the prior year . the primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries , which increased from $ 2,307.9 million at december 31 , 2016 to $ 2,333.5 million at december 31 , 2017. other income decreased by $ 3.1 million , or 23.2 % , to $ 10.2 million in the year ended december 31 , 2017 from $ 13.3 million during the prior year . the decrease in other income resulted from a decrease of $ 2.8 million in revenues associated with direct mail and other related products and services that we offer to our dealers , a decrease of $ 245,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments and a decrease of $ 203,000 in recoveries on previously charged off receivables . expenses . our operating expenses consist largely of provision for credit losses , interest expense , employee costs and general and administrative expenses . provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and by the outstanding balance of finance receivables held by consolidated subsidiaries . employee costs and general and administrative expenses are incurred as applications and automobile contracts are received , processed and serviced .
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in some cases , you can identify forward-looking statements by terminology such as may , might , will , should , expect , plan , anticipate , project , believe , estimate , predict , potential , intend or continue , the negative of terms like these or other comparable terminology , and other words or terms of similar meaning in connection with any discussion of future operating or financial performance . these statements are only predictions . all forward-looking statements included in this annual report on form 10-k are based on information available to us on the date hereof , and we assume no obligation to update any such forward-looking statements . any or all of our forward-looking statements in this document may turn out to be wrong . actual events or results may differ materially . our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks , uncertainties and other factors . we discuss many of these risks , uncertainties and other factors in this annual report on form 10-k in greater detail under the heading item 1arisk factors. we caution investors that our business and financial performance are subject to substantial risks and uncertainties . overview seattle genetics is a biotechnology company focused on the development and commercialization of targeted therapies for the treatment of cancer . our marketed product adcetris ® , or brentuximab vedotin , is now approved by the united states food and drug administration , or fda , and the european commission for three indications , encompassing several settings for the treatment of relapsed hodgkin lymphoma and relapsed systemic anaplastic large cell lymphoma , or salcl . adcetris is commercially available in 66 countries around the world , including in the united states , canada , members of the european union and japan . we are collaborating with takeda pharmaceutical company limited , or takeda , to develop and commercialize adcetris on a global basis . under this collaboration , seattle genetics retains commercial rights for adcetris in the united states and its territories and in canada , and takeda has commercial rights in the rest of the world . beyond our current labeled indications , we and takeda have a broad development strategy for adcetris evaluating its therapeutic potential in earlier lines of therapy for patients with hodgkin lymphoma or mature t-cell lymphoma , or mtcl , also known as peripheral t-cell lymphoma , or ptcl , including salcl , and in other cd30-expressing malignancies . we and takeda are currently conducting three phase 3 clinical trials of adcetris : alcanza , echelon-1 and echelon-2 . all of these trials are being conducted under special protocol assessment , or spa , agreements with the fda and pursuant to scientific advice from the european medicines agency , or ema . an spa is an agreement with the fda regarding the design of the clinical trial , including size and clinical endpoints , to support an efficacy claim in a new drug application or a biologics license application , or bla , submission to the fda if the trial achieves its primary endpoints . we plan to submit a supplemental biologics license application , or sbla , to the fda in mid-2017 to seek approval for a new indication in cd30-expressing relapsed ctcl . we have also completed enrollment of 1,334 patients in our echelon-1 trial and expect to report data in 2017. in november 2016 , we completed enrollment of 452 patients in our echelon-2 trial , and expect to report data in 2018. we are also advancing the development of sgn-cd33a , or vadastuximab talirine . a phase 3 clinical trial , called the cascade trial , was initiated in the second quarter of 2016 based on data from our phase 1 clinical trial for patients with acute myeloid leukemia , or aml . the cascade trial is evaluating sgn-cd33a in combination with hypomethylating agents , or hmas , in previously untreated older patients with aml who are 76 not candidates for intensive induction chemotherapy . we also have been evaluating sgn-cd33a in additional treatment settings , and overall , more than 300 patients have been treated with sgn-cd33a to date in clinical trials across these multiple treatment settings . on december 27 , 2016 , we announced that we had received notice from the fda that a full clinical hold or partial clinical hold had been placed on several early stage trials of sgn-cd33a in aml to evaluate the potential risk of hepatotoxicity following adverse medical events , including fatal events . we are working diligently with the fda to determine whether there is any association between hepatotoxicity and treatment with sgn-cd33a and to promptly identify appropriate measures for patient safety with the goal of addressing the fda 's concerns . in addition , in collaboration with astellas pharma , inc. , or astellas , we are developing asg-22me , or enfortumab vedotin . we and astellas are planning discussions with regulatory agencies during 2017 to advance the program into potential registrational trials in urothelial cancer patients , including patients who have been previously treated with a checkpoint inhibitor therapy . our clinical-stage pipeline also includes six other antibody-drug conjugate , or adc , programs consisting of sgn-liv1a , sgn-cd19a , or denintuzumab mafodotin , sgn-cd19b , sgn-cd123a , sgn-cd352a , and asg-15me , as well as two immuno-oncology agents , sea-cd40 , which is based on our sugar-engineered antibody , or sea , technology , and sgn-2ff , which is a novel small molecule . story_separator_special_tag over the next several years , we expect that we will incur substantial expenses , primarily as a result of activities related to the commercialization of adcetris , the continued development of adcetris and sgn-cd33a and the anticipated development of immu-132 under the immunomedics license . our other product candidates are in relatively early stages of development ; sgn-cd33a , our other product candidates and immu-132 will require significant further development , financial resources and personnel to pursue and obtain regulatory approval and develop into commercially viable products , if at all . in addition , sgn-cd33a is our only product candidate in late stage clinical development and if we are unable to resolve the clinical holds on our sgn-cd33a trials or to otherwise advance the development of sgn-cd33a , or if we fail to produce positive results in the cascade trial , the commercialization prospects for sgn-cd33a , as well as our business and financial prospects , would be materially adversely affected . in addition , despite the substantial commitments of time and resources by our management and other employees already incurred in connection with the immunomedics license as well as our equity investment of approximately $ 14.7 million in immunomedics , we may be unable to consummate the transactions contemplated the immunomedics license , whether as a result of the venbio lawsuit or otherwise , in which case we will not realize any of the benefits of the licensing of immu-132 . likewise , it is possible that , in connection with the venbio lawsuit and or the proxy contest that venbio has initiated with respect to the election of directors at the immunomedics annual meeting , the immunomedics license could be reformed in a way that is disadvantageous to us , including by requiring us to increase the transaction consideration payable to immunomedics under the immunomedics license , or that otherwise adversely affects the anticipated benefits to us of the immunomedics license . our commitment of resources to the continuing development , regulatory and commercialization activities for adcetris , the research , continued development and manufacturing of our product candidates , the transactions contemplated by the immunomedics license , including the related upfront and milestone payments provided for under the immunomedics license , and the anticipated transfer , integration and development activities related to immu-132 , will likely require us to raise substantial amounts of additional capital and our operating expenses will fluctuate as a result of such activities . in addition , we may incur significant milestone payment obligations to certain of our licensors , including to immunomedics if the 78 transactions contemplated by the immunomedics license are comsummated , as our product candidates progress through clinical trials towards potential commercialization . we recognize revenue from adcetris product sales in the united states and canada . our future adcetris product sales are difficult to accurately predict from period to period . in this regard , our product sales have varied , and may continue to vary , significantly from period to period and may be affected by a variety of factors . such factors include the incidence rate of new patients in adcetris ' approved indications , customer ordering patterns , the overall level of demand for adcetris , the duration of therapy for patients receiving adcetris , and the extent to which coverage and reimbursement for adcetris is available from government and other third-party payers . obtaining and maintaining appropriate coverage and reimbursement for adcetris is increasingly challenging due to , among other things , the attention being paid to healthcare cost containment and other austerity measures in the u.s. and worldwide , as well as increasing legislative and enforcement interest in the united states with respect to pharmaceutical drug pricing practices . we anticipate that healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for adcetris . we also anticipate that congress , state legislatures , and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare delivery system , any of which could negatively affect our revenue or sales of adcetris ( or any future approved products ) . we also believe that the level of our current adcetris sales in the united states has been attributable to the incidence flow of patients eligible for treatment with adcetris , which can vary significantly from period to period . moreover , we believe that the incidence rate in adcetris ' approved indications is relatively low , particularly when compared to many other oncology indications . for these and other reasons , we expect that our ability to accelerate adcetris sales growth , if at all , will depend primarily on our ability to continue to expand adcetris ' labeled indications of use , particularly with respect to the frontline hodgkin lymphoma and frontline mtcl indications . our efforts to continue to expand adcetris ' labeled indications of use will continue to require additional time and investment in clinical trials to complete and may not be successful . our ability to successfully commercialize adcetris and to continue to expand its labeled indications of use are subject to a number of risks and uncertainties , including those discussed in part i , item 1a of this annual report on form 10-k. in particular , negative or inconclusive results in our echelon-1 and echelon-2 trials would negatively impact , or preclude altogether , our ability to obtain regulatory approval in the frontline hodgkin lymphoma and frontline mtcl indications , respectively , either of which could limit our sales of , and the commercial potential of , adcetris .
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financial summary total revenues increased to $ 418.1 million in 2016 , compared to $ 336.8 million in 2015. this increase was primarily driven by adcetris net product sales that increased 18 % to $ 265.8 million in 2016 as compared to 79 $ 226.1 million in 2015 , and by royalty revenues that increased 65 % to $ 67.5 million in 2016 as compared to $ 41.0 million in 2015. during 2016 , royalty revenues included a one-time $ 20.0 million milestone payment triggered by takeda exceeding $ 200 million in annual net sales of adcetris in its territory during 2015. total costs and expenses increased 23 % to $ 560.9 million in 2016 , compared to $ 457.8 million in 2015. this primarily reflects increases in our investment in sgn-cd33a and increased adcetris collaboration activities for product supply to takeda , as well as investment in our growing pipeline of preclinical and clinical-stage programs . as of december 31 , 2016 , we had $ 619.0 million in cash , cash equivalents and investments , and $ 634.1 million in total stockholders ' equity . critical accounting policies the preparation of financial statements in accordance with generally accepted accounting principles , or gaap , requires us to make estimates , assumptions and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosures of contingent assets and liabilities . we believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our financial statements . revenue recognition . our revenues are comprised of adcetris net product sales , amounts earned under our collaboration and licensing agreements and royalties . revenue recognition is predicated upon persuasive evidence of an agreement existing , delivery of products or services being rendered , amounts payable being fixed or determinable , and collectibility being reasonably assured .
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the financial impact to j2 global for each of the other acquisitions story_separator_special_tag in addition to historical information , the following management 's discussion and analysis of financial condition and results of operations contains forward-looking statements . these forward-looking statements involve risks , uncertainties and assumptions . the actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including but not limited to those discussed in part i , item 1a - “ risk factors ” in this annual report on form 10-k. readers are cautioned not to place undue reliance on these forward-looking statements , which reflect management 's opinions only as of the date hereof . we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements , except as required by law . readers should carefully review the risk factors and the risk factors set forth in other documents we file from time to time with the sec . overview j2 global , inc. , together with its subsidiaries ( “ j2 global ” , “ our ” , “ us ” or “ we ” ) , is a global provider of internet services . through our business cloud services division , we provide cloud services to businesses of all sizes , from individuals to enterprises , and license our intellectual property ( `` ip '' ) to third parties . our digital media division operates a portfolio of web properties providing technology , gaming and lifestyle content , and an innovative data-driven platform to connect advertisers with visitors to those properties and to visitors of third party websites that are part of the division 's advertising network . our business cloud services division generates revenues primarily from customer subscription and usage fees and from ip licensing fees . our digital media division generates revenues primarily from advertising and ip licensing fees . in addition to growing our business organically , we use acquisitions to grow our customer bases , expand and diversify our service offerings , enhance our technology and acquire skilled personnel . on november 9 , 2012 , we acquired ziff davis , inc. ( “ ziff davis ” ) , a company with extensive digital content holdings within the technology vertical . this acquisition expanded our operations into the digital media market and resulted in the creation of our digital media division . through a combination of organic growth and 2013 acquisitions , including most notably the february 1 , 2013 acquisition of ign entertainment , inc. , we have grown this division into the leading u.s. digital media company in terms of page views in the technology , gaming and men 's lifestyle verticals . for additional information on our acquisitions , see note 3 - business acquisitions of the notes to consolidated financial statements included elsewhere in this annual report on form 10-k. our consolidated revenues are currently generated from three basic business models , each with different financial profiles and variability in revenues . our business cloud services division is driven primarily by subscription revenues that are relatively higher margin and stable and predictable from quarter-to-quarter with some seasonal weakness in the fourth quarter . the business cloud services division also includes the results of our ip licensing business , which can vary dramatically in both revenues and profitability from period-to-period . our digital media division is driven primarily by advertising revenues , has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter . we continue to pursue additional acquisitions , which may include companies operating under business models that differ from those we operate under today . such acquisitions could impact our consolidated profit margins and the variability of our revenues . j2 global was founded in 1995 and is a delaware corporation . we manage our operations through two business segments : business cloud services and digital media . information regarding revenue and operating income attributable to each of our reportable segments is included within note 16 - segment information of the notes to consolidated financial statements included elsewhere in this annual report on form 10-k , which is incorporated herein by reference . - 30 - the following table sets forth certain operating metrics for our business cloud services segment as of or for the years ended december 31 , 2013 , 2012 and 2011 ( in thousands , except for percentages ) : replace_table_token_7_th replace_table_token_8_th ( 1 ) the amounts above reflect the change in estimate relating to the remaining service obligations to annual efax® subscribers ( see note 2 – basis of presentation and summary of significant accounting policies ) , which reduced subscriber revenues for the year ended ended december 31 , 2011 by $ 10.3 million . our digital media web properties attracted 2.2 billion and 345 million visits , and 7.3 billion and 1.1 billion page views , for 2013 and 2012 , respectively . critical accounting policies and estimates in the ordinary course of business , we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with u.s. generally accepted accounting principles ( “ gaap ” ) . actual results could differ significantly from those estimates under different assumptions and conditions . we believe that the following discussion addresses our most critical accounting policies , which are those that are most important to the portrayal of our financial condition and results and require management 's most difficult , subjective and complex judgments , often as a result of the need to make estimates about the effect of matters that are inherently uncertain . revenues . business cloud services the company 's business cloud services revenues substantially consist of monthly recurring subscription and usage-based fees , which are primarily paid in advance by credit card . story_separator_special_tag 360 , property , plant , and equipment ( “ asc 360 ” ) , which addresses financial accounting and reporting for the impairment or disposal of long-lived assets . we assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors we consider important which could individually or in combination trigger an impairment review include the following : - 32 - . significant underperformance relative to expected historical or projected future operating results ; . significant changes in the manner of our use of the acquired assets or the strategy for our overall business ; . significant negative industry or economic trends ; . significant decline in our stock price for a sustained period ; and . our market capitalization relative to net book value . if we determined that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment , we would record an impairment equal to the excess of the carrying amount of the asset over its estimated fair value . we have assessed whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable and noted no indicators of potential impairment for the years ended december 31 , 2013 , 2012 and 2011 , respectively . goodwill and purchased intangible assets . we evaluate our goodwill and intangible assets for impairment pursuant to fasb asc topic no . 350 , intangibles - goodwill and other ( “ asc 350 ” ) , which provides that goodwill and other intangible assets with indefinite lives are not amortized but tested for impairment annually or more frequently if circumstances indicate potential impairment . in connection with the annual impairment test for goodwill , we have the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount . if we determine that it was more likely than not that the fair value of the reporting unit is less than its carrying amount , then we perform the impairment test upon goodwill . in connection with the annual impairment test for intangible assets , we have the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of is less than its carrying amount , then we perform the impairment test upon intangible assets . the impairment test is comprised of two steps : ( 1 ) a reporting unit 's fair value is compared to its carrying value ; if the fair value is less than its carrying value , impairment is indicated ; and ( 2 ) if impairment is indicated in the first step , it is measured by comparing the implied fair value of goodwill and intangible assets to their carrying value at the reporting unit level . we completed the required impairment review at the end of 2013 , 2012 and 2011 and noted no impairment . consequently , no impairment charges were recorded . income taxes . we account for income taxes in accordance with fasb asc topic no . 740 , income taxes ( “ asc 740 ” ) , which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities . asc 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized . our valuation allowance is reviewed quarterly based upon the facts and circumstances known at the time . in assessing this valuation allowance , we review historical and future expected operating results and other factors to determine whether it is more likely than not that deferred tax assets are realizable . income tax contingencies . we calculate current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the following year . adjustments based on filed returns are recorded when identified in the subsequent year . asc 740 provides guidance on the minimum threshold that an uncertain income tax position is required to meet before it can be recognized in the financial statements and applies to all tax positions taken by a company . asc 740 contains a two-step approach to recognizing and measuring uncertain income tax positions . the first step is to evaluate the income tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit , including resolution of related appeals or litigation processes , if any . the second step is to measure the tax benefit as the largest amount that is more than 50 % likely of being realized upon settlement . if it is not more likely than not that the benefit will be sustained on its technical merits , no benefit will be recorded . uncertain income tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold . we recognize accrued interest and penalties related to uncertain income tax positions in income tax expense on our consolidated statement of income . on a quarterly basis , we evaluate uncertain income tax positions and establish or release reserves as appropriate under gaap . as a multinational corporation , we are subject to taxation in many jurisdictions , and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions .
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segment results our business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance . our reportable business segments are : ( i ) business cloud services ; and ( ii ) digital media . we evaluate the performance of our operating segments based on segment revenues , including both external and intersegment net sales , and segment operating income . we account for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments . identifiable assets by segment are those assets used in the respective reportable segment 's operations . corporate assets consist of cash and cash equivalents , deferred income taxes and certain other assets . all significant intersegment amounts are eliminated to arrive at our consolidated financial results . - 39 - business cloud services prior to the acquisition of ziff davis , inc , on november 9 , 2012 , we operated as one segment which has been named business cloud services . the following segment results are presented for fiscal year 2013 and 2012 ( in thousands ) : replace_table_token_16_th segment net sales of $ 390.1 million in 2013 increased $ 28.4 million , or 7.9 % , from 2012 primarily due to an increase in our subscriber base and an increase in patent and technology related licensing revenues . segment gross profit of $ 320.2 million in 2013 increased $ 23.6 million from 2012 primarily due to an increase in net sales between the periods . the gross profit as a percentage of revenues for 2013 was consistent with the prior comparable period .
