ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
ASSETS
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
123,319
|
|
|
$
|
147,634
|
|
Marketable securities
|
16,973
|
|
|
66,357
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,123 and $3,029 at September 30, 2016 and December 31, 2015, respectively
|
217,307
|
|
|
143,692
|
|
Prepaid expenses and other assets
|
48,242
|
|
|
49,262
|
|
Total current assets
|
405,841
|
|
|
406,945
|
|
Marketable securities
|
3,968
|
|
|
19,635
|
|
Property and equipment, net
|
168,083
|
|
|
168,280
|
|
Goodwill
|
315,185
|
|
|
221,271
|
|
Intangible assets, net
|
215,666
|
|
|
174,322
|
|
Deferred tax assets
|
1,904
|
|
|
3,560
|
|
Other assets
|
14,082
|
|
|
16,215
|
|
Total assets
|
$
|
1,124,729
|
|
|
$
|
1,010,228
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
28,724
|
|
|
$
|
26,038
|
|
Accrued expenses
|
54,066
|
|
|
45,819
|
|
Deferred revenues
|
26,106
|
|
|
8,323
|
|
Contingent consideration obligation
|
8,229
|
|
|
—
|
|
Short term debt
|
38,000
|
|
|
—
|
|
Total current liabilities
|
155,125
|
|
|
80,180
|
|
Lease financing obligation - long term
|
13,082
|
|
|
13,343
|
|
Contingent consideration obligation - long-term
|
—
|
|
|
930
|
|
Convertible debt
|
225,938
|
|
|
224,878
|
|
Deferred tax liability
1
|
26,397
|
|
|
16,404
|
|
Other liabilities
|
20,399
|
|
|
3,227
|
|
Redeemable noncontrolling interest
|
52,616
|
|
|
61,452
|
|
Stockholders’ equity:
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding at September 30, 2016 and December 31, 2015
|
—
|
|
|
—
|
|
Common stock, $0.0001 par value; 100,000 shares authorized, 49,309 and 48,084 shares issued; 45,315 and 44,405 outstanding at September 30, 2016 and December 31, 2015, respectively
|
3
|
|
|
4
|
|
Treasury stock, at cost (3,994 and 3,679 shares at September 30, 2016 and December 31, 2015, respectively)
|
(95,183
|
)
|
|
(65,651
|
)
|
Additional paid-in capital
1
|
561,992
|
|
|
512,802
|
|
Accumulated other comprehensive loss
|
(31,788
|
)
|
|
(38,684
|
)
|
Retained earnings
1
|
196,148
|
|
|
201,343
|
|
Total stockholders’ equity
|
631,172
|
|
|
609,814
|
|
Total liabilities and stockholders’ equity
|
$
|
1,124,729
|
|
|
$
|
1,010,228
|
|
1
See Note 2 for discussion of the adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net revenues
|
$
|
176,421
|
|
|
$
|
150,874
|
|
|
$
|
476,658
|
|
|
$
|
421,620
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services*
|
77,230
|
|
|
63,438
|
|
|
217,004
|
|
|
172,013
|
|
Research and development
|
28,141
|
|
|
23,986
|
|
|
78,408
|
|
|
68,472
|
|
Selling, general and administrative
|
31,600
|
|
|
21,003
|
|
|
89,799
|
|
|
60,603
|
|
Net change in contingent consideration obligation
|
572
|
|
|
—
|
|
|
7,299
|
|
|
—
|
|
Restructuring charges
|
977
|
|
|
399
|
|
|
5,139
|
|
|
5,090
|
|
Depreciation and amortization
|
24,692
|
|
|
19,754
|
|
|
74,009
|
|
|
51,221
|
|
Total costs and expenses
|
163,212
|
|
|
128,580
|
|
|
471,658
|
|
|
357,399
|
|
Income from operations
|
13,209
|
|
|
22,294
|
|
|
5,000
|
|
|
64,221
|
|
Interest income
|
271
|
|
|
546
|
|
|
1,492
|
|
|
1,483
|
|
Interest expense
|
(1,596
|
)
|
|
(1,448
|
)
|
|
(5,006
|
)
|
|
(4,208
|
)
|
Other income (expense), net
|
(167
|
)
|
|
(1,030
|
)
|
|
(186
|
)
|
|
(601
|
)
|
Income before income tax expense
|
11,717
|
|
|
20,362
|
|
|
1,300
|
|
|
60,895
|
|
Income tax expense
1
|
(6,884
|
)
|
|
(10,717
|
)
|
|
(14,853
|
)
|
|
(25,535
|
)
|
Net income (loss)
|
4,833
|
|
|
9,645
|
|
|
(13,553
|
)
|
|
35,360
|
|
Net loss attributable to noncontrolling interests
|
(2,843
|
)
|
|
—
|
|
|
(8,836
|
)
|
|
—
|
|
Net income (loss) attributable to Synchronoss
|
$
|
7,676
|
|
|
$
|
9,645
|
|
|
$
|
(4,717
|
)
|
|
$
|
35,360
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to Synchronoss:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.18
|
|
|
$
|
0.23
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.84
|
|
Diluted
|
$
|
0.16
|
|
|
$
|
0.21
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.77
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
43,560
|
|
|
42,491
|
|
|
43,488
|
|
|
42,077
|
|
Diluted
|
48,590
|
|
|
47,692
|
|
|
43,488
|
|
|
47,505
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Synchronoss
|
$
|
10,768
|
|
|
$
|
8,994
|
|
|
$
|
2,179
|
|
|
$
|
22,021
|
|
________________________________
* Cost of services excludes depreciation and amortization which is shown separately.