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the financial measures included in the discussion that follows are presented in accordance with u.s. generally accepted accounting principles ( `` gaap '' ) , except as noted . we present certain financial measures on an `` adjusted , '' or `` non-gaap , '' basis because we believe such measures , when viewed together with financial results computed in accordance with gaap , provide a more complete understanding of the factors and trends affecting our historical financial performance . for each non-gaap financial measure , including adjusted diluted earnings per share ( `` eps '' ) , adjusted ebitda , adjusted ebitda margin , and adjusted effective tax rate , we present a reconciliation to the most directly comparable financial measure calculated in accordance with gaap . these reconciliations and explanations regarding the use of these measures are presented beginning on page 31. in march 2020 , the world health organization declared the novel strain of coronavirus , covid-19 , a global pandemic and recommended containment and mitigation measures worldwide . in response to covid-19 , we implemented certain health and safety policies to help keep our employees , contractors , customers , and communities safe while continuing to run our facilities , which generally have been considered `` essential '' by local governments and public health authorities . in compliance with government protocols , our non-essential employees were instructed to work from home until government mandated restrictions allow for a return to the workplace . those working and visiting our sites are required to follow appropriate procedures , including completion of trainings and performance of self- and on-site screenings , as well as adhere to our personal protective equipment , social distancing , and personal hygiene protocols . 21 table of contents business overview air products and chemicals , inc. is a world-leading industrial gases company that has been in operation for 80 years . focused on serving energy , environment and emerging markets , we provide essential industrial gases , related equipment and applications expertise to customers in dozens of industries , including refining , chemical , metals , electronics , manufacturing , and food and beverage . air products is also the global leader in the supply of liquefied natural gas ( `` lng '' ) process technology and equipment . we develop , engineer , build , own and operate some of the world 's largest industrial gas projects , including gasification projects that sustainably convert abundant natural resources into syngas for the production of high-value power , fuels and chemicals . with operations in 50 countries , in fiscal year 2020 we had sales of $ 8.9 billion and assets of $ 25.2 billion . approximately 19,275 passionate , talented and committed full- and part-time employees from diverse backgrounds are driven by air products ' higher purpose to create innovative solutions that benefit the environment , enhance sustainability and address the challenges facing customers , communities , and the world . as of 30 september 2020 , our operations were organized into five reportable business segments : industrial gases – americas ; industrial gases – emea ( europe , middle east , and africa ) ; industrial gases – asia ; industrial gases – global ; and corporate and other this management 's discussion and analysis discusses our results based on these operations . refer to note 25 , business segment and geographic information , to the consolidated financial statements for additional details on our reportable business segments . 2020 in summary in fiscal year 2020 , our number one priority was the safety and well-being of our people . since the beginning of the covid-19 pandemic , we have kept our global plants running , supplied critical products , and supported our local communities during this time of need . we continued to win significant new growth projects around the world and serve our customers , delivering stable results despite the significant health crisis facing the world . we also remained focused on sustainability and our commitment to advancing diversity and inclusion . we set new goals that are aligned with air products ' business strategy and higher purpose to create innovative solutions that benefit the environment , enhance sustainability , and address the challenges facing customers , communities , and the world . fiscal year 2020 results and highlights are summarized below : sales of $ 8,856.3 decreased 1 % , or $ 62.6 , as 3 % higher pricing and 2 % favorable volumes were more than offset by 4 % lower energy and natural gas cost pass-through to customers , 1 % unfavorable currency , and the 1 % impact of a contract modification to a tolling arrangement in india . we estimate that covid-19 negatively impacted our overall sales by approximately 4 % , primarily driven by lower volumes in our merchant business in the regional industrial gas segments . operating income of $ 2,237.6 increased 4 % , or $ 93.2 , and operating margin of 25.3 % increased 130 bp . net income of $ 1,931.1 increased 7 % , or $ 121.7 , and net income margin of 21.8 % increased 150 bp . adjusted ebitda of $ 3,619.8 increased 4 % , or $ 151.8 , and adjusted ebitda margin of 40.9 % increased 200 bp . diluted eps of $ 8.55 increased 8 % , or $ 0.61 , and adjusted diluted eps of $ 8.38 increased 2 % , or $ 0.17. we estimate that covid-19 negatively impacted our fiscal year 2020 eps by approximately $ 0.60- $ 0.65 per share . a summary table of changes in diluted eps is presented below . 22 table of contents fiscal year 2020 results and highlights ( continued ) : we increased our quarterly dividend by over 15 % from $ 1.16 to $ 1.34 per share , representing the largest dividend increase in our 80-year history . this is the 38 th consecutive year that we have increased our quarterly dividend payment . story_separator_special_tag discontinued operations during the second quarter of fiscal year 2020 , we recorded a pre-tax loss from discontinued operations of $ 19.0 ( $ 14.3 after-tax , or $ 0.06 per share ) to increase our liability for retained environmental obligations associated with the sale of our former amines business in september 2006. refer to the pace discussion within note 17 , commitments and contingencies , to the consolidated financial statements for additional information . net income and net income margin net income of $ 1,931.1 increased 7 % , or $ 121.7 , primarily due to higher pricing and income from the sale of property at our current corporate headquarters . in addition , the prior year was negatively impacted by a facility closure , cost reduction actions , and the u.s. tax cuts and jobs act . these factors were partially offset by higher costs , including the after-tax loss from discontinued operations , unfavorable volume mix , and a gain on the exchange of two equity affiliates in the prior year . net income margin of 21.8 % increased 150 bp , primarily due to the factors noted above as well as lower energy and natural gas cost pass-through to customers . adjusted ebitda and adjusted ebitda margin adjusted ebitda of $ 3,619.8 increased 4 % , or $ 151.8 , primarily due to higher pricing , partially offset by higher operating costs . adjusted ebitda margin of 40.9 % increased 200 bp , primarily due to the higher pricing and lower energy and natural gas cost pass-through to customers , partially offset by unfavorable volume mix and higher operating costs . effective tax rate the effective tax rate equals the income tax provision divided by income from continuing operations before taxes . the effective tax rate was 19.7 % and 21.0 % for the fiscal years ended 30 september 2020 and 2019 , respectively . the 2019 tax rate reflected a discrete net income tax expense of $ 43.8 related to impacts from the u.s. tax cuts and jobs act ( the “ tax act ” ) . the net expense included the reversal of a non-recurring $ 56.2 ( $ 0.26 per share ) benefit recorded in 2018 related to the u.s. taxation of deemed foreign dividends . this was partially offset by a benefit of $ 12.4 ( $ 0.06 per share ) to finalize our estimates of the impacts of the tax act and reduce the total expected costs of the deemed repatriation tax . in addition , the net expense from the tax act was partially offset by benefits from changes in valuation allowance recorded at various entities in 2019. the lower current year rate reflects favorable impacts from higher benefits on the revaluation of deferred tax accounts due to enacted changes in foreign tax law , changes in the tax profile of u.s. entities in various state jurisdictions , and higher excess tax benefits on share-based compensation . these items were partially offset by the enactment of the india finance act 2020 ( the `` india finance act '' ) , which increased income tax expense by $ 20.3. the enactment also increased equity affiliates ' income by $ 33.8 for changes in the future tax costs of repatriated earnings . the overall impact to net income resulting from the india finance act was a benefit of $ 13.5 ( $ 0.06 per share ) . the adjusted effective tax rate was 19.1 % and 19.4 % for the fiscal years ended 30 september 2020 and 2019 , respectively . the lower current year rate reflects favorable impacts from higher benefits on the revaluation of deferred tax accounts due to enacted changes in foreign tax law , changes in the tax profile of u.s. entities in various state jurisdictions , and higher excess tax benefits on share-based compensation . these items were partially offset by benefits from changes in valuation allowances recorded at various entities in 2019. refer to note 22 , income taxes , to the consolidated financial statements for additional information . 27 table of contents segment analysis industrial gases – americas replace_table_token_6_th sales % change from prior year volume ( 1 ) % price 3 % energy and natural gas cost pass-through ( 6 ) % currency ( 2 ) % total industrial gases – americas sales change ( 6 ) % sales of $ 3,630.7 decreased 6 % , or $ 242.8 , as lower energy and natural gas cost pass-through to customers of 6 % , a negative impact from currency of 2 % , and lower volumes of 1 % were partially offset by positive pricing of 3 % . the pricing improvement was driven by our merchant business . lower volumes , particularly in our merchant business , were primarily driven by covid-19 , which began impacting this segment at the end of march 2020 and continued through the end of the fiscal year . the negative impact of covid-19 was partially offset by positive contributions from the commencement of a long-term hydrogen supply agreement with pbf energy inc. from assets we acquired in april . the unfavorable currency impact was driven by the chilean peso . operating income of $ 1,012.4 increased 1 % , or $ 14.7 , due to higher pricing , net of power and fuel costs , of $ 95 , partially offset by higher net operating costs of $ 40 , lower volumes of $ 33 , and unfavorable currency impacts of $ 7. operating margin of 27.9 % increased 210 bp , primarily due to positive pricing and lower energy and natural gas cost pass-through to customers , partially offset by lower volumes and unfavorable net operating costs . equity affiliates ' income of $ 84.3 decreased 1 % , or $ 0.5 .
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results of operations discussion of consolidated results replace_table_token_4_th 24 table of contents sales sales % change from prior year volume 2 % price 3 % energy and natural gas cost pass-through ( 4 ) % currency ( 1 ) % other ( a ) ( 1 ) % total consolidated sales change ( 1 ) % ( a ) includes the impact from the modification of a hydrogen supply contract to a tolling arrangement in india in december 2018 ( the `` india contract modification '' ) . sales of $ 8,856.3 decreased 1 % , or $ 62.6 , as higher pricing of 3 % and favorable volumes of 2 % were more than offset by lower energy and natural gas cost pass-through to customers of 4 % , unfavorable currency of 1 % , and the impact from the india contract modification of 1 % . the pricing improvement was attributable to our merchant business across the regional segments . the volume growth exceeded the negative impacts from covid-19 and was primarily driven by acquisitions , new plants , and higher sale of equipment project activity . we estimate that covid-19 negatively impacted overall sales by approximately 4 % , primarily driven by lower volumes in our merchant business across the regional segments as our onsite business remained stable . unfavorable currency impacts were driven by the chilean peso , chinese renminbi , euro , and south korean won . cost of sales and gross margin cost of sales of $ 5,858.1 decreased 2 % , or $ 146.4 , from total cost of sales of $ 6,004.5 in the prior year , which included the facility closure further discussed below .
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demand for air travel began to weaken at the end of february 2020. the pace of decline accelerated throughout march into april 2020 and demand remained depressed throughout the rest of 2020. this decline in demand has had a material adverse impact on our operating revenues and financial position . our operating revenues for the year ended december 31 , 2020 declined by 63.5 % year-over-year . although demand began to improve as the year progressed , it remained significantly lower than in prior years . the exact timing and pace of the recovery is uncertain given the significant impact of the pandemic on the overall u.s. and global economy . some states have experienced a resurgence of covid-19 cases after reopening and as a result , certain other states have implemented travel restrictions or advisories for travelers from such states . we have also seen a similar resurgence of covid-19 cases in other countries and we expect to continue to see fluctuations in the numbers of cases , which we believe will result in actions by governmental authorities restricting activities . we expect the demand environment to remain depressed until the majority of the u.s. population is vaccinated against covid-19 and the medical community lifts the current physical distancing guidelines . our response to the pandemic and the measures we take to secure additional liquidity may be modified as we have more clarity on the timing of demand recovery . in response to the covid-19 pandemic , since march 2020 we have implemented the following measures to focus on the safety of our customers , our crewmembers , and our business . customers and crewmembers the safety of our customers and crewmembers continues to be a priority . as the covid-19 pandemic has developed , we have taken steps to promote physical distancing and implemented new procedures that reflect the recommendations of health experts , including the following : introduced `` safety from the ground up '' , an initiative with a multi-layer approach that encompasses enhanced safety and cleaning measures on our flights , at our airports , and in our offices ; instituted temperature checks for our customer-facing and support-center crewmembers ; updated our sick leave policy to provide up to 14 days of paid sick leave for crewmembers who were diagnosed with covid-19 or were required to quarantine ; partnered with northwell direct to provide a comprehensive set of covid-19 services and programs to support our crewmembers ; implemented a framework for internal contact tracing , crewmember notification , and a return to work clearance process for all crewmembers , wherever they may be located ; required face coverings for all crewmembers while boarding , in flight , and when physical distancing can not be maintained ; administered more frequent disinfecting of common surfaces and areas with high touchpoints in our facilities ; enhanced daily and overnight cleaning of our aircraft and all facilities , using electrostatic spraying of disinfectant in the cabins of aircraft parked overnight at selected focus cities ; required customers to wear face coverings during check-in , boarding , and inflight ; limited the number of seats sold on most flights through january 7 , 2021 ; suspended group boarding and implemented a back-to-front boarding process to minimize passing in the aisle ; eliminated layovers for crewmembers in new york city and worked with crew transportation companies to ensure physical distancing ; implemented jump seat buffers on our flights to further promote physical distancing measures ; ( 1 ) refer to our `` regulation g reconciliation of non-gaap financial measures '' at the end of this section for more information on this non-gaap measure . 36 provided enhanced flexibility to our customers by waiving change and cancel fees for customers with existing bookings made through march 31 , 2021 , while also extending the expiration date of travel credits issued between february 27 , 2020 and june 30 , 2020 for flight purchases to 24 months ; and announced our partnership with vault health to provide discounted at-home covid-19 testing to customers with pending travel plans . our business the covid-19 pandemic drove a significant decline in demand beginning in the second half of march 2020. we have significantly reduced our capacity to a level that maintains essential services to align with demand . our capacity for the year ended december 31 , 2020 declined by 48.8 % year-over-year . for the first quarter of 2021 , we expect capacity to be down by at least 40 % , as compared to the first quarter of 2019. as a result of the significant reduction in demand expectations and lower capacity , we have temporarily parked a portion of our fleet . the reductions in demand and in our capacity have resulted in a significant reduction to our revenue . as a result , we have , and will continue to implement cost saving initiatives to reduce our overall level of cash spend . some of the initiatives we have undertaken include : adjustments in flying capacity to align with the expected demand . temporary consolidations of our operations in certain cities that contain multiple airport locations . renegotiated service rates with business partners and extended payment terms . instituted a company-wide hiring freeze . implemented salary reductions for a portion of our crewmembers , including our officers throughout 2020 and into 2021. offered crewmembers voluntary time off and separation programs , with most departures for the separation program occurring during the third quarter of 2020. w e believe the unprecedented impact of covid-19 on the demand for air travel and the corresponding decline in revenue will continue to have an adverse impact on our results of operations , operating cash flow , and financial condition . given this situation , we have taken actions to increase liquidity , strengthen our financial position , and conserve cash . story_separator_special_tag in september 2020 , we announced plans to launch 24 new routes aimed at immediately capturing traffic on a variety of new , nonstop routes as demand increases . these routes will introduce new non-stop destinations from our focus cities and expand our mint ® service in newark and los angeles . in december 2020 , we announced plans to introduce service in four new destinations as part of a broader plan to add 24 new nonstop routes in the first half of 2021. these new destinations include miami and key west in florida ; guatemala city , guatemala ; and los cabos , mexico . the new services are aimed at capturing traffic where we anticipate customer demand . story_separator_special_tag information on this non-gaap measure . 40 operating expenses replace_table_token_10_th aircraft fuel and related taxes aircraft fuel and related taxes represented 13.5 % of our total operating expenses in 2020 compared to 25.3 % in 2019. the average fuel price decreased 26.8 % in 2020 to $ 1.53 per gallon . our fuel consumption decreased by 53.4 % , or 473 million gallons , due to capacity reductions in response to lower demand as a result of the covid-19 pandemic . we recognized fuel hedge losses of $ 7 million and $ 5 million , in 2020 and 2019 , respectively . these losses were recorded in aircraft fuel and related taxes . we are unable to predict the potential loss from hedge accounting , which is determined on a derivative-by-derivative basis , due to the volatility in the forward markets for these commodities . we have no outstanding fuel hedges as of december 31 , 2020. salaries , wages and benefits salaries , wages and benefits decreased $ 288 million , or 12.4 % in 2020. this decrease was driven primarily by the actions taken as a result of decreased demand for air travel due to the covid-19 pandemic . beginning in march 2020 , we instituted a company-wide hiring freeze , implemented salary reductions for a portion of our crewmembers , including officers , offered voluntary time off programs to our crewmembers , and reduced work hours for all other management workgroups . in june 2020 , we announced voluntary separation programs to our crewmembers , with most departures occurring in the third quarter . we had approximately 20,000 crewmembers as of december 31 , 2020 as compared to approximately 22,500 crewmembers at december 31 , 2019. during 2020 , the average number of full-time equivalent crewmembers decreased by 16.6 % and the average tenure of our crewmembers was 8 years . landing fees and other rents landing fees and other rents include landing fees , which are at premium rates in the heavily trafficked northeast corridor of the u.s. through which a large number of our flights operate . other rents primarily consist of rent for airports in our bluecities . landing fees and other rents decreased $ 116 million , or 24.4 % , in 2020 primarily due to capacity reductions in response to the significant decline in demand beginning in the second half of march 2020 amid the covid-19 pandemic . depreciation and amortization depreciation and amortization primarily include depreciation for our owned and finance leased aircraft , engines , and inflight entertainment systems . depreciation and amortization increased $ 10 million , or 1.8 % , primarily driven by a 3.4 % increase in the average number of aircraft operating in 2020 compared to the same period in 2019. we placed nine airbus a321neo aircraft into service and bought out the lease of one airbus a321 aircraft in 2020. in addition , we also completed the cabin restyle on 21 airbus a320 aircraft . maintenance , materials and repairs maintenance , materials and repairs are generally expensed when incurred unless covered by a long-term flight hour services contract . the average age of our aircraft in 2020 was 11.3 years which is relatively young compared to our competitors . however , as our fleet ages our maintenance costs will increase significantly , both on an absolute basis and as a percentage of our unit costs , as older aircraft require additional , more expensive repairs over time . we had an average of 8.6 additional total operating aircraft in 2020 compared to 2019 . ( 1 ) refer to our `` regulation g reconciliation of non-gaap financial measures '' at the end of this section for more information on this non-gaap measure . 41 in 2020 , maintenance , materials and repairs decreased by $ 178 million , or 28.8 % compared to 2019. the decrease is primarily driven by the covid-19 related reduction in flying and timing of heavy maintenance visits and engine maintenance . other operating expenses other operating expenses consist of the following categories : outside services ( including expenses related to fueling , ground handling , skycap , security , and janitorial services ) , insurance , personnel expenses , professional fees , onboard supplies , shop and office supplies , bad debts , communication costs , and taxes other than payroll and fuel taxes . in 2020 , other operating expenses decreased by $ 344 million , or 31.0 % , compared to 2019 , due to capacity reductions in response to the significant decline in demand beginning in the second half of march 2020 coupled with the benefits from cost saving initiatives implemented amid the covid-19 pandemic . special items in 2020 , special items included the following : contra-expense of $ 685 million , which represents the amount of cares act payroll support grants utilized during the period . contra-expense of $ 36 million related to the recognition of employee retention credits provided by the cares act . impairment charges of $ 273 million on our embraer e190 fleet . losses of $ 106 million related to sale-leaseback transactions . one-time costs of $ 59 million , consisting of severance and health benefits , in connection with our voluntary separation programs .
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2020 results for the year end december 31 , 2020 : system capacity decreased by 48.8 % year over year . we generated $ 3.0 billion in operating revenue , a decrease of $ 5.1 billion compared to 2019 , primarily due to a 66.6 % decrease in revenue passengers . operating revenue per available seat mile ( rasm ) decreased by 28.7 % to 9.04 cents . operating expense decreased by 36.0 % to $ 4.7 billion . ( 1 ) refer to our `` regulation g reconciliation of non-gaap financial measures '' at the end of this section for more information on this non-gaap measure . 38 operating expense per available seat mile ( casm ) increased by 25.1 % to 14.29 cents . our 2020 and 2019 results included the effects of special items . excluding fuel and related taxes , special items , as well as operating expenses related to our non-airline businesses , our operating expense ( 1 ) decreased by 20.4 % to $ 4.3 billion . excluding fuel and related taxes , special items , as well as operating expenses related to our non-airline businesses , our cost per available seat mile ( casm ex-fuel ) ( 1 ) increased by 55.4 % to 13.12 cents . our operating margin was ( 58.0 ) % in 2020 compared to 9.9 % in 2019. excluding special items , our adjusted operating margin ( 1 ) were ( 67.5 ) % and 10.1 % for full year 2020 and 2019 , respectively .