1
See Note 2 for discussion of the adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
(As Adjusted)
|
Net (loss) income
|
$
|
(13,553
|
)
|
|
$
|
35,360
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
74,009
|
|
|
51,221
|
|
Amortization of debt issuance costs
|
1,197
|
|
|
1,125
|
|
Loss on disposals
|
(70
|
)
|
|
—
|
|
Amortization of bond premium
|
1,214
|
|
|
1,261
|
|
Deferred income taxes
|
5,537
|
|
|
(11,772
|
)
|
Non-cash interest on leased facility
|
763
|
|
|
694
|
|
Stock-based compensation
|
25,407
|
|
|
21,234
|
|
Contingent consideration obligation
|
7,299
|
|
|
(1,532
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
|
(72,871
|
)
|
|
(40,442
|
)
|
Prepaid expenses and other current assets
1
|
5,315
|
|
|
8,020
|
|
Other assets
|
4,558
|
|
|
(670
|
)
|
Accounts payable
|
(5,679
|
)
|
|
106
|
|
Accrued expenses
1
|
4,070
|
|
|
10,497
|
|
Other liabilities
|
(6,596
|
)
|
|
(138
|
)
|
Deferred revenues
|
25,884
|
|
|
1,610
|
|
Net cash provided by operating activities
|
56,484
|
|
|
76,574
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Purchases of fixed assets
|
(46,189
|
)
|
|
(53,461
|
)
|
Purchases of intangible assets
|
—
|
|
|
(1,200
|
)
|
Purchases of marketable securities available-for-sale
|
(12,841
|
)
|
|
(105,817
|
)
|
Maturities of marketable securities available-for-sale
|
76,979
|
|
|
75,370
|
|
Businesses acquired, net of cash
|
(98,428
|
)
|
|
(83,592
|
)
|
Net cash used in investing activities
|
(80,479
|
)
|
|
(168,700
|
)
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
9,382
|
|
|
16,752
|
|
Taxes paid on withholding shares
1
|
(7,176
|
)
|
|
(15,472
|
)
|
Payments on contingent consideration obligation
|
—
|
|
|
(4,468
|
)
|
Debt issuance costs related to convertible notes
|
(1,346
|
)
|
|
—
|
|
Borrowings on revolving line of credit
|
144,000
|
|
|
—
|
|
Repayment of revolving line of credit
|
(106,000
|
)
|
|
—
|
|
Repurchases of common stock
|
(40,025
|
)
|
|
—
|
|
Proceeds from the sale of treasury stock in connection with an employee stock purchase plan
|
2,183
|
|
|
1,902
|
|
Repayments of capital lease obligations
|
(2,933
|
)
|
|
(1,772
|
)
|
Net cash used in financing activities
|
(1,915
|
)
|
|
(3,058
|
)
|
Effect of exchange rate changes on cash
|
1,595
|
|
|
2,569
|
|
Net decrease in cash and cash equivalents
|
(24,315
|
)
|
|
(92,615
|
)
|
Cash and cash equivalents at beginning of period
|
147,634
|
|
|
235,967
|
|
Cash and cash equivalents at end of period
|
$
|
123,319
|
|
|
$
|
143,352
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Issuance of common stock in connection with Openwave acquisition
|
$
|
22,000
|
|
|
$
|
—
|
|
Cash paid for income taxes
|
$
|
3,935
|
|
|
$
|
24,052
|
|
Cash paid for interest
|
$
|
1,636
|
|
|
$
|
3,918
|
|
1
See Note 2 for discussion of the adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
1. Description of Business
Synchronoss Technologies, Inc. (the “Company” or “Synchronoss”) is a leading innovator of cloud solutions, software-based activation, secure mobility, identity management and secure messaging for mobile carriers, enterprises, retailers and OEMs across the globe. Synchronoss’ software provides innovative service provider and enterprise solutions that drive billions of transactions on a wide range of connected devices across the world’s leading networks. The Company’s solutions include: activation and provisioning software for devices and services, cloud-based sync, backup, storage and content management capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management and secure mobility management that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs) and original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices (MIDs), such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, medium and large enterprises and their consumers as well as other customers to accelerate and monetize value-added services for secure and broadband networks and connected devices.
Synchronoss’ Activation Software, Synchronoss Personal Cloud™ and Enterprise products and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. The Company’s customers rely on the Company’s solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services.
The Synchronoss Activation solution navigates the variety of complex back-end systems of CSPs to provide a best-in-class ordering system by orchestrating the workflow and consolidated automated customer care services. This allows CSPs using the Company’s platforms to realize the full benefits of their offerings. The platforms also support, among other automated transaction areas, credit card billing, inventory management, and trouble ticketing. In addition to this, the platform supports customer activation related transactions and other services which include managing access service requests, local service requests, local number portability, and directory listings.
The Synchronoss Personal Cloud™ solution seamlessly transfers content from an old device to a new device, syncs, backs up and connects consumer’s content from multiple smart devices to the Company’s cloud platform. This allows carrier customers to protect and manage their growing cache of personally generated, mobile content over long periods of time.
The Synchronoss Enterprise solutions support an advanced mobility digital experience for accessing and protecting business and consumer information. The Company’s identity and access management platform helps users to securely authenticate access to online websites to conduct e-commerce transactions or access important data. This allows the Company’s platforms to help reduce fraud, improve cybersecurity detection/prevention and overall productivity. The identity and access solution supports both consumers by allowing them to self-register and verify their identity, while providing non-intrusive multi-factor authentication and businesses the ability to be sure the correct person is doing the transaction. The secure mobility platforms help users safely and securely store and share important data. The solutions are based on understanding assumptions on the behaviors of individuals through the capture of who they are, what they are doing and how, where and when they are doing it. The secure mobility solution combines the identity platform with a “bring your own device” (BYOD) platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.
Synchronoss Messaging is a white label messaging platform for service providers and offers a full range of deployment options. The platform can be deployed fully integrated with on premise systems, through hybrid deployment support, for an optimal mix of technologies and existing investments, and full cloud deployment for both SaaS and hosted models. Synchronoss Messaging features a distributed systems management console (messaging security, administration console for user and domain provisioning and management, integration with Nagios for monitoring and alerts) with support for smartphones, tablets and connected devices (support for leading protocols including iCal, CalDAV, CardDAV, EAS, IMAP/IDLE), Native Mobile App for iOS and Android for mail, contacts, calendar and task management.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Synchronoss’ products and platforms are designed to be carrier-grade, highly available, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. Synchronoss' offerings allow it to meet the rapidly changing and converging services and connected devices offered by the Company’s customers. The Company’s products, platforms and solutions enable its Enterprise customers to acquire, retain and service subscribers quickly, reliably and cost-effectively with white label and custom-branded solutions. Customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and enterprise-wide sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of the Company’s platforms enable new revenue streams and retention opportunities for the Company’s customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizing their cost of operations and enhancing customer experience. Synchronoss currently operates in and markets its solutions and services directly through its sales organizations in North America, Europe and Asia-Pacific.
2
.
Basis of Presentation and Consolidation
The condensed consolidated financial statements as of
September 30, 2016
and for the
three and nine
months ended
September 30, 2016
are unaudited, but in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes in the Annual Report of Synchronoss Technologies, Inc. incorporated by reference in the Company's annual report on Form 10-K for the year ended
December 31, 2015
.
The condensed consolidated financial statements include the accounts of the Company, its wholly‑owned subsidiaries, variable interest entities (VIE) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. The Company has no unconsolidated subsidiaries or investments accounted for under the equity method. All material intercompany transactions and accounts are eliminated in consolidation. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain amounts from the prior year’s financial statements have been reclassified to conform to the current year’s presentation.
For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended
December 31, 2015
.
Recently Issued Accounting Standards
In August 2016, the Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,
“Statement of Cash Flows
” (“ASU 2016-15). This new guidance will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the impact of ASU 2016-15 on the condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers,”
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08,
“Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”
which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10,
“Identifying Performance Obligations and Licensing,”
which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect that these ASUs will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the full effect of these standards on its ongoing financial reporting.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Impact of New Accounting Pronouncements
In March, 2016, the FASB released Accounting Standards Update (“ASU”) 2016-09, “
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.” The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments may significantly impact net income, earnings per share, and the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company elected to early adopt this standard in the second quarter ended June 30, 2016.
ASU 2016-09 eliminates the requirement to estimate and apply a forfeiture rate to reduce stock compensation expense during the vesting period and, instead, account for forfeitures as they occur. ASU 2016-09 requires that this change be adopted using the modified retrospective approach. As such, the Company recorded a cumulative-effect adjustment of
$1.0 million
to adjust retained earnings.
Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. The Company applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, retrospectively. This change increased the net cash provided by operating activities and decreased net cash provided by financing activities by
$4.7 million
for the
nine
months ended
September 30, 2015
.
Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are classified as a financing activity in the statement of cash flows. ASU 2016-09 requires that this change be adopted retrospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares increased the net cash provided by operating activities and decreased net cash provided by financing activities by
$15.5 million
for the
nine
months ended
September 30, 2015
.