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the grant-date fair value of the awards is then recognized over the requisite service period , which represents the derived service period for the awards as determined by the monte carlo simulation . 112 the company uses the black-scholes option pricing model to value its stock option awards without market conditions , which require the company to make certain assumptions regarding story_separator_special_tag f financial condition and results of operations you should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this report . some of the information contained in this discussion and analysis or set forth elsewhere in this report , including information with respect to our plans and strategy for our business and related financing , includes forward-looking statements that involve risks and uncertainties . you should read the “ risk factors ” section in part 1—item 1a of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . overview we are a biopharmaceutical company dedicated to advancing a broad portfolio of targeted medicines for oncology and other areas of unmet medical need . our strategy is to retain north american rights to our oncology portfolio while securing partners in development and commercialization outside of north america . we are working to develop and commercialize our lead candidate tivozanib in north america as a treatment for renal cell carcinoma , or rcc . we have entered into partnerships to fund the development and commercialization of our preclinical and clinical stage assets , including av-203 and ficlatuzumab in oncology and av-380 in cachexia . tivozanib ( fotivda® ) , which we have outlicensed outside of north america , is approved in the european union , as well as norway and iceland , for the first-line treatment of adult patients with advanced rcc , or arcc , and for adult patients who are vascular endothelial growth factor receptor , or vegfr , and mtor pathway inhibitor-naïve following disease progression after one prior treatment with cytokine therapy for arcc . we are currently seeking a partner to develop our av-353 platform , a preclinical asset , worldwide for the potential treatment of pulmonary arterial hypertension , or pah . going concern we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern . to continue as a going concern , we must secure additional funding to support our current operating plan . as of december 31 , 2017 , we had approximately $ 33.5 million in existing cash , cash equivalents and marketable securities . in the first quarter of 2018 to-date , we have raised an additional approximate $ 1.9 million in net funding , including approximately $ 0.5 million received in january 2018 related to the exercise of 0.5 million pipe warrants and $ 1.4 million in net partnership-related funding in connection with the $ 2.0 million milestone payment by eusa for the february 2018 reimbursement approval by the nice , for rcc in the uk that was received in march 2018 , net of the corresponding 30 % sub-license fee due to khk . based on these available cash resources , we do not have sufficient cash on hand to support current operations for at least the next twelve months from the date of filing this annual report on form 10-k. this condition raises substantial doubt about our ability to continue as a going concern . we expect that , in order to obtain additional funding , we will need to receive additional milestone payments from our partners and / or complete public or private financings of debt or equity . we may also seek to procure additional funds through future arrangements with collaborators , licensees or other third parties , and these arrangements would generally require us to relinquish or encumber rights to some of our technologies or drug candidates . moreover , we may not be able receive milestone payments or complete financings or enter into such arrangements on acceptable terms , if at all . for more information , refer to “ —liquidity and capital resources—operating capital requirements and going concern ” below and note 1 to our consolidated financial statements included elsewhere in this annual report on form 10-k. recent developments in december 2017 , we entered into a binding memorandum of understanding with class representatives bob levine and william windham , or plaintiffs , regarding the settlement of a securities class action lawsuit , or class action , filed in 2013 and pending in the united states district court for the district of massachusetts against us and certain of our former officers ( tuan ha-ngoc , david johnston , and william slichenmyer , who are collectively referred to as the individual defendants ) , in re aveo pharmaceuticals , inc. securities litigation et al . , no . 1:13-cv-11157-djc . as previously disclosed , the class action was brought on behalf of stockholders who purchased our common stock between may 16 , 2012 and may 1 , 2013. in january 2018 , we entered into a stipulation of settlement with the plaintiffs that was preliminarily approved by the district court in february 2018. under the terms of the mou and the stipulation , we agreed to cause certain of our and the individual defendants ' insurance carriers to provide the class with a cash payment of $ 15.0 million , which includes the cash amount of any attorneys ' fees or litigation expenses that the district court may award plaintiff 's counsel and costs plaintiffs incur in administering and providing notice of the settlement . story_separator_special_tag eusa in december 2015 , we entered into a license agreement with eusa under which we granted to eusa the exclusive , sublicensable right to develop , manufacture and commercialize tivozanib in the territories of europe ( excluding russia , ukraine and the commonwealth of independent states ) , latin america ( excluding mexico ) , africa , australasia and new zealand for all diseases and conditions in humans , excluding non-oncologic eye conditions . eusa is obligated to use commercially reasonable efforts to seek regulatory approval for and commercialize tivozanib throughout its licensed territories for rcc . with the exception of certain support to be provided by us prior to the grant of marketing approval by the ema , eusa has responsibility for all activities and costs associated with the further development , manufacture , regulatory filings and commercialization of tivozanib in its licensed territories . 74 under the license agreement , eusa made research and development reimbursement payments to us of $ 2.5 million upon the execution of the license agreement in 2015 and $ 4.0 million in september 2017 upon its receipt of marketing approval from the ema for tivozanib ( fotivda ) for the treatment of rcc . in september 2017 , eusa elected to opt-in to co-develop the tinivo trial . as a result of eusa 's exercise of its opt-in right , it became an active participant in the ongoing conduct of the tinivo trial and is able to utilize the resulting data from the tinivo trial for regulatory and commercial purposes in its territories . eusa made an additional research and development reimbursement payment to us of $ 2.0 million upon its exercise of its opt-in right . this payment was received in october 2017 , in advance of the completion of the tinivo trial , and represents eusa 's approximate 50 % share of the total estimated costs of the tinivo trial . we are also eligible to receive an additional research and development reimbursement payment from eusa of fifty percent ( 50 % ) of our total costs for our tivo-3 trial , up to $ 20.0 million , if eusa elects to opt-in to that study . we are entitled to receive milestone payments of $ 2.0 million per country upon reimbursement approval , if any , for rcc in each of france , germany , italy , spain and the united kingdom , and an additional $ 2.0 million for the grant of marketing approval , if any , in three of the following five countries : argentina , australia , brazil , south africa and venezuela . in february 2018 , eusa obtained reimbursement approval from the nice in the uk in first line rcc . accordingly , we earned a $ 2.0 million milestone payment that was received from eusa in march 2018. we are also eligible to receive a payment of $ 2.0 million in connection with a filing by eusa with the ema for marketing approval , if any , for tivozanib for the treatment of each of up to three additional indications and $ 5.0 million per indication in connection with the ema 's grant of marketing approval for each of up to three additional indications , as well as up to $ 335.0 million upon eusa 's achievement of certain sales thresholds . upon commercialization , we are eligible to receive tiered double-digit royalties on net sales , if any , of licensed products in its licensed territories ranging from a low double digit up to mid-twenty percent depending on the level of annual net sales . in november 2017 , we began earning sales royalties upon eusa 's commencement of the first commercial launch of tivozanib ( fotivda ) with the initiation of product sales in germany . the research and development reimbursement payments under the eusa license agreement are not subject to the 30 % sublicensing payment to khk , subject to certain limitations . we would , however , owe khk 30 % of other , non-research and development payments we may receive from eusa pursuant to our license agreement , including eu reimbursement approval milestones in up to five specified eu countries , eu marketing approvals for up to three additional indications beyond rcc , marketing approvals in up to three specified licensed territories outside of the eu , sales-based milestones and royalties , as set forth above . the $ 2.0 million milestone we earned in february 2018 upon eusa 's reimbursement approval from the nice in the uk in first line rcc is subject to the 30 % khk sub-license fee , or $ 0.6 million . the term of the license agreement commenced on the effective date and will continue on a product-by-product and country-by-country basis until the later to occur of ( a ) the expiration of the last valid patent claim for such product in such country , ( b ) the expiration of market or regulatory data exclusivity for such product in such country or ( c ) the 10 th anniversary of the effective date . either party may terminate the license agreement in the event of the bankruptcy of the other party or a material breach by the other party that remains uncured , following receipt of written notice of such breach , for a period of ( a ) thirty ( 30 ) days in the case of breach for nonpayment of any amount due under the license agreement , and ( b ) ninety ( 90 ) days in the case of any other material breach . eusa may terminate the license agreement at any time upon one hundred eighty ( 180 ) days ' prior written notice . in addition , we may terminate the license agreement upon thirty ( 30 ) days ' prior written notice if eusa challenges any of the patent rights licensed under the license agreement .
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results of operations comparison of years ended december 31 , 2017 , 2016 and 2015 revenues replace_table_token_7_th in 2017 as compared to 2016 , revenue increased by $ 5.1 million , principally due to a $ 4.0 million research and development reimbursement payment by eusa upon the ema approval of tivozanib ( fotivda ) in rcc and a $ 1.8 million milestone payment by novartis related to av-380 , partially offset by $ 0.8 million related to the acceleration of deferred revenue that was recognized upon the effective termination of our licensing agreement with pharmstandard in september 2016. in 2016 as compared to 2015 , revenue decreased by $ 16.5 million principally due to $ 18.5 million in revenue that was recognized in 2015 related to novartis for the $ 15.0 million upfront payment received in connection with our licensing agreement entered into in august 2015 and $ 3.5 million for the purchase of our inventory of clinical material in the fourth quarter of 2015. this decrease was partially offset by the $ 1.0 million upfront payment received in connection with our collaboration and license agreement with canbridge entered into in march 2016 and $ 0.8 million in the acceleration of deferred revenue that was recognized upon the effective termination of our licensing agreement with pharmstandard in september 2016 that otherwise would have been recognized over the performance period through april 2022. research and development expenses replace_table_token_8_th in 2017 as compared to 2016 , research and development expenses increased by $ 1.5 million principally due to a $ 0.4 million net increase in tivozanib expenses , primarily related to the advancement of the tivo-3 and tinivo trials , and a $ 1.4 million increase in 87 av-380 expense , primarily related to the net increase in milestone payments due to st. vincent 's under our in-licensing agreement . these increases were partially offset by $ 0.2
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the earn-out payments are to be paid in a combination of 70 % cash and 30 % of the company 's common stock , up to an aggregate maximum amount equal to $ 12.0 million in total . the specific number of shares of the company 's common stock to be included in each earn-out payment shall be computed as the average of the closing sales price of the company 's common stock on the new york stock exchange for the 10 trading days immediately prior to the issuance of the shares . story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and related notes . see cautionary note on forward-looking statements and part 1a . risk factors included in this annual report for a description of important factors that could cause actual results to differ from expected results . company overview we are a services-based company focused on total water solutions for shale or unconventional oil and gas exploration and production . we operate in one business segment , water solutions for energy development , which is branded hwr , and includes our water delivery and disposal , trucking , fluids handling , treatment and temporary and permanent pipeline transport facilities and water infrastructure services for oil and gas exploration and production companies . our strategy is to provide an integrated and efficient complete water solution to our customers through a full suite of services which we have built and will continue to build through organic growth and acquisitions . we currently operate multi-modal water disposal , treatment , trucking and pipeline transportation operations in select shale areas in the united states including the marcellus , utica , eagle ford , haynesville , barnett and tuscaloosa marine shale areas . we are currently expanding our business and operations into other hydrocarbon-rich shale plays . we serve customers seeking fresh water acquisition , temporary water transmission and storage , transportation , treatment or disposal of fresh water and complex water flows , such as flowback and produced brine water , in connection with shale oil and gas hydraulic fracturing drilling , or hydrofracturing operations . we also transport fresh water for production and provide services for site preparation , water pit excavations and remediation . 2011 operational developments in addition to the acquisitions completed during the second quarter of 2011 , as described in note 3 of notes to consolidated financial statements , notable achievements during 2011 included : disposition of our bottled water business . through our previously wholly owned subsidiary , china water , we produced bottled water products at seven bottled water facilities in the people 's republic of china , or prc , including purified water , mineralized water and oxygenated water , which we supplied to beverage companies and servicing companies in the prc . on september 30 , 2011 , we completed the sale of all of the shares of china water drinks ( h.k . ) holdings limited , a subsidiary of china water , to pacific water in exchange for shares of pacific water equal to 10 % of its outstanding equity . following the completion of the disposition , we abandoned all of our remaining non-u.s. legal entities related to china water . together , the sale and abandonment result in the disposition and discontinuation of all of our bottled water business . as a result of these transactions , we recorded a loss from discontinued operations of $ 23.7 million in the third quarter of 2011 , of which $ 17.9 million was a one-time non-cash charge . new credit facility . on september 7 , 2011 , we and our hwr subsidiaries entered into a credit agreement , or the new credit facility , with regions bank , as administrative and collateral agent , rbs citizens bank , n.a . and first national bank of pennsylvania , as co-syndication agents , wells fargo bank , national association , as documentation agent , regions capital markets and rbs citizens bank , n.a. , as joint lead arrangers and joint book managers , and certain other lenders party thereto . the new credit facility provides initially for a total of $ 160 million in borrowing capacity , including a $ 70 million term loan facility and a $ 90 million revolving credit facility ( of which up to $ 5 million may be utilized in the form of commercial and standby letters of credit and up to $ 10 million of which may be utilized as a swingline facility ) . the new credit facility also contains an uncommitted accordion feature , which permits us under certain circumstances to increase commitments under the revolving credit facility , or to establish additional term loans , up to an additional 29 $ 40 million in the aggregate , for a total aggregate amount of borrowings of $ 200 million . as of december 31 , 2011 , we had borrowings of $ 140.2 million under the new credit facility , with up to $ 59.8 million available for future borrowings . see liquidity and capital resources . exercise and expiration of warrants . at january 1 , 2011 , we had outstanding warrants exercisable for 64.8 million shares of our common stock . in 2011 , warrants were exercised for 8,783,074 shares of common stock , resulting in cash proceeds to us in the amount of $ 47.9 million . on november 9 , 2011 , all of the publicly-issued warrants , totaling 55.3 million , expired on their own terms . remaining outstanding are approximately 1.56 million privately-issued warrants to purchase our common stock . pipeline expansion . we have completed the majority of our 50 mile fiberglass pipeline that transports produced water to our disposal wells . story_separator_special_tag as a result of pipeline start-up and commissioning expenses incurred in the twelve months ended december 31 , 2010 , management determined that the earn-out obligation related to the 2010 profitability target for the charis acquisition would not be met . income tax benefit the income tax benefit for the year ended december 31 , 2010 was approximately $ 3.4 million related primarily to losses sustained from pipeline start-up and commissioning expenses during the year . the income tax benefit for the year ended december 31 , 2009 was approximately $ 80,000. loss from continuing operations our net loss from continuing operations for the year ended december 31 , 2010 was $ 10.3 million compared to $ 3.3 million for the year ended december 31 , 2009. the change relates primarily to the items mentioned above . loss from discontinued operations our loss from discontinued operations for the year ended december 31 , 2010 was $ 4.4 million compared to a loss of $ 392.0 million for the year ended december 31 , 2009. the increased 2009 loss relates primarily to the $ 357.5 million non-cash goodwill impairment charge based upon finalizing our goodwill analysis on the china water acquisition , a $ 6.8 million impairment to the carrying value of fixed assets related to the closure of the beijing bottled water factory , which was acquired by china water prior to october 30 , 2008 , $ 5.3 million of expense related to the deconsolidation of shen yang aixin , $ 4.5 million of reimbursements made to xu hong bin , the former president and chairman of china water , that were previously capitalized , $ 9.3 million of bad debt expense , a $ 3.9 million loss on disposal of property , plant and equipment , and provisions for liabilities of $ 1.3 million . net loss our net loss for the year ended december 31 , 2010 was $ 14.7 million compared to $ 395.4 million for the year ended december 31 , 2009. the change relates primarily to the items mentioned above . capital expenditures during the year ended december 31 , 2011 , we made capital expenditures totalling $ 150.9 million , including an expansion of our fleet of trucks and trailers , additional salt water disposal wells and construction of a pipeline in the haynesville shale area . our capital expenditures , excluding acquisitions , are expected to be approximately $ 70.0 million for 2012. a significant portion of our planned capital expenditures can be adjusted to reflect changes in our expectations for future customer spending and we will manage these investments to match market demand . liquidity and capital resources we require cash to fund our operating expenses and working capital requirements , including outlays for capital expenditures , strategic acquisitions and investments , repurchases of our securities , and lease payments . our primary sources of liquidity are cash on hand and cash generated from operations and from our new credit facility . cash generated from operations is a function of such factors as changes in demand for our products and services , competitive pricing pressures , effective management of the utilization of our assets , our ability to 34 achieve reductions in operating expenses , and the impact of integration on our productivity . we seek to preserve our cash balances by investing in marketable securities consisting of high grade corporate notes and united states government securities purchased in accordance with our investment policy , which allows us to invest and reinvest in united states government securities having a maturity of five years or less , and other obligations of united states government agencies and instrumentalities , including government sponsored enterprises , commercial paper , corporate notes and bonds , short term instruments that are direct obligations of issuers , long term instruments that are direct obligations of issuers , and municipal notes and bonds with a maturity of five years or less . we avoid any involvement with mortgage backed securities , collateralized mortgage obligations , auction rate securities , collateralized debt obligations , credit default swaps and similar high risk and or exotic financial instruments . however , as required pursuant to the terms of our new credit facility , we maintain a floating-to-fixed interest rate swap in the notional amount of $ 35.0 million . any decisions regarding the size of individual investments or their composition must comply with our investment policy with the intent to yield higher obtainable returns with the understanding that the investment may need to be liquidated in the near term to consummate strategic business combinations . as of december 31 , 2011 , we had cash and cash equivalents of approximately $ 80.2 million , and approximately $ 5.2 million of marketable securities , for an aggregate of approximately $ 85.4 million in cash and cash equivalents and short-term investments . in addition , we had outstanding borrowings under our new credit facility of $ 140.2 million , with up to $ 59.8 million available thereunder for future borrowings assuming exercise of the uncommitted accordion feature. under our new credit facility , we are required to maintain at least $ 20.0 million in cash and cash equivalents at all times as well as to comply with certain financial covenants . as of december 31 , 2011 we were in compliance with these covenants . we believe that our cash , cash equivalents , investments and availability on our revolving line of credit under our new credit facility will be sufficient to facilitate planned capital expenditures that we may undertake this year . we may , however , seek to raise additional financing during the next twelve months in order to support our growth , including possible acquisitions , or to maintain a strong balance sheet with sufficient cash and liquidity . however , there can be no assurance that our liquidity will be adequate over time . our capital expenditures may be greater than we expect if we decide to bring capacity on line more rapidly .
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results of operations our operating results are substantially affected by our acquisition activities , and the expenses we incur in connection with those activities , which can limit comparability of our results from period to period . results are also driven by demand for our services , which are in turn affected by the level of drilling activity ( which impacts the amount of flowback water being processed ) and active wells ( which impacts the amount of produced water being processed ) in the shale areas in which we operate . activity in the oil and gas drilling industry is affected by market prices for those commodities . recent declines in natural gas prices have caused many oil and natural gas producers to announce reductions in capital budgets for future periods . these cuts in spending curtailed drilling programs as well as discretionary spending on well services in certain shale areas and accordingly reduced demand for our services in these areas . we have been actively transferring certain operating assets to oil- and liquids-rich basins where drilling activity is more robust . to the extent such cuts in spending continue to curtail drilling programs , we will continue to redeploy our operating assets where possible . year ended december 31 , 2011 compared to the year ended december 31 , 2010 replace_table_token_6_th 30 revenue revenue for 2011 grew to $ 156.8 million from $ 15.2 million in 2010. the significant year-over-year growth in revenue resulted from ( a ) the full year effect of the cvr acquisition which we consummated on november 30 , 2010 , ( b ) the five acquisitions that we closed in the second quarter of 2011 , and ( c ) revenues resulting from a significant capital investment program during 2011 , including an expansion of the company 's fleet and disposal well assets .