ASU 2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This decreased the effective tax rate for the three months ended
September 30, 2016
by
2%
and increased the effective tax rate by
51%
for the
nine
months ended
September 30, 2016
. The ASU requires that this change be adopted prospectively. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for the three months ended
September 30, 2016
. This increased the diluted weighted average common shares outstanding by
43,762
shares for the three months ended
September 30, 2016
and decreased the diluted weighted average common shares outstanding by
121,041
for the
nine
months ended
September 30, 2016
.
ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before they can be recognized. Previously unrecognized deferred tax assets were recognized on a modified retrospective basis which resulted in a cumulative-effect adjustment to retained earnings of
$0.5 million
.
Adoption of the new standard impacted previously reported quarterly results as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016,
|
|
As reported
|
|
As adjusted
|
Income statement:
|
|
|
|
|
|
Provision for income taxes
|
$
|
(3,965
|
)
|
|
$
|
(4,588
|
)
|
Cash flows statement:
|
|
|
|
|
|
Net cash from operations
|
$
|
37,731
|
|
|
$
|
40,489
|
|
Net cash used in financing
|
(35,253
|
)
|
|
(32,495
|
)
|
Balance sheet:
|
|
|
|
|
|
Deferred tax liability
|
$
|
23,096
|
|
|
$
|
22,864
|
|
Additional paid-in capital
|
535,326
|
|
|
536,659
|
|
Retained earnings
|
194,012
|
|
|
192,911
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company adopted ASU 2015-03, “Interest- Imputation of Interest (subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, during the first quarter of 2016, concurrently. The adoption of these ASUs required the Company to reclassify its deferred financing costs associated with its Convertible Senior Notes from other assets to long-term debt on a retrospective basis. The Company's consolidated balance sheets included deferred financing costs of
$4.1 million
and
$5.1 million
as of
September 30, 2016
and
December 31, 2015
, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with the Company's Credit Facility and Amended Credit Facility continue to be presented in other assets on the condensed consolidated balance sheets.
3. Earnings per Common Share
Basic earnings per share is calculated by using the weighted-average number of common shares outstanding during the period, excluding amounts associated with restricted shares.
The diluted earnings per share calculation is based on the weighted-average number of shares of common stock outstanding adjusted for the number of additional shares that would have been outstanding had all potentially dilutive common shares been issued.
Potentially dilutive shares of common stock include stock options, convertible debt and unvested restricted stock. The dilutive effects of stock options and restricted stock awards are based on the treasury stock method. The dilutive effect of the assumed conversion of convertible debt is determined using the if-converted method. The after-tax effect of interest expense related to the convertible securities is added back to net income (loss), and the convertible debt is assumed to have been converted into common shares at the beginning of the period.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Synchronoss
|
$
|
7,676
|
|
|
$
|
9,645
|
|
|
$
|
(4,717
|
)
|
|
$
|
35,360
|
|
Income effect for interest on convertible debt, net of tax
|
323
|
|
|
377
|
|
|
—
|
|
|
1,366
|
|
Numerator for diluted EPS- Income to common stockholders after assumed conversions
|
$
|
7,999
|
|
|
$
|
10,022
|
|
|
$
|
(4,717
|
)
|
|
$
|
36,726
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
43,560
|
|
|
42,491
|
|
|
43,488
|
|
|
42,077
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
Shares from assumed conversion of convertible debt
|
4,326
|
|
|
4,326
|
|
|
—
|
|
|
4,326
|
|
Options and unvested restricted shares
|
704
|
|
|
875
|
|
|
—
|
|
|
1,102
|
|
Weighted average common shares outstanding — diluted
|
48,590
|
|
|
47,692
|
|
|
43,488
|
|
|
47,505
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options excluded:
|
1,084
|
|
|
745
|
|
|
—
|
|
|
434
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
4. Fair Value Measurements of Assets and Liabilities
The Company classifies marketable securities as available-for-sale. The fair value hierarchy established in the guidance adopted by the Company prioritizes the inputs used in valuation techniques into three levels as follows:
|
|
•
|
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;
|
|
|
•
|
Level 2 – Observable inputs – other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
|
|
|
•
|
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
|
The following is a summary of assets, liabilities and redeemable noncontrolling interest and their related classifications under the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents (A)
|
$
|
123,319
|
|
|
$
|
123,319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities available-for-sale (B)
|
20,941
|
|
|
—
|
|
|
20,941
|
|
|
—
|
|
Total assets
|
$
|
144,260
|
|
|
$
|
123,319
|
|
|
$
|
20,941
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration obligation
|
$
|
8,229
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,229
|
|
Total liabilities
|
$
|
8,229
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,229
|
|
Temporary Equity
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest (C)
|
$
|
52,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52,616
|
|
Total temporary equity
|
$
|
52,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (A)
|
$
|
147,634
|
|
|
$
|
147,634
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities available-for-sale (B)
|
85,992
|
|
|
—
|
|
|
85,992
|
|
|
—
|
|
Total assets
|
$
|
233,626
|
|
|
$
|
147,634
|
|
|
$
|
85,992
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration obligation
|
$
|
930
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
930
|
|
Total liabilities
|
$
|
930
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
930
|
|
Temporary Equity
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
$
|
61,452
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,452
|
|
Total temporary equity
|
$
|
61,452
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,452
|
|
|
|
(A)
|
Cash and cash equivalents includes money market funds.
|
|
|
(B)
|
Securities available-for-sale include municipal bonds, commercial papers, certificates of deposit, enhanced income money market fund and corporate bonds which are classified as marketable securities.
|
|
|
(C)
|
As of
September 30, 2016
, the carrying amount of the redeemable noncontrolling interest was greater than the fair value and accordingly
no
adjustment to the fair value was recorded.