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the 2017 compensation table summary below includes the discretionary payouts to the named executive officers . ( 4 ) equity compensation 2014 ltip the company awards equity-based compensation to named executive officers in order to provide a link between the long-term results achieved for its shareholders and the rewards provided to named executive officers , thereby ensuring that such officers have a continuing stake in the company 's long-term success . in march 2014 , our board of directors adopted story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this annual report on form 10-k. in addition to historical consolidated financial information , the following discussion contains forward-looking statements that reflect our plans , estimates , or beliefs . actual results could differ materially from those discussed in the forward-looking statements . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on form 10-k , particularly in risk factors. overview we are one of the largest providers of hydraulic fracturing services in north america . our services enhance hydrocarbon flow from oil and natural gas wells drilled by e & p , companies in shale and other unconventional resource formations . our customers include chesapeake energy corporation , conocophillips , devon energy corporation , eog resources , inc. , diamondback energy , inc. , eqt company , range resources corporation , and other leading e & p companies that specialize in unconventional oil and natural gas resources in north america . we are one of the top three hydraulic fracturing providers across our operating footprint , which consists of five of the most active major unconventional basins in the united states : the permian basin , the scoop/stack formation , the marcellus/utica shale , the eagle ford shale and the haynesville shale . substantially all of our business activities support our well completion services . we manage our business , allocate resources , and assess our financial performance on a consolidated basis ; therefore we do not have separate operating segments . significant developments in 2017 and 2018 · during the first quarter of 2017 , we reached a milestone of over 10 million man-hours without a lost time incident , which is significantly better than our industry peer group , according to the u.s. bureau of labor statistics . · due to improving industry conditions and our operational efficiencies , during 2017 , we generated positive operating income for the first time since 2014 and positive net income for the first time since 2011 . · during 2017 , we activated ten fleets in response to increased customer demand , which brought our total active fleet count to 27 at december 31 , 2017 . · during the fourth quarter of 2017 , we purchased certain components that can be used to build two additional fleets , which we expect to complete in 2018. once completed , our total available fleet size will increase from 32 fleets to 34 fleets , representing a total of 1.7 million hydraulic horsepower . we expect the total cost of these two additional fleets to be approximately $ 50 million . · in february 2018 , we completed an ipo of 22.4 million shares of common stock of which 18.1 million shares were sold by the company . the company received net proceeds from the offering of approximately $ 303 million , and we intend to use the net proceeds from the offering for general corporate purposes , including debt repayments . · in january and february 2018 , we repaid $ 345.0 million of aggregate principal amount of long-term debt using cash on hand and proceeds received from the ipo . our remaining principal amount of long-term debt after these repayments was $ 785.0 million as of february 22 , 2018 . · in february 2018 , we entered into a $ 250 million asset-based revolving credit facility . trends that affected our business from 2015 to 2017 our business is cyclical , and we depend on the willingness of our customers to make expenditures to explore for , develop , and produce oil and natural gas in the united states . the willingness of our customers to undertake these activities is predominantly influenced by current and expected future prices for oil and natural gas . oil and natural gas prices declined significantly in 2015. as a result of these low commodity prices , our customers significantly reduced their hydraulic fracturing activities in 2015. this reduction in activity levels created an oversupply of service providers in our industry and , consequently , market prices for our services declined significantly . in early 2016 , we continued to experience very low commodity prices ; however , oil and natural gas prices started improving in the second quarter of 2016 and generally increased through the remainder of 2016. the low commodity prices at the beginning of 2016 caused our customers to reduce their activity levels and request lower pricing for our services . as commodity prices improved , we experienced an increase in demand for our services in the second half of 2016. this increase in activity combined with a lower 33 level of available hydraulic fracturing equipment in the market allowed us to request increased pricing for our services . many of our customers agreed to price increases that took effect in the first quarter of 2017. in 2017 , higher commodity prices enabled our customers to significantly increase their activity levels , which resulted in an increase in the horizontal rig count from 532 at the end of 2016 to 796 at the end of 2017 , according to a report by baker hughes , inc. this increase in customer activity levels increased the demand for hydraulic fracturing services above the available supply . story_separator_special_tag in the fourth quarter of 2015 , we concluded that the persistent low commodity price environment and its effect on our current and forecasted cash flows required us to perform multiple asset impairment tests . as a result , we recorded a number of asset impairments in the fourth quarter of 2015 . · we evaluated the long-lived assets of our pressure pumping asset group for impairment and concluded that the fair value of this asset group was lower than the carrying value of the assets in the asset group . we recognized a total impairment for this asset group of $ 487.0 million . of this amount , $ 461.4 million was attributable to our customer relationships , $ 20.6 million was attributable to certain equipment , and $ 5.0 million was attributable to our proprietary chemical blends . · we evaluated the long-lived assets of our wireline asset group for impairment and concluded that the fair value of this asset group was lower than the carrying value of the assets in the asset group . we recognized a total impairment for this asset group of $ 33.3 million . of this amount $ 24.2 million was attributable to certain equipment and $ 9.1 million was attributable to our customer relationships . · we evaluated our tradename intangible asset for impairment and concluded that the fair value of this asset was lower than its carrying value , which resulted in an impairment of $ 30.2 million . · we recorded $ 14.8 million of impairments for certain land and buildings that we no longer use . supply commitment charges : we have recorded supply commitment charges related to contractual inventory purchase commitments to certain proppant suppliers . in 2017 , 2016 and 2015 , we recorded charges under these supply arrangements of $ 1.2 million , $ 2.5 million and $ 11.0 million , respectively . these charges were attributable to our decreased volume of purchases from these suppliers due to our lower activity levels and or certain customers procuring their own proppants . while we have successfully worked with our vendors to minimize charges related to these purchase commitments , if industry conditions worsen , if customer requirements for specific types of proppant differ from our contracted supply , or if we are unable to work with our vendors in the future , we may incur supply commitment charges in future periods . lease abandonment charges : during 2016 and 2015 , we vacated certain leased facilities to consolidate our operations . in 2017 , 2016 and 2015 , we recognized expense of $ 0.6 million , $ 2.0 million and $ 1.8 million , respectively , in connection with these actions . employee severance costs : during 2016 and 2015 , we incurred employee severance costs of $ 0.8 million and $ 13.1 million , respectively , in connection with our corporate and operating restructuring initiatives . at december 31 , 2016 , we had paid substantially all severance payments owed to former employees . inventory write-down : during 2015 , we made improvements to our supply chain that reduced our inventory requirements . in connection with this initiative we executed a program to liquidate excess inventory . we recorded a $ 24.5 million inventory write-down charge in connection with this liquidation program . acquisition earn-out adjustments : in 2015 , we remeasured the fair value of the contingent consideration related to a wireline acquisition and we recorded adjustments to reduce this liability by $ 3.4 million . at december 31 , 2015 and december 31 , 2016 , the fair value of the contingent consideration was zero and the period to earn the contingent consideration expired on october 31 , 2016. loss on disposal of assets , net during 2017 and 2016 , we sold a number of surplus pieces of property and equipment . in 2017 , we received $ 4.1 million of proceeds and recognized a $ 1.4 million net gain on the sale of these assets . in 2016 , we received $ 23.5 million of proceeds and recognized a $ 1.3 million net loss on the sale of these assets . in february 2016 , we sold substantially all of our remaining sand transportation equipment and related inventory . we received $ 8.0 million of proceeds and recognized a $ 0.3 million gain on this sale . gain on insurance recoveries in january 2017 , a fire destroyed certain equipment in one of our fleets . these assets were insured at values greater than their carrying values . we received $ 4.2 million of insurance recovery proceeds for these assets , which exceeded their carrying values by $ 2.9 million . 37 in january 2016 , a fire at one of our job sites in oklahoma destroyed substantially all of the equipment in one of our fleets . these assets were insured at values greater than their carrying values . we received $ 19.0 million of insurance recovery proceeds for these assets , which exceeded their carrying values by $ 15.1 million . interest expense , net interest expense , net of interest income , in 2017 decreased by $ 0.8 million from 2016. this decrease was primarily due to a lower average long-term debt balance , which was partially offset by higher average interest rates in 2017 for our senior floating rate notes due june 2020. interest expense , net of interest income , in 2016 increased by $ 10.3 million from 2015. the increase was due to a higher average long-term debt balance and a higher average interest rate in 2016 for our senior floating rate notes due june 2020. gain on extinguishment of debt , net in 2017 , we repaid $ 60.0 million of aggregate principal amount of our senior floating rate notes due june 2020. we recognized a loss on debt extinguishment of $ 1.8 million . in 2017 , we also repurchased $ 17.3 million of aggregate principal amount of senior notes due may 2022 in the qualified institutional market .
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results of operations revenue we recognize revenue upon the completion of a stage of a job . a stage is considered complete when we have met the specifications set forth by our customer . we typically complete multiple stages per day during the course of a job . invoices typically include an equipment charge and material charges for proppant , chemicals and other products consumed during the course of providing our services . see business our services hydraulic fracturing in item 1 of this annual report for details regarding fracturing stages and fleets and the types of agreements we use to provide hydraulic fracturing services . the following table includes certain operating statistics that affect our revenue : replace_table_token_5_th ( 1 ) active fleets is the average number of fleets operating during the period . we had 27 , 17 and 14 active fleets at december 31 , 2017 , 2016 and 2015 , respectively . ( 2 ) total fleets is the total number of fleets owned during the period . total revenue in 2017 increased by $ 933.9 million from 2016. this increase was primarily due to an increase in the number of stages completed and an increase in the prices for our services in 2017 , both of which were driven by increased customer demand . the average number of active fleets during 2017 increased by 7.7 from 2016 , due to increased customer demand . at december 31 , 2017 , we evaluated all of our idle fleets and concluded that each of these fleets is available to return to service after our maintenance personnel make any necessary repairs and confirm that the equipment is in operating condition . we believe all of our remaining inactive fleets can be returned to active service within six months , if market conditions require .
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during the period of time where the leverage ratio exceeds 3.50:1 , the interest payable on the senior unsecured notes shall increase by 0.50 % . the debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases . recently adopted accounting standards in may 2014 , amended accounting guidance was issued regarding the recognition of revenue from contracts with customers . the objective of this guidance is to significantly enhance comparability and clarify principles of revenue recognition practices across entities , industries , jurisdictions and capital markets . this guidance was originally effective for annual and interim reporting periods beginning after december 15 , 2016 ; however , the financial accounting standards board ( fasb ) amended the standard in august 2015 to delay the effective period date by one story_separator_special_tag story_separator_special_tag company recorded a $ 46 million charge , which consisted of a $ 6 million cash contribution to the plan and a $ 40 million non-cash charge related to the reversal of unrecognized actuarial losses recorded in accumulated other comprehensive income in the stockholders ' equity . the $ 46 million pre-tax charge reduced net income per diluted share by $ 0.39. the significant increase in the provision for income taxes for 2017 was a result of the $ 550 million estimate for the impact of the enactment of the legislation informally referred to as the tax cuts and jobs act ( the 2017 tax act ) . the 2017 tax act changed the u.s. tax system to a territorial system , including broadening measures requiring the taxation of the company 's historical unremitted foreign earnings through a deemed repatriation . this provision reduced net income per diluted share by $ 6.82 in 2017 , and the company 's effective tax rate was 11.0 % excluding this $ 550 million provision . as permitted by the u.s. securities and exchange commission ( sec ) staff accounting bulletin no . 118 , the company completed its analysis and calculation of the 2017 tax act federal and state transition tax liability during 2018 , which remained significantly unchanged . the company generated $ 604 million , $ 698 million and $ 643 million of net cash flows from operations in 2018 , 2017 and 2016 , respectively . the decrease in operating cash flow in 2018 was primarily a result of $ 103 million of income tax payments made in the u.s. relating to the company 's estimated 2017 transition tax liability and 2018 estimated tax payments , a $ 15 million litigation settlement payment and $ 11 million of contributions to certain defined benefit pension plans . over the next four years , the company is required to make annual u.s. federal tax payments of approximately $ 38 million to tax authorities in connection with the company 's estimated transition tax liabilities of $ 433 million under the 2017 tax act . the remaining 60 % of the total liability is required to be paid over a three-year period beginning in 2023. the increase in operating cash flow in 2017 was primarily a result of the increase in sales and operating income . cash flows used in investing activities included capital expenditures related to property , plant , equipment and software capitalization of $ 96 million , $ 85 million and $ 95 million in 2018 , 2017 and 2016 , respectively . in february 2018 , the company 's board of directors approved expanding its precision chemistry consumable manufacturing operations in the u.s. the company anticipates spending an estimated $ 215 million to build and equip this new state-of-the-art manufacturing facility , which will be paid for with existing cash , investments and available debt capacity . the company has spent $ 11 million on this facility through the end of 2018. during the past three years , the company has acquired technology to expand its future sales . in july 2018 , the company acquired the sole intellectual property rights to the desorption electrospray ionization ( desi ) imaging technology for $ 30 million in cash and a future contractual obligation to pay a minimum royalty of $ 3 million over the remaining life of the patent . desi is a mass spectrometry imaging technique that is used to develop medical therapies . during 2018 , the company made $ 8 million of investments in unaffiliated companies . in 2017 , the company made a $ 7 million payment for an investment in a developer of analytical system solutions used to make measurements , predict stability and accelerate product discovery in the routine analytic , process monitoring and quality control release processes for life science and biopharmaceutical markets . in addition , the company made a milestone payment of $ 5 million in 2017 to acquire and license intellectual property . in september 2016 , the company acquired rubotherm gmbh for approximately $ 6 million in cash . during 2018 , the company had net proceeds from the maturity of short-term investments of $ 1.8 billion . most of these proceeds were repatriated into the u.s. in 2018 , and were taxed at lower income tax rates as a result of the 2017 tax act , and used to reduce the company 's debt by $ 850 million and fund $ 1,315 million of share repurchases . the company has conducted a post-tax reform evaluation of its capital allocation strategy and the company is currently planning to use its existing cash , cash equivalents and investments , cash flow from operations and its available debt capacity to repurchase up to $ 4 billion of the company 's common stock over the next two years . the company is currently planning to increase its outstanding debt balances to approximately 2.5 times the 29 company 's net debt-to-earnings before interest , taxes , depreciation and amortization ratio to fund a significant portion of these share repurchases . story_separator_special_tag waters sales in japan in 2018 increased 5 % , with the effect of foreign currency translation increasing sales 2 % . sales in the rest of asia declined 2 % in 2018 , primarily due to lower customer demand in india and a negative 2 % impact of foreign currency translation . in the americas , u.s. sales increased 1 % in 2018. in 2017 , waters sales increased 10 % in both europe and asia and were flat in the americas . waters sales increased 16 % in china and were broad-based across all product and customer classes . waters sales in japan decreased 1 % , primarily due to foreign currency translation , which decreased sales by 3 % . waters sales in the rest of asia increased 8 % and were driven by recurring revenues across all customer classes . ta product and services net sales net sales for ta products and services are as follows for the years ended december 31 , 2018 and december 31 , 2017 ( dollars in thousands ) : replace_table_token_8_th ta 's instrument system sales were broad-based across all product classes in 2018 , while 2017 instrument system sales grew primarily from the discovery product line of thermal instrument systems . in addition , ta 's rheology instrument systems saw strong performance across the entire range of products in the portfolio in 2017 , driven by the discovery hybrid rheometer and rubber rheometer instrument systems . ta service sales increased in both 2018 and 2017 due to sales of service plans and billings to a higher installed base of customers . the effect of foreign currency translation and recent acquisitions had a minimal impact on ta 's sales in both 2018 and 2017. in 2018 , ta sales increased 9 % in the americas , 8 % in europe and 5 % in asia . ta sales in the u.s. increased 9 % in 2018 , while sales in the rest of the americas increased 8 % . ta 's sales in asia were driven by double-digit sales growth in india and 8 % sales growth in china , which was offset by declines in japan . in 2017 , ta sales increased 14 % in asia , 11 % in europe and 5 % in the americas . ta achieved double-digit sales growth in asia , with the exception of japan , where a 5 % sales growth included a 2 % negative impact of foreign currency translation . ta sales in the u.s. in 2017 increased 8 % , while sales in the rest of the americas declined after strong sales in the prior year . cost of sales the increases in cost of sales for both 2018 and 2017 were consistent with the increase in sales volumes . the effect of foreign currency translation had a minimal impact on cost of sales in both 2018 and 2017. cost of sales is affected by many factors , including , but not limited to , foreign currency translation , product mix , product costs of instrument systems and amortization of software platforms . at current foreign currency exchange rates , the company expects that the impact of foreign currency translation may decrease sales and gross profit during 2019 . 32 selling and administrative expenses selling and administrative expenses decreased 1 % in 2018 and increased 6 % in 2017. the decrease in 2018 was primarily due to the impact of $ 13 million of severance costs incurred in 2017 in connection with the closure of a facility in germany and an early retirement transition incentive program . the effect of foreign currency translation increased selling and administrative expenses by 3 % in 2017 and had a minimal impact in 2018. in addition , selling and administrative expenses in both 2018 and 2017 were impacted by headcount additions and higher merit compensation costs , as well as $ 1 million and $ 4 million , respectively , of stock compensation expense related to the modification of certain stock awards upon the retirement of senior executives . as a percentage of net sales , selling and administrative expenses were 22.2 % , 23.6 % and 23.6 % for 2018 , 2017 and 2016 , respectively . research and development expenses research and development expenses increased 8 % and 6 % in 2018 and 2017 , respectively . research and development expenses in both 2018 and 2017 were impacted by additional headcount , merit compensation and costs associated with new products and the development of new technology initiatives . in addition , the effect of foreign currency translation reduced research and development expenses by 4 % in 2017 , primarily due to the weakening of the british pound on the company 's u.k.-based research and development expenses . foreign currency translation had a minimal impact on research and development costs in 2018. litigation settlement in the second quarter of 2017 , the company incurred an $ 11 million litigation provision related to the issuance of a verdict in a patent litigation case . in the first quarter of 2018 , the company resolved the case with a final settlement that resulted in a gain of $ 2 million . acquired in-process research and development during 2017 , the company incurred charges of $ 5 million for acquired in-process research and development related to milestone payments associated with a licensing arrangement for certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date . these licensing arrangements are significantly related to new , biologically-focused applications , as well as other applications , and require the company to make additional future payments of up to $ 7 million if certain milestones are achieved , as well as royalties on future net sales . these future payments may be significant and occur over multiple years .
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results of operations business and financial overview the company has two operating segments : waters tm and ta tm . waters products and services primarily consist of high performance liquid chromatography ( hplc ) , ultra performance liquid chromatography ( uplc tm and together with hplc , referred to as lc ) , mass spectrometry ( ms ) and precision chemistry consumable products and related services . ta products and services primarily consist of thermal analysis , rheometry and calorimetry instrument systems and service sales . the company 's products are used by pharmaceutical , biochemical , industrial , nutritional safety , environmental , academic and governmental customers . these customers use the company 's products to detect , identify , monitor and measure the chemical , physical and biological composition of materials and to predict the suitability and stability of fine chemicals , pharmaceuticals , water , polymers , metals and viscous liquids in various industrial , consumer goods and healthcare products . the company 's operating results are as follows for the years ended december 31 , 2018 , 2017 and 2016 ( dollars in thousands , except per share data ) : replace_table_token_4_th * * percentage not meaningful 27 the company 's net sales increased 5 % in 2018 as compared to 2017 , and 7 % in 2017 as compared to 2016. foreign currency translation increased sales growth by 1 % in both 2018 and 2017. recent acquisitions did not have an impact on sales growth . unless otherwise noted , sales growth or decline percentages are presented as compared with the same period in the prior year . instrument system sales increased 2 % and 6 % in 2018 and 2017 , respectively . in 2018 , the increase in instrument system sales was primarily driven by an increase in demand for lc and ta 's instrument systems .
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introduction the company leases aircraft , provides air cargo lift and performs aircraft maintenance and other support services primarily to the air cargo transportation and package delivery industries . through the company 's subsidiaries , we offer a range of complementary services to delivery companies , freight forwarders , e-commerce operators , airlines and government customers . the company 's principal subsidiaries include two independently certificated airlines , abx air , inc. ( “ abx ” ) and air transport international , inc. ( “ ati ” ) , and an aircraft leasing company , cargo aircraft management , inc. ( “ cam ” ) . cam provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters and offering them to customers under long-term leases . the company has two reportable segments : cam , which leases boeing 767 and boeing 757 aircraft and aircraft engines , and acmi services , which primarily includes the cargo transportation operations of the company 's two airlines . the company 's other business operations , which primarily provide support services to the transportation industry , include aircraft maintenance , aircraft parts sales , ground and material handling equipment maintenance and mail handling services . these operations do not constitute reportable segments due to their size . at december 31 , 2016 , the company owned 59 cargo aircraft that were in revenue service . the combined fleets consisted of 35 boeing 767-200 aircraft , 16 boeing 767-300 aircraft , four boeing 757-200 aircraft and four boeing 757 `` combi '' aircraft . cam also owned one boeing 767-200 aircraft that was being prepped for a lease beginning in 2017 and seven boeing 767-300 aircraft either already undergoing or awaiting induction in the freighter conversion process . the company has had long term contracts with dhl network operations ( usa ) , inc. and its affiliates ( `` dhl '' ) , since august 2003. dhl is the company 's largest customer and accounted for 34 % , 46 % and 55 % of the company 's consolidated revenues during the years ended december 31 , 2016 , 2015 and 2014 , respectively . in 2010 , the company and dhl executed commercial agreements under which dhl leased thirteen boeing 767 freighter aircraft from cam and abx operates those aircraft under a separate crew , maintenance and insurance ( “ cmi ” ) agreement . the initial term of the cmi agreement was five years while the terms of the aircraft leases were seven years . in 2015 , the company and dhl amended and restated the cmi agreement ( `` restated cmi agreement '' ) . as a result , effective april 1 , 2015 , the existing monthly aircraft lease rates for the thirteen boeing 767-200 freighter aircraft declined approximately 5 % , dhl agreed to lease an additional two boeing 767 aircraft which were previously supporting dhl under short-term operating arrangements , and the boeing 767 aircraft lease terms with dhl were extended through march 2019. under the restated cmi agreement , abx continues to operate and maintain the aircraft through march 2019. similar to the previous agreement , pricing for services provided under the restated cmi agreement is based on pre-defined fees scaled for the number of aircraft hours flown , aircraft scheduled and flight crews provided to dhl for its network . under the pricing structure of the restated cmi agreement , abx is responsible for complying with faa airworthiness directives , the cost of boeing 767 airframe maintenance and certain engine maintenance events for the dhl-leased aircraft that it operates . generally , provisions of the restated cmi agreement negatively impact the company 's acmi services operating results , but were partially offset by extending the agreements and by adding two additional aircraft leases during 2015. as of december 31 , 2016 , the company , through cam , leased 16 boeing 767 aircraft to dhl , 14 of which were being operated by the company 's airlines for dhl . additionally , the airlines operated five cam-owned boeing aircraft under other operating arrangements with dhl . during september 2015 , the company began to operate a trial air network for amazon fulfillment services , inc. ( “ afs ” ) , a subsidiary of amazon.com , inc. ( “ amazon ” ) . the network grew to five boeing 767 freighter aircraft through the first quarter of 2016 and included services for cargo handling and logistical support . on march 8 , 2016 , the company entered into an air transportation services agreement ( the “ atsa ” ) with afs pursuant to which cam will lease 20 boeing 767 freighter aircraft to afs , including 12 boeing 767-200 freighter aircraft for a term of five years and eight boeing 767-300 freighter aircraft for a term of seven years . 24 as of december 31 , 2016 , the company , through cam , leased 12 boeing 767-200 freighter aircraft and two boeing 767-300 freighter aircraft to afs . the atsa , which has a term of five years , also provides for the operation of those aircraft by the company 's airline subsidiaries , and the performance of hub and gateway services by the company 's subsidiary , lgstx services , inc. ( `` lgstx '' ) . cam owns all of the boeing 767 aircraft that will be leased and operated under the atsa . the remaining six boeing 767-300 aircraft are being converted to freighter aircraft and are scheduled to enter service during 2017. the atsa became effective on april 1 , 2016. revenues performed for afs comprised approximately 29 % and 5 % of the company 's consolidated revenues from continuing operations during the years ended december 31 , 2016. and 2015 , respectively . in conjunction with the execution of the atsa , the company and amazon entered into an investment agreement and a stockholders agreement on march 8 , 2016. the investment agreement calls for the company to issue warrants in three tranches which grant amazon the right to acquire up to 19.9 story_separator_special_tag summary external customer revenues from continuing operations increased by $ 149.6 million to $ 768.9 million during 2016 compared to 2015. excluding directly reimbursed revenues , customer revenues increased $ 105.0 million , or 18 % during 2016 compared with 2015. increased external customer revenues from cam 's leasing operations , expanded acmi services for afs , increased aircraft maintenance services and additional logistics services , also for afs , were partially offset by lower acmi service revenues for dhl during 2016 , compared to 2015 . 26 the consolidated net earnings from continuing operations were $ 21.1 million for 2016 compared to $ 39.2 million for 2015. the pre-tax earnings from continuing operations were $ 34.5 million for 2016 compared to $ 62.6 million , for 2015. earnings were affected by specific events and certain adjustments that do not directly reflect our underlying operations among the years presented . on a pre-tax basis , earnings included net losses of $ 18.1 million for the year ended december 31 , 2016 , for the re-measurement of financial instruments , primarily warrant obligations granted to amazon during 2016 , to fair value . the larger re-measurement loss for 2016 compared to 2015 primarily reflects the increase in the value of the traded atsg share price after the warrants were granted in 2016. pre-tax earnings for 2016 were also reduced by $ 4.5 million for the amortization of lease incentives given to afs in the form of warrants during 2016. additionally , pre-tax earnings from continuing operations for 2016 were unfavorably impacted by a $ 9.9 million increase in actuarial losses for the non-service component of retiree benefit plan costs compared to 2015. separately , pre-tax earnings for the year ended december 31 , 2016 , included an actuarial gain of $ 2.0 million for the settlement of a retiree medical plan during 2016. pre-tax earnings for the year ended december 31 , 2016 , also included a $ 1.2 million charge for the company 's share of capitalized debt issuance costs that were charged off when west atlantic ab , a non-consolidated affiliate , restructured its debt . after removing the effects of these items , adjusted pre-tax earnings from continuing operations , a non-gaap measure ( a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows ) were $ 65.1 million for 2016 compared to $ 60.6 million for 2015. adjusted pre-tax earnings from continuing operations for 2016 improved compared to 2015 , driven by additional aircraft lease revenues , increased aircraft maintenance revenues and additional logistics support services for afs . this growth in revenue was partially offset by the cost necessary to support expanded operations , including training costs for new flight crews , additional premium pay for abx flight crews , higher aircraft depreciation expense and more employee expenses , particularly in our support services businesses . operating results for 2016 were negatively impacted when abx flight crew members went on strike for two days , which disrupted our customers ' operations and reduced our revenues . during 2014 , we offered vested , former employee participants of the qualified pension plan and vested employee participants of the crewmembers qualified pension plan a one-time option to settle their pension benefit with the company through a single payment or a nonparticipating annuity contract . as a result , pre-tax earnings from continuing operations reflects an actuarial charge of $ 6.7 million in 2014. effective december 31 , 2016 , abx modified its unfunded , non-pilot retiree medical plan to settle benefits to all participants . as a result , pre-tax earnings from continuing operations reflects an actuarial gain of $ 2.0 million for 2016 . 27 a summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is shown below ( in thousands ) : replace_table_token_5_th adjusted pre-tax earnings from continuing operations , a non-gaap measure , is pre-tax earnings excluding non-service components of retiree benefit costs , gains and losses for the fair value re-measurement of financial instruments , lease incentive amortizations , the pension settlement costs and the charge off of debt issuance costs from a non-consolidated affiliate during the first quarter of 2016. we exclude these items from adjusted pre-tax earnings because they are distinctly different in their predictability or not closely related to our on-going operating activities . management uses adjusted pre-tax earnings to compare the performance of core operating results between periods . presenting this measure provides investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods . adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of the company 's results as reported under gaap . acmi reimbursable revenues shown above include revenues related to fuel , landing fees , navigation fees , aircraft rent and certain other operating costs that are directly reimbursed to the airlines by their customers . prior to april 1 , 2015 , the cost of airframe maintenance for cam-owned , boeing 767-200 aircraft operated for dhl and provided by the airlines were directly reimbursed . for all periods presented above , airline services revenues include the compensation for maintenance provided by the airlines on aircraft operated for dhl . 28 2016 and 2015 cam cam offers aircraft leasing and related services to external customers and also leases aircraft internally to the company 's airlines . aircraft leases normally cover a term of five to eight years . in a typical leasing agreement , customers pay rent and maintenance deposits on a monthly basis . cam 's revenues grew $ 17.3 million during 2016 compared to 2015 , primarily as a result of additional aircraft leases . as of december 31 , 2016 and 2015 , cam had 41 and 30 aircraft under lease to external customers , respectively . revenues from external customers totaled $ 117.6 million and $ 93.4 million for 2016 and 2015 , respectively .