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company's marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities.
No
transfers of assets between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy occurred during the
nine
months ended
September 30, 2016
.
Available-for-Sale Securities
At
September 30, 2016
and
December 31, 2015
, the estimated fair value of investments classified as available for sale, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
450
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
451
|
|
Corporate bonds
|
3,032
|
|
|
—
|
|
|
(31
|
)
|
|
3,001
|
|
Municipal bonds
|
17,513
|
|
|
1
|
|
|
(25
|
)
|
|
17,489
|
|
Total available-for-sale securities
|
$
|
20,995
|
|
|
$
|
2
|
|
|
$
|
(56
|
)
|
|
$
|
20,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
2,329
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
2,324
|
|
Corporate bonds
|
39,986
|
|
|
—
|
|
|
(253
|
)
|
|
39,733
|
|
Municipal bonds
|
38,564
|
|
|
11
|
|
|
(44
|
)
|
|
38,531
|
|
Fixed Income Fund
|
5,593
|
|
|
—
|
|
|
(189
|
)
|
|
5,404
|
|
Total available-for-sale securities
|
$
|
86,472
|
|
|
$
|
11
|
|
|
$
|
(491
|
)
|
|
$
|
85,992
|
|
Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses as of
September 30, 2016
and
December 31, 2015
are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available-for-sale, the Company does not currently intend to sell such investments and it is more likely than not to recover the carrying value prior to being required to sell such investments.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of
September 30, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Securities in unrealized loss position
less than 12 months
|
|
Securities in unrealized loss position
greater than 12 months
|
|
Total
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Corporate bonds
|
$
|
(31
|
)
|
|
$
|
3,001
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
3,001
|
|
Municipal bonds
|
(13
|
)
|
|
15,585
|
|
|
(1
|
)
|
|
689
|
|
|
(14
|
)
|
|
16,274
|
|
|
$
|
(44
|
)
|
|
$
|
18,586
|
|
|
$
|
(1
|
)
|
|
$
|
689
|
|
|
$
|
(45
|
)
|
|
$
|
19,275
|
|
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of
December 31, 2015
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Securities in unrealized loss position
less than 12 months
|
|
Securities in unrealized loss position
greater than 12 months
|
|
Total
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Certificates of deposit
|
$
|
(5
|
)
|
|
$
|
2,324
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
2,324
|
|
Corporate bonds
|
(253
|
)
|
|
39,808
|
|
|
—
|
|
|
—
|
|
|
(253
|
)
|
|
39,808
|
|
Municipal bonds
|
(43
|
)
|
|
20,630
|
|
|
(1
|
)
|
|
550
|
|
|
(44
|
)
|
|
21,180
|
|
Fixed Income Fund
|
—
|
|
|
—
|
|
|
(189
|
)
|
|
5,404
|
|
|
(189
|
)
|
|
5,404
|
|
|
$
|
(301
|
)
|
|
$
|
62,762
|
|
|
$
|
(190
|
)
|
|
$
|
5,954
|
|
|
$
|
(491
|
)
|
|
$
|
68,716
|
|
Expected maturities of available-for-sale securities are as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Amortized
Cost
|
|
Fair
Value
|
Due within one year
|
$
|
17,019
|
|
|
$
|
16,973
|
|
Due after 1 year through 5 years
|
3,976
|
|
|
3,968
|
|
Total available-for-sale securities
|
$
|
20,995
|
|
|
$
|
20,941
|
|
Contingent Consideration
The Company determined the fair value of the contingent consideration related to the acquisition of Razorsight using a real options approach which uses a risk-adjusted expected growth rate based on assessments of expected growth in revenue, adjusted by an appropriate factor. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration obligation are the probabilities of achieving certain financial targets and contractual milestones. Significant changes in any of those probabilities in isolation may result in a higher (lower) fair value measurement.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The changes in fair value of the Company’s Level 3 contingent consideration obligation during the
nine
months ended
September 30, 2016
were as follows:
|
|
|
|
|
Balance at December 31, 2015
|
$
|
930
|
|
Fair value adjustment to contingent consideration obligation included in net loss
|
7,299
|
|
Balance at September 30, 2016
|
$
|
8,229
|
|
Redeemable Noncontrolling Interests
The Company accounts for the redeemable noncontrolling interest at its fair value as temporary equity, due to the redemption option existing outside the control of the Company. The noncontrolling shareholders have the option, which is embedded in the noncontrolling interest, to require the Company to purchase the remaining noncontrolling share at a formula price designed to approximate fair value based on operating results of the entity.
The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount. As of
September 30, 2016
, the carrying amount of the redeemable noncontrolling interest was greater than the fair value and accordingly no adjustment to the fair value was recorded.
The fair value of the redeemable noncontrolling interest was estimated by applying an income approach using a discounted cash flow analysis. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value the redeemable noncontrolling interest could significantly increase or decrease the fair value estimates recorded in the condensed consolidated balance sheets.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the
nine
months ended
September 30, 2016
were as follows:
|
|
|
|
|
Balance at December 31, 2015
|
$
|
61,452
|
|
Fair value adjustment
|
—
|
|
Net loss attributable to redeemable noncontrolling interests
|
(8,836
|
)
|
Balance at September 30, 2016
|
$
|
52,616
|
|
5. Acquisition
Openwave Messaging, Inc. (“Openwave”)
On March 1, 2016, the Company acquired all outstanding shares of Openwave for
$124.5 million
, net of working capital adjustments and liabilities assumed, comprised of
$102.5 million
paid in cash and
$22.0 million
paid in shares of the Company’s common stock, based upon the average market value of the common stock for the
ten
trading days prior to the acquisition date.
Openwave’s product portfolio includes its core complete messaging platform optimized for today’s most complex messaging requirements worldwide with a particular geographic strength in Asia-Pacific. With this acquisition and combined with Synchronoss’ current global footprint, Synchronoss will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud™ platform and bolster the Company’s go-to-market efforts internationally.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company determined the preliminary fair value of the net assets acquired as follows:
|
|
|
|
|
|
|
|
Purchase Price
Allocation
|
|
|
Cash
|
$
|
4,110
|
|
|
|
Prepaid expenses and other assets
|
3,473
|
|
|
|
Property, Plant & Equipment
|
2,882
|
|
|
Long term assets
|
2,396
|
|
|
|
Intangible assets:
|
|
|
Wtd. Avg.
|
Tradename
|
1,000
|
|
|
1 year
|
Technology
|
32,100
|
|
|
7 years
|
Customer relationships
|
29,000
|
|
|
10 years
|
Goodwill
|
93,930
|
|
|
|
Total assets acquired
|
168,891
|
|
|
|
Accounts payable and accrued liabilities
|
17,722
|
|
|
|
Deferred revenues
|
7,854
|
|
|
|
Long term liabilities
|
18,777
|
|
|
|
Net assets acquired
|
$
|
124,538
|
|
|
|
The goodwill recorded in connection with this acquisition was based on operating synergies and other benefits expected to result from the combined operations and the assembled workforce acquired. The goodwill acquired is not deductible for tax purposes.
Acquisition-related costs recognized during the
nine
months ended
September 30, 2016
and
2015
including transaction costs such as legal, accounting, valuation and other professional services, were
$2.9 million
and
$1.0 million
, respectively and are included in the selling, general and administrative expenses on the condensed consolidated statements of income.
6. Stockholders’ Equity
Stock-Based Compensation
The following table summarizes information about stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Stock options
|
$
|
1,989
|
|
|
$
|
2,221
|
|
|
$
|
5,957
|
|
|
$
|
6,361
|
|
Restricted stock awards
|
6,786
|
|
|
5,776
|
|
|
18,794
|
|
|
14,398
|
|
ESPP Plan
|
206
|
|
|
150
|
|
|
656
|
|
|
475
|
|
Total stock-based compensation before taxes
|
$
|
8,981
|
|
|
$
|
8,147
|
|
|
$
|
25,407
|
|
|
$
|
21,234
|
|
Tax benefit
|
$
|
2,949
|
|
|
$
|
2,570
|
|
|
$
|
8,311
|
|
|
$
|
6,701
|
|
The total stock-based compensation cost related to unvested equity awards as of
September 30, 2016
was approximately
$73.4 million
. The expense is expected to be recognized over a weighted-average period of approximately
2.65
years.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock Options
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Expected stock price volatility
|
46
|
%
|
|
46
|
%
|
|
45
|
%
|
|
48
|
%
|
Risk-free interest rate
|
1.27
|
%
|
|
1.27
|
%
|
|
1.16
|
%
|
|
1.26
|
%
|
Expected life of options (in years)
|
3.98
|
|
|
3.98
|
|
|
4.00
|
|
|
4.00
|
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Weighted-average fair value (grant date) of the options
|
$
|
15.53
|
|
|
$
|
15.53
|
|
|
$
|
11.08
|
|
|
$
|
16.54
|
|
The following table summarizes information about stock options outstanding as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Options
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2015
|
|
2,348
|
|
|
$
|
31.04
|
|
|
|
|
|
Options Granted
|
|
862
|
|
|
30.85
|
|
|
|
|
|
Options Exercised
|
|
(432
|
)
|
|
21.74
|
|
|
|
|
|
Options Cancelled
|
|
(169
|
)
|
|
36.38