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summary external customer revenues from continuing operations increased by $ 29.7 million to $ 619.3 million during 2015 compared to 2014. excluding directly reimbursed revenues , customer revenues increased 6 % , or by $ 32.6 million during 2015 compared with 2014. increased external customer revenues from cam 's leasing operations , aircraft maintenance services and parcel handling operations were offset by lower revenues from acmi services during 2015 , which reflect six fewer boeing 767 aircraft under acmi operations compared to 2014. the consolidated net earnings from continuing operations were $ 39.2 million for 2015 compared to $ 32.1 million for 2014. the pre-tax earnings from continuing operations were $ 62.6 million for 2015 compared to $ 51.8 million for 2014 , the latter of which included a one-time charge of $ 6.7 million for pension obligation settlements . adjusted pre-tax earnings from continuing operations , a non-gaap measure , were $ 60.6 million for 2015 compared to $ 49.2 million for 2014. adjusted pre-tax earnings from continuing operations for 2015 improved compared to 2014 due to additional aircraft lease revenues and better acmi services aircraft utilization , offset by higher aircraft depreciation and more employee expenses , particularly in our support services businesses . during 2014 , we offered vested , former employee participants of the qualified pension plan and vested employee participants of the crewmembers qualified pension plan a one-time option to settle their pension benefit with the company through a single payment or a nonparticipating annuity contract . as a result , abx settled $ 98.7 million of pension obligations in december of 2014 funded by pension plan assets . the settlement resulted in a pre-tax charge of $ 6.7 million to continuing operations . fleet summary 2015 & 2014 as of december 31 , 2015 , acmi services leased 25 of its in-service aircraft internally from cam .
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we will be responsible for the cost of awards granted under our ltip and all determinations with respect to awards to be made under our ltip will be made by the board of directors of our general partner or any committee thereof that may be established for such purpose or by any delegate of the board of directors or such committee , subject to applicable law , which we refer to as the plan administrator . we currently expect that the board of directors of our general partner or a committee thereof will be designated as the plan administrator . the following description reflects the terms of the ltip . general . story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations contains a discussion of our business , including a general overview of our properties , our results of operations , our liquidity and capital resources , and our quantitative and qualitative disclosures about market risk . because we were formed in september 2013 and our historical financial operating results primarily reflect costs incurred associated with our ipo , we present the historical financial statements and discussion and analysis of cypress llc , including its predecessor , and of the tir entities on a combined basis . at the closing of our ipo on january 21 , 2014 , cypress llc and a 50.1 % interest in the tir entities were contributed to us and became our water and environmental services segment and our pipeline inspection and integrity services segment , respectively . on june 26 , 2013 , cypress holdings indirectly acquired a controlling interest in the tir entities . the contribution of the tir entities will be treated for accounting purposes as a combination of entities under common control and the results of the tir entities will be included in our financial statements for periods subsequent to june 26 , 2013. accordingly , the operating results and discussion and analysis for the tir entities is for the period from june 26 , 2013 through december 31 , 2013. the financial information for cypress llc and the tir entities included in “ item 7 – management 's discussion and analysis of financial condition and results of operations ” should be read in conjunction with the audited financial statement of cypress energy partners , llc as of december 31 , 2013 and 2012 and for the years ended december 31 , 2013 , 2012 and 2011 and the audited combined financial statements of the tulsa inspection resources entities as of and for the year ended december 31 , 2013 and the audited consolidated financial statements of tulsa inspection resources , inc. as of and for the years ended december 31 , 2012 and 2011 included in “ item 8 – financial statements and supplementary data. ” 56 the following discussion contains forward-looking statements that reflect our future plans , estimates , beliefs and expected performance . the forward-looking statements are dependent upon events , risks and uncertainties that may be outside our control , including among other things , the risk factors discussed in “ item 1a . risk factors ” of this annual report on form 10-k. our actual results could differ materially from those discussed in these forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , market prices for oil and natural gas , production volumes , estimates of proved reserves , capital expenditures , economic and competitive conditions , regulatory changes and other uncertainties , as well as those factors discussed below and elsewhere in this annual report on form 10-k , all of which are difficult to predict . in light of these risks , uncertainties and assumptions , the forward-looking events discussed may not occur . see “ cautionary statements regarding forward-looking statements ” in the front of this annual report on form 10-k. overview we are a growth-oriented master limited partnership that provides saltwater disposal and other water and environmental services to u.s. onshore oil and natural gas producers and trucking companies . through our water and environmental services segment , which is comprised of the historical operations of cypress llc and its predecessor , we own and operate nine swd facilities , seven of which are in the bakken shale region of the williston basin in north dakota and two of which are in the permian basin in west texas . we also manage four other swd facilities in the bakken shale region . our water and environmental services segment customers are oil and natural gas exploration and production companies and trucking companies operating in the regions that we serve . through our pipeline inspection and integrity services segment , we provide independent pipeline inspection and integrity services to various energy , public utility and pipeline companies . the pipeline inspection and integrity services segment is comprised of the operations of the tir entities since cypress holdings obtained control on june 26 , 2013. in both of these business segments , we work closely with our customers to help them comply with increasingly complex and strict environmental and safety rules and regulations applicable to production and pipeline operations and reduce their operating costs . how we generate revenue we will generate revenue in our water and environmental services segment primarily by treating flowback and produced water and injecting the saltwater into our swd facilities . our results in the water and environmental services segment are driven primarily by the volumes of produced water and flowback water we inject into our swd facilities and the fees we charge for our services . these fees are charged on a per barrel basis and vary based on the quantity and type of saltwater disposed , competitive dynamics and operating costs . in addition , for minimal marginal cost , we generate revenue by selling residual oil we recover from the flowback and produced water . through our 51.0 % ownership interest in ces we also generate revenue managing swd facilities for a fee . story_separator_special_tag this fee is subject to an increase by an annual amount equal to ppi plus one percent or , with the concurrence of the conflicts committee , in the event of an expansion of our operations , including through acquisitions or internal growth . the amount of this fee is approximately the amount we would expect to reimburse the general partner for such services in the absence of the fee . included in this administrative fee are our incremental general and administrative expenses attributable to operating as a publicly traded partnership , such as expenses associated with annual and quarterly sec reporting ; tax return and schedule k-1 preparation and distribution expenses ; sarbanes-oxley compliance ; listing on the new york stock exchange ; independent registered public accounting firm fees ; legal fees ; investor relations , registrar and transfer agent fees ; director and officer liability insurance costs and director compensation , which we estimate to be approximately $ 2.0 million . these incremental partnership overhead expenses are not reflected in our historical financial statements . for the year ending december 31 , 2014 , pursuant to the omnibus agreement , $ 1.0 million of this partnership overhead expense attributable to our operating as a publicly traded partnership will be absorbed by cypress holdings and affiliates , the owners of the 49.9 % non-controlling interests in the tir entities . included in the administrative fee for future general and administrative expenses will be compensation expense associated with the cypress energy partners , l.p. 2013 long-term incentive plan . in the event of termination of the omnibus agreement , in lieu of the quarterly fee , we will be required by our partnership agreement to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations , at which time we expect our payment for these services to increase . this increase may be substantial . our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us . furthermore , our general partner and its affiliates allocate other expenses related to our operations to us and may provide us other services for which we will be charged fees as determined by our general partner . payments to our general partner and its affiliates following the expiration of the omnibus agreement could be substantial and will reduce the amount of cash we have available to distribute to unitholders . depreciation and amortization . depreciation and amortization expense consists of our estimate of the decrease in value of the assets capitalized in property , plant and equipment as a result of using the assets throughout the applicable year . depreciation is recorded on a straight-line basis . we estimate our assets have useful lives ranging from three years to 39 years . the facilities , wells and equipment constituted 91.0 % of our assets as of december 31 , 2012 and december 31 , 2013 and have useful lives of nine to 15 years . segment gross margin , adjusted ebitda and distributable cash flow we view segment gross margin as one of our primary management tools , and we track this item on a regular basis , both as an absolute amount and as a percentage of revenues compared to prior periods . we also track adjusted ebitda , and we define adjusted ebitda as net income , plus interest expense , depreciation and amortization expenses , income tax expense and impairments related to swd facilities , one of which is retained by cypress holdings , less a gain on the reversal of a contingent liability related to the acquisition of the cypress llc predecessor . although we have not quantified distributable cash flow on a historical basis , we intend to use distributable cash flow , which we define as adjusted ebitda less net cash interest paid and maintenance capital expenditures , to analyze our performance . distributable cash flow will not reflect changes in working capital balances , which could be significant as headcount of our pipeline inspection and integrity services segment varies period to period . adjusted ebitda is a non-gaap , supplemental financial measure used by management and by external users of our financial statements , such as investors , commercial banks and research analysts , to assess : 59 our operating performance as compared to those of other providers of similar services , without regard to financing methods , historical cost basis or capital structure ; the ability of our assets to generate sufficient cash flow to support our indebtedness and make distributions to our partners ; the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities ; our ability to incur and service debt and fund capital expenditures ; and the viability of acquisitions and other capital expenditure projects and the rates of return on various investment opportunities . adjusted ebitda and distributable cash flow are not financial measures presented in accordance with gaap . we believe that the presentation of these non-gaap financial measures will provide useful information to investors in assessing our financial condition and results of operations . net income is the gaap measure most directly comparable to adjusted ebitda . the gaap measure most directly comparable to distributable cash flow is net cash provided by operating activities . our non-gaap financial measures should not be considered as alternatives to the most directly comparable gaap financial measure . each of these non-gaap financial measures has important limitations as an analytical tool because it excludes some but not all items that affect the most directly comparable gaap financial measure . you should not consider any of adjusted ebitda or distributable cash flow in isolation or as a substitute for analysis of our results as reported under gaap .
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general and administrative expenses cypress llc 's general and administrative expenses were $ 3.3 million for the year ended december 31 , 2013 , compared to $ 0.5 million for its predecessor for the same period in 2012 , an increase of 560 % . general and administrative expenses increased by $ 2.3 million attributable to $ 0.5 in incremental expenses associated with operating the moxie wells for a full year and $ 1.8 million attributable to cypress llc corporate office activities . the increase in the corporate activities was largely attributable to an increase in professional services of $ 1.2 million incurred primarily in relation to legal and accounting services . the remaining corporate activity costs were associated with corporate salaries of $ 0.5 million that were not included in the 2012 predecessor results . the general and administrative expenses associated with the predecessor wells increased $ 0.5 million due to the variable costs of running the facilities with higher volumes of saltwater disposed primarily associated with the start date of wells that commenced operations in 2012. net income cypress llc recorded net income of approximately $ 10.8 million for the year ended december 31 , 2013 , compared to its predecessor 's net income of $ 6.6 million for the same period in 2012 , an increase of 62 % . operationally , this increase in net income was primarily the result of higher segment gross margin from the increased number of well sites of $ 6.2 million offset by higher operating expenses , primarily depreciation and amortization ( $ 2.7 million increase ) and general and administrative expenses ( $ 2.8 million increase ) associated with the expanded operations . additionally , net income was impacted by the $ 11.3 million gain recorded for the reversal of contingent consideration from the acquisition of the cypress llc predecessor on december 31 , 2012 offset by $ 7.8 million in impairments recorded on two of its swd facilities .
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income taxes we account for income taxes in accordance with fasb asc 740 , accounting for income taxes ( `` asc 740 `` ) , which requires the recognition story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with `` selected consolidated financial data '' and our audited consolidated financial statements and accompanying notes included elsewhere in this filing . this discussion contains forward-looking statements , based on current expectations and related to our plans , estimates , beliefs and anticipated future financial performance . these statements involve risks and uncertainties and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those set forth under `` risk factors , '' `` forward-looking statements '' and elsewhere in this filing . overview we believe we are the leading global provider of neutral-host commercial mobile wi-fi internet solutions and indoor das services in the world . our software applications and solutions enable individuals to access our extensive global wi-fi networks that cover more than 1.5 million hotspots . we operate 36 das networks containing approximately 19,200 nodes . our offerings provide compelling cost and performance advantages to our customers and partners . we grew revenue from $ 139.6 million in 2015 to $ 159.3 million in 2016 , an increase of 14.1 % . we grew revenue from $ 119.3 million in 2014 to $ 139.6 million in 2015 , an increase of 17.0 % . we generated a net loss attributable to common stockholders of $ 27.3 million in 2016 compared to $ 22.3 million in 2015. adjusted ebitda increased from $ 29.6 million in 2015 to $ 40.8 million in 2016 , an increase of 37.7 % . for a discussion of adjusted ebitda and a reconciliation of net ( loss ) income attributable to common stockholders to adjusted ebitda , see footnote 1 to `` selected financial data '' in part ii , item 6. the proliferation of smartphones , tablets , laptops , wearables , and other wi-fi enabled devicesin conjunction with the increased consumption of high-bandwidth activities like video , online gaming , streaming , cloud-based applications and mobile appshas created a demand for high-speed , high-bandwidth internet access in public places both large and small . these data intensive activities are driving a global surge in mobile internet data traffic that is expected to increase nearly seven-fold between 2016 and 2021 , according to cisco 's visual networking index . we believe these trends present us with opportunities to generate significant growth in revenue and profitability . critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america ( `` gaap '' ) and rules and regulations of the united states securities and exchange commission ( `` sec '' ) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , as well as the disclosure of contingent assets and liabilities , at the date of the financial statements . such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period . although we believe these estimates are reasonable , actual results could differ from these estimates . on a regular basis , we evaluate our assumptions , judgments and estimates . we also discuss our critical accounting policies and estimates with the audit committee of the board of directors . we believe that the assumptions and estimates associated with revenue recognition , goodwill , measuring recoverability of long-lived assets , stock-based compensation and income taxes have the greatest potential impact on our consolidated financial statements . therefore , we believe the accounting policies discussed below are paramount to understanding our historical and future performance , as these policies relate to the more significant areas involving our management 's judgments , assumptions and estimates . 33 revenue recognition we generate revenue from several sources including : ( i ) das customers that are telecom operators under long-term contracts for access to our das at our managed and operated locations , ( ii ) military and retail customers under subscription plans for month-to-month network access that automatically renew , and military and retail single-use access from sales of hourly , daily or other single-use access plans , ( iii ) arrangements with wholesale wi-fi customers that provide software licensing , network access , and or professional services fees , and ( iv ) display advertisements and sponsorships on our walled garden sign-in pages . software licensed by our wholesale wi-fi platform services customers can only be used during the term of the service arrangements and has no utility to them upon termination of the service arrangement . we recognize revenue when an arrangement exists , services have been rendered , fees are fixed or determinable , no significant obligations remain related to the earned fees and collection of the related receivable is reasonably assured . revenue is presented net of any sales and value added taxes . revenue generated from access to our das networks consists of build-out fees and recurring access fees under certain long-term contracts with telecom operators . build-out fees paid upfront are generally deferred and recognized ratably over the term of the estimated customer relationship period , once the build-out is complete . periodically , we install and sell wi-fi and das networks to customers where we do not have service contracts or remaining obligations beyond the installation of those networks and we recognize build-out fees for such projects as revenue when the installation work is completed and the network has been accepted by the customer . minimum monthly access fees for usage of the das networks are non-cancellable and generally escalate on an annual basis . these minimum monthly access fees are recognized ratably over the term of the telecom operator agreement . the initial term of our contracts with telecom operators generally range from five to twenty years and the agreements generally contain renewal clauses . story_separator_special_tag the estimated useful lives for property and equipment are as follows : software 2 to 5 years computer equipment 2 to 5 years furniture , fixtures and office equipment 3 to 5 years leasehold improvements the shorter of the estimated useful life or the remaining term of the agreements , generally ranging from 2 to 18 years we perform an impairment review of long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors we consider important that could trigger an impairment review include , but are not limited to , significant under-performance relative to projected future operating results , significant changes in the manner of our use of the acquired assets or our overall business and or product strategies and significant industry or economic trends . when we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of these indicators , we determine the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate or other indices of fair value . we would then recognize an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset . stock-based compensation stock-based compensation consists of stock options and restricted stock units ( `` rsus '' ) , which are granted to employees and non-employees . we recognize compensation expense equal to the grant date fair value on a straight-line basis , net of forfeitures , over the employee requisite service period . we recognize stock-based compensation expense for performance-based rsus when we believe that it is probable that the performance objectives will be met . the grant date fair value of our stock option awards is determined using the black-scholes option pricing model . income taxes income taxes are provided based on the liability method , which results in income tax assets and liabilities arising from temporary differences . temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years . the liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted . the liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized . we may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities , based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon settlement with the taxing authorities . we establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized . we evaluate the need for , and the adequacy of , valuation allowances based on the expected realization of our deferred tax assets . the factors used to assess the likelihood of realization include historical earnings , our latest forecast of taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets . 36 our effective tax rates are primarily affected by changes in our valuation allowances , the amount of our taxable income or losses in the various taxing jurisdictions in which we operate , the amount of federal and state net operating losses and tax credits , the extent to which we can utilize these net operating loss carryforwards and tax credits and certain benefits related to stock option activity . recent accounting pronouncements information regarding recent accounting pronouncements is contained in note 2 `` significant accounting policies '' to the accompanying consolidated financial statements included in part ii , item 8 , which is incorporated herein by this reference . key business metrics in addition to monitoring traditional financial measures , we also monitor our operating performance using key performance indicators . our key performance indicators follow : replace_table_token_9_th das nodes . this metric represents the number of active das nodes as of the end of the period . a das node is a single communications endpoint , typically an antenna , which transmits or receives radio frequency signals wirelessly . this measure is an indicator of the reach of our das network . we are experiencing strong customer demand from telecom operators to gain access to our das networks ; accordingly , we expect to continue to invest in securing , building out and upgrading our das networks to meet this demand . subscribersmilitary and subscribers retail . these metrics represent the number of paying customers who are on a month-to-month subscription plan at a given period end . military subscribers have increased as we deploy our service on new military bases . we also expect to see modest increases in military subscribers as we increase signups for new customers on existing military bases through targeted marketing and by continuing to build the boingo brand in the military vertical . retail subscribers have continued to decline as we have expanded our product offerings and enhanced our focus on our wholesale and advertising service offerings . connects . this metric shows how often individuals connect to our global wi-fi network in a given period . the connects include wholesale and retail customers in both customer pay locations and customer free locations where we are a paid service provider or receive sponsorship or promotion fees . we count each connect as a single connect regardless of how many times that individual accesses the network at a given venue during their 24 hour period . this measure is an indicator of paid activity throughout our network .