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
2,609
|
|
|
$
|
32.17
|
|
|
4.76
|
|
$
|
24,664
|
|
Vested at September 30, 2016
|
|
2,445
|
|
|
$
|
32.08
|
|
|
4.68
|
|
$
|
23,261
|
|
Exercisable at September 30, 2016
|
|
1,129
|
|
|
$
|
29.97
|
|
|
3.08
|
|
$
|
13,049
|
|
The below table summarizes additional information related to stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total intrinsic value for stock options exercised
|
$
|
2,157
|
|
|
$
|
3,597
|
|
|
$
|
5,796
|
|
|
$
|
15,141
|
|
Fair value of vested options
|
3,571
|
|
|
2,064
|
|
|
27,241
|
|
|
18,741
|
|
Awards of Restricted Stock and Performance Stock
A summary of the Company’s unvested restricted stock at
September 30, 2016
, and changes during the
nine
months ended
September 30, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
Non-Vested Restricted Stock
|
|
Number of
Awards
|
|
Weighted- Average
Grant Date
Fair Value
|
Non-vested at December 31, 2015
|
|
1,412
|
|
|
$
|
36.80
|
|
Granted
|
|
907
|
|
|
33.90
|
|
Vested
|
|
(569
|
)
|
|
35.68
|
|
Forfeited
|
|
(134
|
)
|
|
38.85
|
|
Non-vested at September 30, 2016
|
|
1,616
|
|
|
$
|
35.40
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Employee Stock Purchase Plan
On February 1, 2012, the Company established a
ten
year Employee Stock Purchase Plan (“ESPP” or “the Plan”) for certain eligible employees. The Plan is to be administered by the Company’s Board of Directors. The total number of shares available for purchase under the Plan is
500
thousand shares of the Company’s Common Stock. Employees participate over a
six
month period through payroll withholdings and may purchase, at the end of the
six
month period, the Company’s Common Stock at the lower of
85%
of the fair market value on the first day of the offering period or the fair market value on the purchase date. No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than
5%
of the total combined voting power of the Company. In addition, no participant may purchase more than a thousand shares of Common Stock within any purchase period or with a value greater than
$25 thousand
in any calendar year.
Treasury Stock
On February 4, 2016, the Company's Board of Directors authorized a stock repurchase program to purchase up to
$100 million
of the Company's outstanding Common Stock. Under the program, the Company may purchase shares of its Common Stock in the open market, through block trades or otherwise at prices deemed appropriate by the Company. The timing and amount of repurchase transactions under the program will depend on available working capital and other factors as determined by the Board of Directors and management.
As of
September 30, 2016
, a total of
1.3 million
shares have been purchased under the program for an aggregate purchase price of
$40 million
. The Company classifies Common Stock repurchased as Treasury Stock on its balance sheet.
7. Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income (loss) attributable to Synchronoss
|
$
|
7,676
|
|
|
$
|
9,645
|
|
|
$
|
(4,717
|
)
|
|
$
|
35,360
|
|
Translation adjustments
|
2,645
|
|
|
(971
|
)
|
|
6,089
|
|
|
(11,681
|
)
|
Unrealized gain on securities, (net of tax)
|
147
|
|
|
255
|
|
|
145
|
|
|
389
|
|
Net income (loss) on intra-entity foreign currency transactions, (net of tax)
|
300
|
|
|
65
|
|
|
662
|
|
|
(2,047
|
)
|
Total comprehensive income attributable to Synchronoss
|
$
|
10,768
|
|
|
$
|
8,994
|
|
|
$
|
2,179
|
|
|
$
|
22,021
|
|
The changes in accumulated other comprehensive income (loss) during the
nine
months ended
September 30, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
|
|
Unrealized
(Loss)
Income on
Intra-Entity
Foreign
Currency
Transactions
|
|
Unrealized Holding
Gains
(Losses) on
Available-for-Sale
Securities
|
|
Total
|
Balance at December 31, 2015
|
$
|
(34,092
|
)
|
|
$
|
(4,292
|
)
|
|
$
|
(300
|
)
|
|
$
|
(38,684
|
)
|
Other comprehensive income
|
6,089
|
|
|
809
|
|
|
305
|
|
|
7,203
|
|
Tax effect
|
—
|
|
|
(147
|
)
|
|
(160
|
)
|
|
(307
|
)
|
Total comprehensive income
|
6,089
|
|
|
662
|
|
|
145
|
|
|
6,896
|
|
Balance at September 30, 2016
|
$
|
(28,003
|
)
|
|
$
|
(3,630
|
)
|
|
$
|
(155
|
)
|
|
$
|
(31,788
|
)
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
8. Goodwill and Intangibles
Goodwill
The Company records goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
The changes in goodwill during the
nine
months ended
September 30, 2016
are as follows:
|
|
|
|
|
Balance at December 31, 2015
|
$
|
221,271
|
|
Acquisition
|
93,930
|
|
Reclassifications, adjustments and other
|
(3,033
|
)
|
Translation adjustments
|
3,017
|
|
Balance at September 30, 2016
|
$
|
315,185
|
|
The reclassification adjustment of
$3.0 million
is primarily related to a change in the Company’s deferred tax asset in connection with a pre-acquisition tax loss.