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results of operations the following tables set forth our results of operations for the specified periods . replace_table_token_10_th depreciation and amortization expense depreciation expense increased $ 10.9 million , or 28.5 % , in 2016 , as compared to 2015 , and depreciation expense increased $ 10.8 million , or 39.5 % , in 2015 , as compared to 2014 , primarily due to increased depreciation and amortization expense from our increased fixed assets for our das build-out projects , wi-fi networks , and software development in those periods . stock-based compensation expense stock-based compensation expense increased $ 3.4 million , or 36.3 % , in 2016 , as compared to 2015 , primarily due to additional stock-based compensation expenses for rsus granted in 2015 and 2016 . 40 further , in 2016 , our compensation committee determined to adjust its practice of making annual long-term equity grants and instead adopted a compensation cycle whereby it granted equity awards to our chief executive officer and chief financial officer covering the number of shares it might otherwise have granted in 2016 through 2018 , with `` cliff '' vesting dates in 2019. these grants were made to focus our chief executive officer and chief financial officer on the company 's overall long-term corporate and strategic goals , eliminate intervening quarterly vesting dates that force them to sell shares in the market to cover taxes triggered upon vesting , and strengthen the company 's ability to retain our senior management team over the next three years .
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forward-looking statements this annual report on form 10-k contains forward-looking statements , principally in the sections entitled “ business , ” “ risk factors , ” “ management 's discussion and analysis of financial condition and results of operations , ” and “ quantitative and qualitative disclosures about market risk. ” statements and financial discussion and analysis contained in this form 10-k that are not historical facts are forward-looking statements . these statements discuss goals , intentions and expectations as to future trends , plans , events , results of operations or financial condition , or state other information relating to us , based on our current beliefs as well as assumptions made by us and information currently available to us . forward-looking statements generally will be accompanied by words such as “ anticipate , ” “ believe , ” “ could , ” “ estimate , ” “ expect , ” “ forecast , ” “ intend , ” “ may , ” “ possible , ” “ potential , ” “ predict , ” “ project , ” or other similar words , phrases or expressions . this includes , without limitation , our statements and expectations regarding any current or future recovery in our industry and publicly announced plans for increased capital and investment spending to achieve our long-term revenue and profitability growth goals , and our expectations with respect to leverage . although we believe these forward-looking statements are reasonable , they are based upon a number of assumptions concerning future conditions , any or all of which may ultimately prove to be inaccurate . important factors that could cause actual results to differ materially from the forward-looking statements include , without limitation : the risks described in item 1a and in item 7a of this annual report on form 10-k ; changes in the financial stability of our clients or the overall economic environment , resulting in decreased corporate spending and service sector employment ; changes in relationships with clients ; the mix of products sold and of clients purchasing our products ; the success of new technology initiatives ; changes in business strategies and decisions ; competition from our competitors ; our ability to recruit and retain an experienced management team ; changes in raw material prices and availability ; restrictions on government spending resulting in fewer sales to the u.s. government , one of our largest customers ; our debt restrictions on spending ; our ability to protect our patents , copyrights and trademarks ; our reliance on furniture dealers to produce sales ; lawsuits arising from patents , copyrights and trademark infringements ; violations of environmental laws and regulations ; potential labor disruptions ; adequacy of our insurance policies ; the availability of future capital and the cost of borrowing ; the overall strength and stability of our dealers , suppliers , and customers ; access to necessary capital ; our ability to successfully integrate acquired businesses ; the success of our design and implementation of a new enterprise resource planning system ; and currency rate fluctuations . the factors identified above are believed to be important factors ( but not necessarily all of the important factors ) that could cause actual results to differ materially from those expressed in any forward-looking statement . unpredictable or unknown factors could also have material adverse effects on us . all forward-looking statements included in this form 10-k are expressly qualified in their entirety by the foregoing cautionary statements . except as required under the federal securities laws and the rules and regulations of the sec , we undertake no obligation to update , amend , or clarify forward-looking statements , whether as a result of new information , future events , or otherwise . overview we design , manufacture , market and sell high-end commercial and residential furniture , accessories , textiles , fine leathers and designer felt for the workplace and home . we work with clients to create inspired modern interiors . our design-driven businesses share a reputation for high-quality and sophistication offering a diversified product portfolio that endures throughout evolving trends and performs throughout business cycles . our products are targeted at the middle to upper-end of the market where we reach customers primarily through a broad network of independent dealers and distribution partners , through our direct sales force , and through our showrooms , as well as our online presence . business highlights during the last decade we have diversified our sources of revenue among our varying operating segments . during 2016 , over 37 % of our sales and 45 % of our profits came from outside our office segment . we continue to build knoll with an eye toward what works for our customers and shareholders : a constellation of high-design , high-margin businesses that leverage our historic relationships with architects , designers and decorators that combined with our disciplined approach to the management of our business has resulted in the creation of a singular entity . 26 we believe that over time our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise . the 2016 acquisitions of datesweiser and vladimir kagan further advance our strategy of building global capability as a singular go-to resource for high-design workplaces and homes . datesweiser plays an integral role in the creation of high performance workplaces as its sophisticated meeting and conference tables and credenzas set a standard for design , quality and technology integration . datesweiser products will be offered as a compliment of our ‘ ancillary ' offerings . vladimir kagan 's elegant and contemporary designs will be leveraged within our holly hunt distribution channels to maximize probability and growth in the future years . our efforts to diversify our sources of revenue among our operating segments has not detracted from our continued focus on growing and improving the operating performance of our office segment . story_separator_special_tag the most predominant growth was experienced in complimentary products where we have been aggressively investing . operating profit for the office segment in 2015 was $ 55.8 million , an increase of $ 17.7 million , or 46.5 % , when compared with 2014. the increase in operating profit was driven by more efficiency and continued work in our plants and a more profitable mix of product revenue . operating profit for the office segment in 2015 includes a $ 0.9 million seating product discontinuation charge and the $ 0.5 million restructuring charges . operating profit for the office segment in 2014 includes a restructuring charges of $ 2.1 million . studio net sales for the studio segment in 2015 were $ 303.8 million , an increase of $ 24.7 million , or 8.8 % , when compared with 2014. this increase in net sales was driven by strong sales growth in holly hunt , one additional month of holly hunt sales included in 2015 as well as additional sales growth in our north american studio business . operating profit for the studio segment in 2015 was $ 48.0 million , an increase of $ 10.1 million , or 26.7 % , when compared with 2014. the increase in operating profit was driven by foreign exchange benefits , increased sales volume and net price realization . operating profit for the studio segment in 2015 includes a $ 0.4 million restructuring charge . operating profit for the studio segment in 2014 includes a restructuring benefit of $ 0.9 million . coverings net sales for the coverings segment in 2015 were $ 113.7 million , a decrease of $ 1.2 million , or 1.1 % , when compared with 2014. for the full year 2015 , spinneybeck | filzfelt and knolltextiles all grew , while edelman was negatively impacted by weakness in the private aviation market . operating profit for the coverings segment in 2015 was $ 17.3 million , a decrease of $ 6.5 million , or 27.5 % , when compared with 2014. operating profit for the coverings segment in 2015 includes a $ 10.7 intangible asset impairment charge . operating profit for the coverings segment in 2014 includes $ 0.3 million of restructuring charges . corporate corporate costs in 2015 were $ 19.9 million , a decrease of $ 3.0 million , or 13.0 % , when compared with 2014. the decrease was driven primarily by a $ 6.1 million settlement charge recognized in 2014 related to pension and obep curtailments that did not reoccur in 2015 , partially offset by increased stock compensation expense and higher incentive compensation expenses . 32 reconciliation of non-gaap financial measures this annual report on form 10-k contains certain non-gaap financial measures . a “ non-gaap financial measure ” is a numerical measure of a company 's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with u.s. generally accepted accounting principles ( “ gaap ” ) in the statements of income , balance sheets , or statements of cash flow of the company . these non-gaap financial measures are presented because management uses this information to monitor and evaluate financial results and trends . therefore , management believes this information is also useful for investors . pursuant to applicable reporting requirements , the company has provided reconciliations below of non-gaap financial measures to the most directly comparable gaap measure . the non-gaap financial measures presented within this item are last twelve months ( “ ltm ” ) adjusted ebitda . these non-gaap measures are not indicators of our financial performance under gaap and should not be considered as an alternative to the applicable gaap measure . these non-gaap measures have limitations as analytical tools , and you should not consider them in isolation or as a substitute for analysis of our results as reported under gaap . in addition , in evaluating these non-gaap measures , you should be aware that in the future we may incur expenses similar to the adjustments in this presentation . our presentation of these non-gaap measures should not be construed as an inference that our future results will be unaffected by unusual or infrequent items . we compensate for these limitations by providing equal prominence of our gaap results and using non-gaap measures only as supplemental presentations . the following table reconciles net earnings to adjusted ebitda and computes our bank leverage calculations for the periods shown . the bank leverage calculation is in accordance with our second amended and restated credit agreement dated may 20 , 2014 . 12/31/2015 3/31/2016 6/30/2016 9/30/2016 12/31/2016 ( $ in millions ) debt levels ( 1 ) $ 238.7 $ 233.7 $ 221.7 $ 206.7 $ 231.8 ltm net earnings 66.0 65.8 69.3 74.1 82.1 ltm adjustments interest 6.1 6.2 6.2 5.0 4.7 taxes 37.5 37.8 39.3 39.6 45.4 depreciation and amortization 21.3 21.3 21.3 22.5 23.0 non-cash items and other ( 2 ) 12.5 21.9 22.4 23.8 13.4 ltm adjusted ebitda $ 143.4 $ 153.0 $ 158.5 $ 165.0 $ 168.6 bank leverage calculation ( 3 ) 1.67 1.53 1.40 1.25 1.37 ( 1 ) outstanding debt levels include outstanding letters of credit and guarantee obligations . excess cash over $ 15.0 million reduces outstanding debt per the terms of our credit facility , a copy of which was filed with the securities and exchange commission on may 21 , 2014 . ( 2 ) non-cash items and other includes , but is not limited to , an intangible asset impairment charge , stock-based compensation expenses , unrealized gains and losses on foreign exchange , and restructuring charges . ( 3 ) debt divided by ltm adjusted ebitda , as calculated in accordance with our credit facility . 33 liquidity and capital resources the following table highlights certain key cash flows and capital information pertinent to the discussion that follows : replace_table_token_13_th we have historically funded our business through cash generated from operations , supplemented by debt borrowings .
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results of operations comparison of consolidated results for the years ended december 31 , 2016 and december 31 , 2015 replace_table_token_9_th net sales net sales for the year ended december 31 , 2016 were $ 1,164.3 million , an increase of $ 59.9 million , or 5.4 % , from sales of $ 1,104.4 million for the year ended december 31 , 2015 . the increase in sales was largely due to a $ 44.4 million increase in office sales driven by continued growth in our core systems portfolio as well as an increase in complimentary products . while coverings segment sales were slightly down compared to the prior year , studio segment sales increased $ 19.6 million , led by knollstudio in north america and europe . 27 gross profit gross profit for 2016 was $ 446.0 million , an increase of $ 33.8 million , or 8.2 % , from gross profit of $ 412.1 million in 2015 . gross profit for 2015 includes a charge of $ 0.9 million due to the discontinuation of one of our seating products . as a percentage of sales , gross profit increased from 37.3 % for 2015 to 38.3 % for 2016 . this improvement was driven mainly by the office and studio segments , where operating efficiencies and improved fixed-cost leverage from higher volumes were favorable . operating profit operating profit for 2016 was $ 136.3 million , an increase of $ 35.2 million , or 34.8 % , from operating profit of $ 101.1 million for 2015 . operating profit as a percentage of sales increased from 9.2 % in 2015 to 11.7 % in 2016 . operating profit for 2015 included $ 11.5 million of restructuring and impairment charges . selling , general , and administrative expenses for 2016 were $ 309.7 million , or 26.6 % of sales , compared to $ 299.5 million , or 27.1 % of sales , for 2015 .
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however , the independent directors may not take any action which , under maryland law , must be taken by the entire board of directors or which is otherwise not within their authority . the independent directors , as a group , are authorized to retain their own legal and financial advisors . among the story_separator_special_tag the following discussion and analysis should be read in conjunction with the selected financial data above and our accompanying consolidated financial statements and the notes thereto . also see forward looking statements preceding part i. overview we were formed as a maryland corporation on september 18 , 2008 to invest in and manage a portfolio of income-producing retail properties , located primarily in the western united states , and real estate-related assets , including the investment in or origination of mortgage , mezzanine , bridge and other loans related to commercial real estate . on august 7 , 2009 , our registration statement on form s-11 ( file no . 333-154975 ) , registering a public offering of up to $ 1,100,000,000 in shares of our common stock , was declared effective under the securities act , and we commenced our initial public offering . we are offering up to 100,000,000 shares of our common stock to the public in our primary offering at $ 10.00 per share and up to 10,526,316 shares of our common stock pursuant to our distribution reinvestment plan at $ 9.50 per share . pursuant to the terms of our initial public offering , all subscription proceeds were placed in an account held by our escrow agent in trust for subscribers ' benefit until we had achieved gross offering proceeds of $ 2,000,000 from persons who are not affiliated with us . on november 12 , 2009 , we achieved the minimum offering amount of $ 2,000,000 and offering proceeds were released to us from the escrow account . we acquired our first property on november 19 , 2009. we are dependent upon proceeds received from the sale of shares of our common stock in our initial public offering and any indebtedness that we may incur in order to conduct our proposed real estate investment activities . we were capitalized with $ 200,000 which was contributed in cash on october 16 , 2008 , from the sale of 22,222 shares in the aggregate . our sponsor , thompson national properties , llc , or any affiliate of our sponsor , must maintain this investment while it remains our sponsor . as of december 31 , 2009 , we had accepted investors ' subscriptions for , and issued , 509,752 shares of our common stock , including shares issued pursuant to our distribution reinvestment plan , resulting in gross offering proceeds of $ 5,009,000. as of march 26 , 2010 , we had accepted investors ' subscriptions for , and issued , 893,318 shares of our common stock , including shares issued pursuant to our distribution reinvestment plan , resulting in gross offering proceeds of $ 8,806,000. we will experience a relative increase in liquidity as additional subscriptions for shares of our common stock are received and a relative decrease in liquidity as offering proceeds are used to acquire and operate our assets . 35 we are externally managed by our advisor , tnp strategic retail advisor , llc . our advisor may , but is not required to , establish working capital reserves from offering proceeds out of cash flow generated by our investments or out of proceeds from the sale of our investments . we do not anticipate establishing a general working capital reserve during the initial stages of our initial public offering ; however , we may establish capital reserves with respect to particular investments . we also may , but are not required to , establish reserves out of cash flow generated by investments or out of net sale proceeds in non-liquidating sale transactions . working capital reserves are typically utilized to fund tenant improvements , leasing commissions and major capital expenditures . our lenders also may require working capital reserves . to the extent that the working capital reserve is insufficient to satisfy our cash requirements , additional funds may be provided from cash generated from operations , through short-term borrowing or borrowings under our revolving credit agreement . in addition , subject to certain limitations , we may incur indebtedness in connection with the acquisition of any real estate asset , refinance the debt thereon , arrange for the leveraging of any previously unfinanced property or reinvest the proceeds of financing or refinancing in additional properties . we intend to qualify as a reit for federal income tax purposes , therefore we generally will not be subject to federal income tax on income that we distribute to our stockholders . if we fail to qualify as a reit in any taxable year , including and after the taxable year in which we initially elect to be taxed as a reit , we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a reit for federal income tax purposes for four years following the year in which qualification is denied . failing to qualify as a reit could materially and adversely affect our net income . review of our policies our board of directors , including our independent directors , has reviewed our policies described in this annual report and determined that they are in the best interest of our stockholders because : ( 1 ) they increase the likelihood that the company will be able to acquire a diversified portfolio of income producing properties , thereby reducing risk in its portfolio ; ( 2 ) the company 's executive officers , directors and affiliates of the advisor have expertise with the type of real estate investments the company seeks ; and ( 3 ) borrowings should enable the company to purchase assets and earn rental income more quickly , thereby increasing the likelihood of generating income for the company story_separator_special_tag the difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts receivable in the accompanying consolidated balance sheets . we anticipate collecting these amounts over the terms of the leases as scheduled rent payments are made . reimbursements from tenants for recoverable real estate taxes and operating expenses are accrued as revenue in the period the applicable expenditures are incurred . lease payments that depend on a factor that does not exist or is not measurable at the inception of the lease , such as future sales volume , would be contingent rentals in their entirety and , accordingly , would be excluded from minimum lease payments and included in the determination of income as they are earned . valuation of accounts receivable we have taken into consideration certain factors that require judgments to be made as to the collectability of receivables . collectability factors taken into consideration are the amounts outstanding , payment history and financial strength of the tenant , which taken as a whole determines the valuation . organization and offering costs our organization and offering costs ( other than selling commissions and the dealer manager fee ) are paid by our advisor and its affiliates on our behalf . such costs shall include legal , accounting , printing and other offering expenses , including marketing , salaries and direct expenses of our advisor 's employees and employees of our advisor 's affiliates and others . pursuant to our advisory agreement , we are obligated to reimburse our advisor or its affiliates , as applicable , for organization and offering costs associated with our initial public offering , provided that our advisor is obligated to reimburse us to the extent organization and offering costs , other than selling commissions and dealer manager fees , incurred by us exceed 3.0 % of our gross offering proceeds . any such reimbursement will not exceed actual expenses incurred by our advisor . prior to raising the minimum offering amount of $ 2,000,000 , we had no obligation to reimburse our advisor or its affiliates for any organization and offering costs . as of december 31 , 2009 , organization and offering costs incurred by our advisor on our behalf were $ 1,579,000. these costs are payable by us to the extent organization and offering costs , other than selling commissions and dealer manager fees , do not exceed 3.0 % of the gross proceeds of our initial public offering . as of december 31 , 2009 , organization and offering costs did exceed 3.0 % of the gross proceeds of our initial public offering , thus the amount in excess of 3.0 % , or $ 1,425,000 is deferred . all offering costs , including sales commissions and dealer manager fees are recorded as an offset to additional paid-in-capital , and all organization costs are recorded as an expense when we have an obligation to reimburse our advisor . we will reimburse our advisor for all expenses paid or incurred by our advisor in connection with the services provided to us , subject to the limitation that we will not reimburse our advisor for any amount by which our operating expenses ( including the asset management fee ) at the end of the four preceding fiscal quarters exceeds the greater of : ( 1 ) 2 % of our average invested assets , or ( 2 ) 25 % of our net income determined without reduction for any additions to depreciation , bad debts or other similar non-cash expenses and excluding any gain from the sale of our assets for that period . notwithstanding the above , we may reimburse our advisor for expenses in excess of this limitation if a majority of the independent directors determines that such excess expenses are justified based on unusual and nonrecurring factors . as of december 31 , 2009 , amounts incurred by our advisor in connection with services provided to us were $ 1,967,000 , of which $ 1,579,000 were organization and offering costs and $ 388,000 were other costs incurred on our behalf prior to achieving our minimum offering . income taxes we intend to elect to be taxed as a reit under sections 856 through 860 of the internal revenue code , commencing with the 2009 fiscal year which is the taxable year in which we satisfied the minimum offering requirements . as we believe we qualify for taxation as a reit , we generally will not be subject to federal 38 corporate income tax to the extent we distributed our reit taxable income to our stockholders , so long as we distributed at least 90 % of our reit taxable income ( which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with gaap ) . reits are subject to a number of other organizational and operations requirements . even though we believe we qualify for taxation as a reit , we may be subject to certain state and local taxes on our income and property , and federal income and excise taxes on its undistributed income . story_separator_special_tag financing activities , we invested approximately $ 12,500,000 in property acquisitions , and paid acquisition fees and closing costs of $ 408,000. we paid distributions to stockholders ( net of reinvested distributions ) of $ 6,000 for the year ended december 31 , 2009. net cash used in operating activities for the year ended december 31 , 2009 was $ 1,047,000. the excess cash generated from financing activities ( net of cash used in investing activities and net cash used in operating activities ) of $ 905,000 is expected to be used to pay liabilities or to make additional real estate investments .
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results of operations our results of operations for the year ended december 31 , 2009 are not indicative of those expected in future periods as we commenced real estate operations on november 19 , 2009 in connection with our first property acquisition . during the period from our inception ( september 18 , 2008 ) to december 31 , 2008 , we had been formed but had not yet commenced our ongoing initial public offering or real estate operations . as a result , we had no material results of operations for that period . as of december 31 , 2009 , we had acquired one property for an aggregate purchase price of $ 12,500,000 , plus closing costs . we funded the acquisition of this property with a combination of debt and proceeds from our ongoing initial public offering . we acquired the moreno property during the fourth quarter of 2009 , and therefore our financial statements do not reflect a full period of operations for this property . we expect that all income and expenses related to our portfolio will increase in future years as a result of owning the property acquired in 2009 for a full year and as a result of anticipated future acquisitions of real estate and real estate-related assets . revenue . total revenue for the year ended december 31 , 2009 , was $ 145,000 , which consisted of rental revenue from our sole property of $ 140,000 and $ 5,000 from other operating revenue . general and administrative expenses . general and administrative expenses were $ 660,000 for the year ended december 31 , 2009. these general and administrative expenses consisted primarily of legal and accounting , restricted stock compensation , directors fees , insurance , and organization fees .
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( “ risk factors ” ) and our audited consolidated financial statements included elsewhere in this annual report . some of the statements in the following discussion are forward-looking statements . see the discussion about forward-looking statements on page 1 of this annual report on form 10-k. executive overview ani pharmaceuticals , inc. and its consolidated subsidiaries , anip acquisition company and ani pharmaceuticals canada inc. ( together , “ ani , ” the “ company , ” “ we , ” “ us , ” or “ our ” ) is an integrated specialty pharmaceutical company focused on delivering value to our customers by developing , manufacturing , and marketing high quality branded and generic prescription pharmaceuticals . we focus on niche and high barrier to entry opportunities including controlled substances , anti-cancer ( oncolytics ) , hormones and steroids , and complex formulations . our three pharmaceutical manufacturing facilities , of which two are located in baudette , minnesota and one is located in oakville , ontario are together capable of producing oral solid dose products , as well as semi-solids , liquids and topicals , controlled substances , and potent products that must be manufactured in a fully-contained environment . our strategy is to use our assets to develop , acquire , manufacture , and market branded and generic specialty prescription pharmaceuticals . by executing this strategy , we believe we will be able to continue to grow our business , expand and diversify our product portfolio , and create long-term value for our investors . on june 19 , 2013 , biosante pharmaceuticals , inc. ( “ biosante ” ) acquired anip acquisition company ( “ anip ” ) in an all-stock , tax-free reorganization ( the “ merger ” ) , in which anip became a wholly-owned subsidiary of biosante . biosante was subsequently renamed ani pharmaceuticals , inc. the merger was accounted for as a reverse acquisition pursuant to which anip was considered the acquiring entity for accounting purposes . in 2014 , we acquired abbreviated drug applications ( “ andas ” ) for 31 generic products , the new drug application ( “ nda ” ) for lithobid , and the nda for vancocin , along with two related andas . we also launched our methazolamide product . in addition , we completed a follow-on public offering of common stock , yielding net proceeds of $ 46.7 million , and closed a public offering of $ 143.8 million of 3.0 % convertible senior notes due in 2019 ( the “ notes ” ) , with simultaneous bond hedge and warrant transactions . in 2015 , we acquired andas for 23 generic products , the nda for testosterone gel , and entered into a distribution agreement with idt australia limited ( “ idt ” ) to market several generic products in the u.s. we also launched six products during the year . in 2016 , we acquired the ndas and product rights for cortrophin gel , cortrophin-zinc , and inderal la , and acquired the rights to market and distribute our fenofibrate and hydrocortisone rectal cream products . we also entered into a three-year senior secured asset-based revolving credit facility for up to $ 30.0 million . during the 2016 year , we launched 11 products . in 2017 , we acquired the right , title , and interest in the ndas and the u.s. rights to market atacand , atacand hct , arimidex , and casodex . in addition , we acquired the nda , trademarks , and certain finished goods inventory for inderal xl and innopran xl . we also entered into a five-year senior secured credit facility ( the “ credit agreement ” ) comprised of a $ 75.0 million five-year term loan ( the “ term loan ” ) and a $ 50.0 million senior secured revolving credit facility ( the “ revolving credit facility ” ) . during the 2017 year , we launched six products . in 2018 , our subsidiary , ani pharmaceuticals canada inc. ( “ ani canada ” ) , acquired all the issued and outstanding equity interests of wellspring pharma services inc. ( “ wellspring ” ) , a canadian company that performs contract development and manufacturing of pharmaceutical products . in conjunction with the transaction , we acquired wellspring 's pharmaceutical manufacturing facility , laboratory , and offices , its current book of commercial business , as well as an organized workforce . following the consummation of the transaction , wellspring was merged into ani canada with the resulting entity 's name being ani pharmaceuticals canada inc. in addition , we acquired the andas for three previously-commercialized generic products , the approved andas for two generic products that have yet to be commercialized , the development package for one generic product , a license , supply , and distribution agreement for a generic product with an anda that is pending approval , and certain manufacturing equipment required to manufacture one of the products . we also acquired the andas for 23 previously-marketed generic products and api for four of the acquired products . during the 2018 year , we launched 11 products . 42 in addition , in december 2018 , we refinanced our $ 125.0 million credit agreement by entering into an amended and restated senior secured credit facility ( the “ credit facility ” ) for up to $ 265.2 million . the principal new feature of the credit facility is a $ 118.0 million delayed draw term loan ( the “ ddtl ” ) , which can only be drawn on in order to pay down the company 's remaining 3.0 % convertible senior notes , which will mature in december 2019. the credit facility also extended the maturity of the $ 72.2 million secured term loan balance to december 2023. in addition , the credit facility increased the previous $ 50.0 million line of credit ( the “ revolver ” ) to $ 75.0 million . as of december 31 , 2018 , we had not drawn on the revolver or ddtl . story_separator_special_tag in 2019 , we anticipate a decrease in royalty and other income primarily related to the launch of atacand , atacand hct , arimidex , and casodex under our own label in 2018. as described in item 1. business – government regulations – unapproved products , we receive royalties on the net sales of a group of contract-manufactured products , which are marketed by the customer without an fda-approved nda . if the fda took enforcement action against such customer , the customer may be required to seek fda approval for the group of products or withdraw them from the market . our royalties on the net sales of these unapproved products were less than 1 % of total revenues for the years ended december 31 , 2018 and 2017. cost of sales ( excluding depreciation and amortization ) years ended december 31 , ( in thousands ) 2018 2017 change % change cost of sales ( excl . depreciation and amortization ) $ 73,024 $ 79,032 $ ( 6,008 ) ( 7.6 ) % cost of sales consists of direct labor , including manufacturing and packaging , active and inactive pharmaceutical ingredients , freight costs , packaging components , and royalties related to profit-sharing arrangements . cost of sales does not include depreciation and amortization expense , which is reported as a separate component of operating expenses on our consolidated statements of operations . for the year ended december 31 , 2018 , cost of sales decreased to $ 73.0 million from $ 79.0 million for the same period in 2017 , a decrease of $ 6.0 million or 7.6 % , primarily due to lower sales of products subject to profit-sharing arrangements , as well as the lack of $ 7.5 million of costs of sales related to the excess of fair value over cost on inderal xl and innopran xl inventory , which impacted 2017. this decrease was tempered by $ 5.6 million of cost of sales related to the excess of fair value over costs on inderal xl and innopran xl inventory and the write-off of remaining inventory acquired as part of the acquisition when we re-launched the products under our own label during the first quarter of 2018. cost of sales as a percentage of net revenues decreased to 36.2 % during the year ended december 31 , 2018 , from 44.7 % during same period in 2017 , primarily as a result of increased royalty income and a change in product mix towards higher-margin brand products and lower sales of products subject to profit-sharing arrangements . cost of sales for the year ended december 31 , 2017 also included $ 7.5 million net impact on cost of sales ( 5.9 % as a percent of net revenues ) of the excess of fair value over cost for inderal xl and innopran xl inventory sold during the period . 47 we source the raw materials for our products from both domestic and international suppliers , which we carefully select . generally , we qualify only a single source of api for use in each product due to the cost and time required to validate and qualify a second source of supply . any change in one of our api suppliers must usually be approved through a pas by the fda . the process of obtaining an approval of such a pas can require between four and 18 months . while we also generally qualify a single source for non-api raw materials , the process required to qualify an alternative source of a non-api raw material is typically much less rigorous . if we were to change the supplier of a raw material for a product , the cost for the material could be greater than the amount we paid with the previous supplier . changes in suppliers are rare , but could occur as a result of a supplier 's business failing , an issue arising from an fda inspection , or failure to maintain our required standards of quality . as a result , we select suppliers with great care , based on various factors including quality , reliability of supply , and long-term financial stability . certain of the apis for our drug products , including those that are marketed without approved ndas or andas , such as eemt , are sourced from international suppliers . from time to time , we have experienced temporary disruptions in the supply of certain of such imported api due to fda inspections . during the year ended december 31 , 2018 , we purchased 13 % of our inventory from one supplier . as of december 31 , 2018 , amounts payable to this supplier was immaterial . in the year ended december 31 , 2017 , we purchased 23 % of our inventory from two suppliers . in order to manufacture morphine sulfate oral solution , opium tincture , oxycodone hydrochloride oral solution ( 5 mg/5 ml ) , oxycodone hydrochloride oral solution ( 100 mg/5 ml ) , and oxycodone hydrochloride capsules , we must submit a request to the drug enforcement agency ( “ dea ” ) for a quota to purchase the amount of morphine sulfate , opium , and oxycodone hydrochloride needed to manufacture the respective products . without approved quotas from the dea , we would not be able to purchase these ingredients from our suppliers . as a result , we are dependent upon the dea to annually approve a sufficient quota of api to support the continued manufacture of morphine sulfate oral solution , opium tincture , oxycodone hydrochloride oral solution ( 5 mg/5 ml ) , oxycodone hydrochloride oral solution ( 100 mg/5 ml ) , and oxycodone hydrochloride capsules . other operating expenses replace_table_token_5_th other operating expenses consist of research and development costs , selling , general , and administrative expenses , depreciation and amortization , and impairment charges .
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general the following table summarizes our results of operations for the years ended december 31 , 2018 , 2017 , and 2016. replace_table_token_2_th the following table sets forth , for the periods indicated , items in our consolidated statements of operations as a percentage of net revenues . replace_table_token_3_th 45 results of operations for the years ended december 31 , 2018 and 2017 net revenues replace_table_token_4_th we derive substantially all of our revenues from sales of generic and branded pharmaceutical products , contract manufacturing , and contract services , which include product development services , laboratory services , and royalties on net sales of certain products . net revenues for the year ended december 31 , 2018 were $ 201.6 million compared to $ 176.8 million for the same period in 2017 , an increase of $ 24.7 million , or 14.0 % , primarily as a result of the following factors : · net revenues for generic pharmaceutical products were $ 117.5 million during the year ended december 31 , 2018 , a slight decrease of 0.8 % compared to $ 118.4 million for the same period in 2017. the primary reason for the decrease was volume decreases for fenofibrate and nilutamide , as well as sales decreases for propranolol er driven by price , tempered by the impact of the second quarter 2017 launch of diphenoxylate hydrochloride and atropine sulfate , the second quarter 2018 launch of ezetimibe-simvastatin , and other products launched in 2018. in 2019 , we anticipate increases in generic pharmaceutical product revenues , primarily related to products we expect to launch in 2019. as described in item 1. business – government regulations – unapproved products , we market eemt and opium tincture without fda approved ndas . the fda 's policy with respect to the continued marketing of unapproved products appears in the fda 's september 2011 compliance policy guide sec . 440.100 titled `` marketed new drugs without approved ndas or andas . ''
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the risk free rate utilized was 2.2 % based upon the normalized 20-year u.s. treasury bond rate as of the effective story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this annual report on form 10-k. the following discussion contains forward-looking statements that are based on management 's current expectations , estimates and projections about our business and operations , and involves risks and uncertainties . our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors , including those we discuss under risk factors , cautionary note regarding forward-looking statements and elsewhere in this annual report on form 10-k. overview we are an independent exploration and production company focused on the application of modern drilling , completion and production operations techniques in oil and liquids-rich basins in the onshore united states . our operations are focused on exploration and production activities in the mississippian lime . as of december 31 , 2018 , our properties consisted of approximately 102,198 net acres of leasehold , with 498 gross productive wells , 85 % of which we operate , and in which we held an average working interest of approximately 88 % . as of december 31 , 2018 , our estimated net proved reserves were 72,422 mmboe , of which 52 % was oil or ngls and 68 % was proved developed . during the year ended december 31 , 2018 , our properties had aggregate net daily production of approximately 20,326 boe/d . as discussed in note 3. fresh start accounting in the notes to the consolidated financial statements set forth in part iv , item 15 of this annual report on form 10-k , upon our emergence from the chapter 11 cases on october 21 , 2016 , we adopted fresh start accounting as required by us gaap . as a result of the application of fresh start accounting , as well as the effects of the implementation of the plan , our consolidated financial statements on or after october 21 , 2016 , are not comparable with our consolidated financial statements prior to that date . references to successor period relate to the financial position and results of operations for the period october 21 , 2016 through december 31 , 2016 , and references to predecessor period refer to the financial position and results of operations of the company from january 1 , 2016 through october 20 , 2016. recent developments stock buyback program on november 15 , 2018 , we entered into a second amendment to the exit facility ( the second amendment ) . the second amendment provides the company with the ability to make dividends and distributions , including repurchases of its equity interests in cash , in each case , subject to certain conditions . on january 14 , 2019 , we announced the commencement of a tender offer to repurchase up to 5,000,000 shares of common stock at the offer price of $ 10.00 per share in the first quarter of 2019. on february 14 , 2019 , the tender offer was completed with 5,000,000 shares of common stock purchased at a purchase price of $ 10.00 per share . we partially funded the stock buyback by drawing down $ 39.0 million from our exit facility , with the remainder funded by cash on hand . sale of anadark basin assets on may 31 , 2018 , we closed on the sale of our anadarko basin assets for $ 58.0 million in cash ( $ 54.1 million , net of customary closing adjustments ) . the net proceeds were reflected as a reduction of oil and natural gas properties , with no gain or loss recognized as the sale did not result in a significant alteration of the full cost pool . we used $ 50.0 million of the net proceeds from the sale of the anadarko basin assets to pay down a portion of outstanding borrowings under our exit facility and retained the remainder for general corporate purposes . emergence from chapter 11 bankruptcy on the petition date , we filed voluntary petitions for reorganization under chapter 11 of the bankruptcy code in the united states bankruptcy court . our chapter 11 cases were jointly administered under the case styled in re midstates petroleum company , inc. , et al. , case no . 16-32237 . on september 28 , 2016 , the bankruptcy court entered the confirmation order , which approved and confirmed the plan . on the effective date , we satisfied the conditions to effectiveness set forth in the confirmation order and in the plan , and the plan therefore became effective in accordance with its terms and we emerged from bankruptcy . further information is set forth in note 2. emergence from voluntary reorganization under chapter 11 proceedings in the notes to the consolidated financial statements set forth in part iv , item 15 of this annual report on form 10-k. 41 fresh start accounting upon our emergence on the effective date , we adopted fresh start accounting as required by us gaap . we qualified for fresh start accounting because ( i ) the holders of existing voting shares of the pre-emergence debtor-in-possession received less than 50 % of the voting shares of the post-emergence successor entity and ( ii ) the reorganization value of our assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims . as discussed in note 3. fresh start accounting in the notes to the consolidated financial statements set forth in part iv , item 15 of this annual report on form 10-k , we applied fresh start accounting as of october 21 , 2016. adopting fresh start accounting results in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit . story_separator_special_tag we had open derivative contracts at december 31 , 2018 and 2017. our open derivative contracts at december 31 , 2018 extend through december 2020. we did not have any open commodity derivative contract positions at december 31 , 2016. the following table sets forth the components of our realized gain on commodity derivative contracts , net in our consolidated statements of operations ( in thousands ) : replace_table_token_18_th cash settlements , as presented in the table above , represent realized gains/losses related to our derivative instruments . in addition to cash settlements , we also recognize fair value changes on our derivative instruments in each reporting period . the changes in fair value result from new positions and settlements that may occur during each reporting period , as well as the relationships between contract prices and the associated forward curves . other revenues year ended december 31 , 2018 as compared to the year ended december 31 , 2017 our other revenues increased by $ 0.1 million , or 2.4 % , to $ 4.3 million during the year ended december 31 , 2018 , as compared to $ 4.2 million for the year ended december 31 , 2017. other revenue for the year ended december 31 , 2018 and 2017 , was primarily comprised of fees charged to other working interest owners for salt water disposal . successor period for the successor period , other revenues were $ 1.0 million . other revenue for the successor period was primarily comprised of fees charged to other working interest owners for salt water disposal . predecessor period for the predecessor period , other revenues were $ 4.8 million . other revenue for the predecessor period was primarily comprised of fees charged to other working interest owners for salt water disposal . 47 expenses replace_table_token_19_th lease operating and workover lease operating expenses represent costs incurred to bring oil and gas out of the ground and to the market , together with the daily costs incurred to maintain our producing properties . lease operating expenses include both a portion of costs that are fixed in nature , such as infrastructure costs , as well as variable costs resulting from additional wells and production , such as chemicals and electricity , which are primarily associated with the production of produced water . the production of hydrocarbons in our operating area results in a significant amount of produced water . our lease operating expenses are primarily driven by the handling and disposal of this produced water . as oil , ngls , and natural gas production increases , our average lease operating expense per barrel of oil equivalent is typically reduced because fixed costs do not increase proportionately with production . workover expense includes major remedial operations on a completed well to restore , maintain , or improve a well 's production and is closely correlated to the levels of workover activity . because workover projects are pursued on an as needed basis and are not regularly scheduled , workover expense is not necessarily comparable from period to period . year ended december 31 , 2018 as compared to the year ended december 31 , 2017 lease operating and workover expenses decreased $ 9.1 million , or 14.4 % , to $ 54.2 million , or $ 8.14 per boe , during the year ended december 31 , 2018 as compared to $ 63.3 million , or $ 7.83 per boe , for the year ended december 31 , 2017. lease operating and workover expense were down from prior year due to the lincoln county divestiture and the andarko basin divestiture . lease operating expense were also impacted by a decrease in production of 17.6 % during the year ended december 31 , 2018. workover expenses increased $ 3.0 million , or 34 % , to $ 11.9 million during december 31 , 2018 compared to $ 8.9 million for the year ended december 31 , 2017 as a result of our enhanced workover plan that we executed during the first half of 2018. successor period for the successor period , our lease operating and workover expenses were $ 15.3 million at a cost of $ 8.52 per boe . lease operating and workover expenses for the successor period were impacted by weather disruptions , which lowered production and increased costs during the period . predecessor period for the predecessor period , our lease operating and workover expenses were $ 52.8 million at a cost of $ 6.02 per boe . 48 gathering and transportation gathering and transportation costs are incurred for the movement of natural gas to the contractual delivery point . for the year ended december 31 , 2018 , 2017 , the successor period and the predecessor period , these costs relate to the amended gas transportation , gathering and processing contract which commenced during the third quarter of 2013 in our mississippian lime assets . year ended december 31 , 2018 as compared to the year ended december 31 , 2017 gathering and transportation expenses decreased $ 14.3 million , or 98.6 % , to $ 0.2 million , or $ 0.04 per boe , during the year ended december 31 , 2018 as compared to $ 14.5 million , or $ 1.79 per boe , for the year ended december 31 , 2017. gathering and transportation expenses decreased for the year ended december 31 , 2018 , primarily as a result of our adoption of asc 606 on january 1 , 2018. as a result , $ 12.4 million in gathering and transportation expenses for the year ended december 31 , 2018 , are reflected as a decrease in oil , ngls and natural gas sales in the consolidated statements of operations . gathering and transportation , excluding adjustments for asc 606 , decreased $ 1.9 million for the year ended december 31 , 2018 , due to a decrease in natural gas production in our mississippian lime asset .
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results of operations oil , ngls and natural gas revenue oil , ngls and natural gas our revenues are derived from the sale of oil and natural gas production , as well as the sale of ngls that are extracted from our high btu content natural gas . on january 1 , 2018 , financial accounting standards board ( fasb ) accounting standards update ( asu ) 2014-09 became effective for us . see critical accounting policies and estimates below as well as recent accounting pronouncements adopted during the period in note 4. summary of significant accounting policies in the notes to the consolidated financial statements set forth in part iv , item 15 of this annual report on form 10-k , for year ended december 31 , 2018 , for further discussion of updates to our revenues under fasb accounting standards codification ( asc ) 606 . as a result , oil , ngls and natural gas revenues are recognized at the point in time that control of the product is transferred to the customer and collectability is reasonably assured . our oil and natural gas revenues do not include the effects of derivatives and may vary significantly from period to period as a result of changes in production volumes or commodity prices . prices for oil , ngls and natural gas fluctuate widely and affect : · the amount of our cash flows available for capital expenditures ; · our ability to borrow and raise additional capital ; · the quantity of oil , ngls and natural gas we can economically produce ; and · our revenues and profitability . average market prices for oil and ngls have historically experienced significant volatility . for a description of factors that may impact future commodity prices , please read risk factorsrisks related to the oil and natural gas industry and our business .
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overview we are the largest recreational boat and yacht retailer in the united states with fiscal 2018 revenue approaching $ 1.2 billion . through our current 63 retail locations in 16 states ( as of the filing of this annual report on form 10-k ) , we sell new and used recreational boats and related marine products , including engines , trailers , parts , and accessories . we also arrange related boat financing , insurance , and extended service contracts ; provide boat repair and maintenance services ; offer yacht and boat brokerage sales ; yacht charter services ; and , where available , offer slip and storage accommodations , as well as the charter of power yachts in the british virgin islands . marinemax was incorporated in january 1998 ( and reincorporated in florida in march 2015 ) . we commenced operations with the acquisition of five independent recreational boat dealers on march 1 , 1998. since the initial acquisitions in march 1998 , we have , as of the filing of this annual report on form 10-k , acquired 28 recreational boat dealers , two boat brokerage operations , and two full-service yacht repair facilities . as a part of our acquisition strategy , we frequently engage in discussions with various recreational boat dealers regarding their potential acquisition by us . potential acquisition discussions frequently take place over a long period of time and involve difficult business integration and other issues , including , in some cases , management succession and related matters . as a result of these and other factors , a number of potential acquisitions that from time to time appear likely to occur do not result in binding legal agreements and are not consummated . we completed three acquisitions in the fiscal year ended september 30 , 2016 , one in the fiscal year ended september 30 , 2017 , and three acquisitions in the fiscal year ending september 30 , 2018. general economic conditions and consumer spending patterns can negatively impact our operating results . unfavorable local , regional , national , or global economic developments or uncertainties regarding future economic prospects could reduce consumer spending in the markets we serve and adversely affect our business . economic conditions in areas in which we operate dealerships , particularly florida in which we generated approximately 55 % , 55 % , and 51 % of our revenue during fiscal 2016 , 2017 , and 2018 , respectively , can have a major impact on our operations . local influences , such as corporate downsizing , military base closings , and inclement weather such as hurricanes and other storms , environmental conditions , and specific events , such as the bp oil spill in the gulf of mexico in 2010 , also could adversely affect , and in certain instances have adversely affected , our operations in certain markets . in an economic downturn , consumer discretionary spending levels generally decline , at times resulting in disproportionately large reductions in the sale of luxury goods . consumer spending on luxury goods also may decline as a result of lower consumer confidence levels , even if prevailing economic conditions are favorable . as a result , an economic downturn could impact us more than certain of our competitors due to our strategic focus on a higher end of our market . although we have expanded our operations during periods of stagnant or modestly declining industry trends , the cyclical nature of the recreational boating industry or the lack of industry growth may adversely affect our business , financial condition , and results of operations . any period of adverse economic conditions or low consumer confidence is likely to have a negative effect on our business . lower consumer spending resulting from a downturn in the housing market and other economic factors adversely affected our business in fiscal 2007 , and continued weakness in consumer spending and depressed economic conditions had a substantial negative effect on our business and industry for several years after fiscal 2007. these conditions caused us to substantially reduce our acquisition program , delay new store openings , reduce our inventory purchases , engage in inventory reduction efforts , close a number of our retail locations , reduce our headcount , and amend and replace our credit facility . acquisitions and new store openings remain important strategies to our company , and we plan to accelerate our growth through these strategies as industry conditions continue to improve . however , we can not predict the length of unfavorable economic or industry conditions or the extent to which they could adversely affect our operating results nor can we predict the effectiveness of the measures we have taken to address unfavorable economic or industry conditions . although past economic conditions have adversely affected our operating results , we believe we have capitalized on our core strengths to substantially outperform the industry , resulting in market share gains . our ability to capture such market share supports the alignment of our retailing strategies with the desires of consumers . we believe the steps we have taken to address weak market conditions have yielded , and will yield in the future , an increase in revenue . we expect our core strengths and retailing strategies will position us to capitalize on growth opportunities as they occur and will allow us to emerge with greater earnings potential as industry conditions continue to recover . 43 application of critical accounting policies we have identified the policies below as critical to our business operations and the understanding of our results of operations . the impact and risks related to these policies on our business operations is discussed throughout management 's discussion and analysis of financial condition and results of operations when such policies affect our reported and expected financial results . story_separator_special_tag as of september 30 , 2017 and september 30 , 2018 , our lower of cost or net realizable value valuation allowance for new and used boat , motor , and trailer inventories was $ 1.8 million and $ 1.5 million , respectively . if events occur and market conditions change , causing the fair value to fall below carrying value , the lower of cost or net realizable value valuation allowance could increase . goodwill we account for goodwill in accordance with fasb accounting standards codification 350 , “ intangibles - goodwill and other ” ( “ asc 350 ” ) , which provides that the excess of cost over net assets of businesses acquired is recorded as goodwill . in january 2017 , we purchased hall marine group , a privately owned boat dealer in the southeast united states with locations in north carolina , south carolina , and georgia , resulting in the recording of $ 16.0 million in goodwill . in january 2018 , we purchased island marine center , a privately owned boat dealer located in new jersey resulting in the recording of $ 1.3 million in goodwill . in total , current and previous acquisitions have resulted in the recording of $ 27.4 million in goodwill . in accordance with asc 350 , we review goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable . our annual impairment test is performed during the fourth fiscal quarter . if the carrying amount of goodwill exceeds its fair value we would recognize an impairment loss in accordance with asc 350. as of september 30 , 2018 , and based upon our most recent analysis , we determined through our qualitative assessment that it is not “ more likely than not ” that the fair values of our reporting units are less than their carrying values . as a result , we were not required to perform a quantitative goodwill impairment test . the qualitative assessment requires us to make judgments and assumptions regarding macroeconomic and industry conditions , our financial performance , and other factors . we do not believe there is a reasonable likelihood that there will be a change in the judgments and assumptions used in our qualitative assessment which would result in a material effect on our operating results . impairment of long-lived assets fasb accounting standards codification 360-10-40 , “ property , plant , and equipment - impairment or disposal of long-lived assets ” ( “ asc 360-10-40 ” ) , requires that long-lived assets , such as property and equipment and purchased intangibles subject to amortization , be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate . if such assets are considered to be impaired , the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value . estimates of expected future cash flows represent our best estimate based on currently available information and reasonable and supportable assumptions . our impairment loss calculations contain uncertainties because they require us to make assumptions and to apply judgment in order to estimate expected future cash flows . any impairment recognized in accordance with asc 360-10-40 is permanent and may not be restored . the analysis is performed at a regional level for indicators of permanent impairment given the geographical interdependencies among our locations . based upon our most recent analysis , we believe no impairment of long-lived assets existed as of september 30 , 2018. we do not believe there is a reasonable likelihood that there will be a change in the future estimates or assumptions used to test for recoverability which would result in a material effect on our operating results . 45 stock-based compensation we account for our stock-based compensation plans following the provisions of fasb accounting standards codification 718 , “ compensation — stock compensation ” ( “ asc 718 ” ) . in accordance with asc 718 , we use the black-scholes valuation model for valuing all stock-based compensation and shares purchased under our employee stock purchase plan . we measure compensation for restricted stock awards and restricted stock units at fair value on the grant date based on the number of shares expected to vest and the quoted market price of our common stock . we recognize compensation cost for all awards in operations , net of estimated forfeitures , on a straight-line basis over the requisite service period for each separately vesting portion of the award . our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards . these assumptions and judgments include estimating the volatility of our stock price , expected dividend yield , employee turnover rates and employee stock option exercise behaviors . we do not believe there is a reasonable likelihood that there will be a change in the future estimates or assumptions we use to calculate our stock-based compensation which would result in a material effect on our operating results . income taxes we account for income taxes in accordance with fasb accounting standards codification 740 , “ income taxes ” ( “ asc 740 ” ) . under asc 740 , we recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . we measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled . we record valuation allowances to reduce our deferred tax assets to the amount expected to be realized by considering all available positive and negative evidence .
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results of op erations the following table sets forth certain financial data as a percentage of revenue for the periods indicated : replace_table_token_9_th fiscal year ended september 30 , 2018 , compared with fiscal year ended september 30 , 2017 revenue . revenue increased $ 125.1 million , or 11.9 % , to approximately $ 1.177 billion for the fiscal year ended september 30 , 2018 from $ 1.052 billion for the fiscal year ended september 30 , 2017. of this increase , $ 100.3 million was attributable to a 10 % increase in comparable-store sales and an approximate $ 24.8 million net increase related to stores opened or closed that were not eligible for inclusion in the comparable-store base . the increase in our comparable-store sales was primarily due to incremental increases in new and used boat sales and incremental increases in brokerage sales , storage services , finance and insurance products , service revenue , and parts revenue . improving industry conditions resulting from improved economic conditions contributed to our comparable-store sales growth . gross profit . gross profit increased $ 32.9 million , or 12.4 % , to $ 298.2 million for the fiscal year ended september 30 , 2018 from $ 265.3 million for the fiscal year ended september 30 , 2017. gross profit as a percentage of revenue increased to 25.3 % for the fiscal year ended september 30 , 2018 from 25.2 % for the fiscal year ended september 30 , 2017. the increase in gross profit as a percentage of revenue was primarily the result of improved margins on boat sales and our higher margin service , parts and accessories products , and storage services . the increase in gross profit dollars was primarily attributable to the increase in our gross margins and increased boat sales . selling , general , and administrative expenses .
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the acquisition was funded through borrowings under our revolving credit facility with jpmorgan chase bank , n.a . stoneridge 's pollak business had manufacturing and distribution story_separator_special_tag the following discussion should be read in conjunction with our consolidated financial statements and the notes thereto . this discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended december 31 , 2020. story_separator_special_tag 10pt ; font-family : 'times new roman ' ; font-weight : bold ; font-style : italic ; '' > discounts , allowances , and incentives . we offer a variety of usual customer discounts , allowances and incentives . first , we offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice . second , we offer pricing discounts based on volume purchased from us and participation in our cost reduction initiatives . these discounts are principally in the form of “ off-invoice ” discounts and are immediately deducted from sales at the time of sale . for those customers that choose to receive a payment on a quarterly basis instead of “ off-invoice , ” we accrue for such payments as the related sales are made and reduce sales accordingly . finally , rebates and discounts are provided to customers as advertising and sales force allowances , and allowances for warranty and overstock returns are also provided . management analyzes historical returns , current economic trends , and changes in customer demand when evaluating the adequacy of the sales returns and other allowances . significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period . we account for these discounts and allowances as a reduction to revenues , and record them when sales are recorded . impact of the novel coronavirus ( “ covid-19 ” ) the global outbreak of the novel coronavirus ( covid-19 ) pandemic has created significant volatility , uncertainty and economic disruption in many countries in which we operate , including the united states , mexico , canada , poland , and china . in certain countries in which we operate , national , state and local governments implemented a variety of measures in response to the covid-19 pandemic that had the effect of restricting or limiting , among other activities , the operations of certain businesses . while many of these measures have eased , allowing for increased economic activity , there can be no assurances that restrictive measures will not be implemented again if the outbreak were to increase . as we were declared an essential business under national and regional shelter-in-place orders , our business operations have continued throughout 2020. although we initially experienced a significant reduction in customer demand for our products in the second quarter of 2020 , our business began to rebound in the last half of the quarter as we experienced an increase in incoming orders and increased demand for our products . this trend continued into the second half of 2020 as our business improved to pre-covid-19 levels with our customers ' pos sales exceeding their comparable figures for 2019 , resulting in strong second half of 2020 results . 30 index in response to the covid-19 pandemic , we established a committee , comprised of our executive officers , to oversee the company 's risk identification , management and mitigation strategies regarding the impact of the pandemic on our business and operations . among the issues that are actively being managed by the committee are those relating to the management of inventories and production volumes , cost reduction and cash preservation initiatives , and the enactment of policies and practices to ensure the health and safety of our employees , contractors and customers , as well as the impact of the continued duration and scope of the pandemic , of governmental measures in response to the pandemic , of potentially declining customer demand for our products , and of the potential future deterioration of general economic conditions and disruptions in our supply chain . the committee continues to meet on a regular basis , closely monitoring events related to the pandemic and any appropriate actions that may be taken . commencing in the second quarter of 2020 , we implemented many cost reduction measures in response to the impact of the covid-19 pandemic on our business , including the reduction of discretionary spending , salary reductions of our executive officers and board of directors , and suspension of our quarterly cash dividend payments and stock repurchases . in september 2020 , our board of directors approved to reinstate our stock repurchase program ; and in october 2020 our board of directors approved the reinstatement of our quarterly cash dividend of $ 0.25 per share . in november 2020 , we reinstated the salaries of our executive officers and board of directors and retroactively restored their compensation . regarding the health and welfare of our employees , contractors and customers , we have implemented a number of policies and practices at all of our facilities . we have provided personal protection equipment , including face masks and gloves , to all our employees and require their usage while at work , have installed plexiglas partitions where appropriate , and require temperature checks for all employees and visitors upon entering our facilities . we have established protocols for individuals who have tested positive , and for employees who have symptoms or have been exposed to the virus . all of our facilities are thoroughly cleaned and sanitized daily , and all state mandated protocols are followed as employees return to work after the lifting of shelter-in-place orders . the health and safety of our employees , vendors and visitors has always been and will continue to be our first priority . story_separator_special_tag after a downturn in net sales initially in the second quarter of 2020 due to impact of the covid-19 pandemic , customer orders strengthened in the last half of the second quarter and continued throughout the second half of 2020 , resulting in strong engine management net sales in the second half of 2020 , which have largely offset the steep declines experienced earlier in the year . temperature control 's net sales increased $ 3.6 million , or 1.3 % , to $ 282 million for the year ended december 31 , 2020. net sales in the compressors product group for the year ended december 31 , 2020 were $ 163.1 million , an increase of $ 2.6 million , or 1.6 % , compared to $ 160.5 million in the same period of 2019. net sales in the other climate control parts group for the year ended december 31 , 2020 were $ 118.9 million , an increase of $ 1 million , or 0.9 % , compared to $ 117.9 million for the year ended december 31 , 2019. temperature control 's increase in net sales for the year ended december 31 , 2020 , when compared to the same period in 2019 , reflects the impact of a strong second half of the year after a significant year-over-year decrease in net sales in the first and second quarters of 2020. the lower year-over-year net sales in the first half of 2020 reflects the impact of strong pre-season orders in the first quarter of 2019 that did not recur in the first quarter of 2020 ; and the impact in the second quarter of 2020 of the covid-19 pandemic and resulting national and regional shelter-in-place orders related thereto . after a downturn in net sales in the first quarter of 2020 , and initially in the second quarter of 2020 due to impact of the covid-19 pandemic , temperature control 's net sales strengthened in the last half of the second quarter and continued throughout the second half of 2020 , aided by the impact of very warm summer weather conditions , which more than offset the declines earlier in the year . demand for our temperature control products may vary significantly with summer weather conditions and customer inventory levels . 33 index margins . gross margins , as a percentage of consolidated net sales , increased to 29.8 % for 2020 , compared to 29.2 % for 2019. the following table summarizes gross margins by segment for the years ended december 31 , 2020 and 2019 , respectively ( in thousands ) : replace_table_token_6_th ( a ) segment net sales include intersegment sales in our engine management and temperature control segments . compared to 2019 , gross margins at engine management increased 0.5 percentage points from 29.6 % to 30.1 % , while gross margins at temperature control increased 1.5 percentage points from 25.2 % to 26.7 % . the gross margin percentage increases at both engine management and temperature control reflect the impact of improved year-over-year absorption in the third and fourth quarters of 2020 , as production volumes increased due to higher year-over-year customer demand , which more than offset the decline in gross margins in the second quarter of 2020 caused by lower absorption and production volumes . the lower production volume at both engine management and temperature control in the second quarter of 2020 was reflective of the general slowdown in the worldwide economy caused by the covid-19 pandemic , as we temporarily reduced production levels in several of our facilities in line with lower customer demand . as customer demand began to increase , the production levels at all of our facilities were adjusted to meet the increase in customer demand , resulting in higher year-over-year production volumes in the second half of 2020. selling , general and administrative expenses . selling , general and administrative expenses ( “ sg & a ” ) decreased to $ 224.7 million , or 19.9 % of consolidated net sales in 2020 , as compared to $ 234.7 million , or 20.6 % of consolidated net sales in 2019. the $ 10 million decrease in sg & a expenses as compared to 2019 is principally due to lower selling and marketing expenses , lower costs incurred related to our accounts receivable supply chain financing arrangements resulting primarily from lower discount rates , annual savings initiatives , and to a lesser extent by certain non-recurring benefits from cost reduction initiatives . these decreases more than offset the impact of slightly higher distribution expenses , covid-19 related costs , and $ 1.1 million of incremental expenses from our april 2019 acquisition of certain assets and liabilities of the pollak business of stoneridge inc. , including amortization of intangible assets acquired . intangible asset impairment . in december 2020 , a large retail customer informed us of its decision to pursue a private brand strategy for its engine management product line . as a result of this development , we anticipate that products sold under the bwd trademark will be significantly reduced and uncertain beyond the first quarter of 2021. in connection with the decision , we recorded an impairment charge of $ 2.6 million in 2020. restructuring and integration expenses . restructuring and integration expenses were $ 0.5 million in 2020 compared to restructuring and integration expenses of $ 2.6 million in 2019. restructuring and integration expenses incurred in 2020 relate to ( 1 ) $ 0.3 million in environmental cleanup costs for ongoing monitoring and remediation in connection with the prior closure of our manufacturing operations at our long island city , new york location , and ( 2 ) $ 0.2 million in costs related to the residual relocation activities in our engine management segment in connection with our integration of the pollak business of stoneridge , inc. , acquired in april 2019. restructuring and integration expenses incurred in 2019 of $ 2.6 million consisted of ( 1 ) $ 2.2 million of expenses related to relocation of certain inventory , machinery and equipment acquired in our
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overview we are a leading independent manufacturer and distributor of premium replacement parts for the engine management and temperature control systems of motor vehicles in the automotive aftermarket industry with a complementary focus on the heavy duty , industrial equipment and original equipment markets . we are organized into two operating segments . each segment focuses on providing our customers with full-line coverage of its products , and a full suite of complementary services that are tailored to our customers ' business needs and driving end-user demand for our products . we sell our products primarily to automotive aftermarket retailers , program distribution groups , warehouse distributors , original equipment manufacturers and original equipment service part operations in the united states , canada , europe , asia , mexico and other latin american countries . our business strategy our mission is to be the best full-line , full-service supplier of premium engine management and temperature control products . the key elements of our strategy are as follows : maintain our strong competitive position in our engine management and temperature control businesses . we are a leading independent manufacturer and distributor serving north america and other geographic areas in our core businesses of engine management and temperature control . we believe that our success is attributable to our emphasis on product quality , the breadth and depth of our product lines for both domestic and import vehicles , and our reputation for outstanding value-added services .
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