Other Intangible Assets
Intangible assets consist primarily of trade names, technology, and customer lists and relationships. These intangible assets are amortized on the straight‑line method over the estimated useful life. Amortization expense for the
nine
months ended
September 30, 2016
and the year ended
December 31, 2015
was
$35.0 million
and
$28.6 million
, respectively.
The Company’s intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Trade name
|
$
|
2,541
|
|
|
$
|
(2,012
|
)
|
|
$
|
529
|
|
Technology
|
162,744
|
|
|
(55,546
|
)
|
|
107,198
|
|
Customer lists and relationships
|
137,645
|
|
|
(47,901
|
)
|
|
89,744
|
|
Capitalized software and patents
|
23,874
|
|
|
(5,679
|
)
|
|
18,195
|
|
|
$
|
326,804
|
|
|
$
|
(111,138
|
)
|
|
$
|
215,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Trade name
|
$
|
1,531
|
|
|
$
|
(1,372
|
)
|
|
$
|
159
|
|
Technology
|
130,200
|
|
|
(35,336
|
)
|
|
94,864
|
|
Customer lists and relationships
|
105,864
|
|
|
(33,969
|
)
|
|
71,895
|
|
Capitalized software and patents
|
11,406
|
|
|
(4,002
|
)
|
|
7,404
|
|
|
$
|
249,001
|
|
|
$
|
(74,679
|
)
|
|
$
|
174,322
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Estimated future amortization expense of its intangible assets for the next five years is as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
2016
|
$
|
12,079
|
|
2017
|
49,338
|
|
2018
|
46,218
|
|
2019
|
38,984
|
|
2020
|
25,302
|
|
2021
|
13,161
|
|
9. Debt
Credit Facility
In September 2013, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was used for general corporate purposes, was a
$100 million
unsecured revolving line of credit that matures on September 27, 2018. The Company paid a commitment fee in the range of
25
to
35
basis points on the unused balance of the revolving credit facility under the Credit Agreement. Synchronoss had the right to request an increase in the aggregate principal amount of the Credit Facility to
$150 million
.
Interest on the borrowings were based upon LIBOR plus a
2.25
basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, which will be used for general corporate purposes, is a
$250 million
unsecured revolving line of credit that matures on July 7, 2021, subject to terms and conditions set forth therein. The Company pays a commitment fee in the range of
15
to
30
basis points on the unused balance of the revolving credit facility under the Credit Agreement. Synchronoss has the right to request an increase in the aggregate principal amount of the Amended Credit Facility to
$350 million
.
Interest on the borrowing was based upon LIBOR plus a
1.99
basis point margin. As of
September 30, 2016
, the Company had an outstanding balance of
$38 million
on the Amended Credit Facility.
The Amended Credit Facility is subject to certain financial covenants. As of
September 30, 2016
, the Company was in compliance with all required covenants.
Interest expense and commitment fees under the Credit Facility and the Amended Credit Facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commitment fees
|
$
|
154
|
|
|
$
|
89
|
|
|
$
|
272
|
|
|
$
|
241
|
|
Interest expense
|
230
|
|
|
—
|
|
|
753
|
|
|
—
|
|
Convertible Senior Notes
On August 12, 2014, the Company issued
$230.0 million
aggregate principal amount of its
0.75%
Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accounted for the
$230.0 million
face value of the debt as a liability and capitalized approximately
$7.1 million
of financing fees, related to the issuance which are presented net of the face value of the 2019 Notes on the balance sheet.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The 2019 Notes are senior, unsecured obligations of the Company, and are convertible into shares of its common stock based on a conversion rate of
18.8072
shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion price of approximately
$53.17
per share. The Company will satisfy any conversion of the 2019 Notes with shares of the Company’s common stock. The 2019 Notes are convertible at the note holders’ option prior to their maturity and if specified corporate transactions occur. The issue price of the 2019 Notes was equal to their face amount.
Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to
100%
of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of
September 30, 2016
, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.
The 2019 Notes are the Company’s direct senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness.
At
September 30, 2016
, the carrying amount of the liability was
$225.9 million
and the outstanding principal of the 2019 Notes was
$230 million
, with an effective interest rate of approximately
1.39%
. The fair value of the 2019 Notes was
$248.3 million
at
September 30, 2016
. The fair value of the liability of the 2019 Notes was determined using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair-value hierarchy.
Interest expense for the Company’s 2019 Notes related to the contractual interest coupon was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Contractual interest expense
|
$
|
431
|
|
|
$
|
431
|
|
|
$
|
1,294
|
|
|
$
|
1,293
|
|
10. Restructuring
In March 2016, the Company initiated the preliminary phase of a work-force reduction as part of a corporate restructuring, with reductions occurring across all levels and departments within the Company. This measure was intended to reduce costs and to align the Company’s resources with its key strategic priorities. As of
September 30, 2016
, there were
$0.4 million
of accrued restructuring charges on the balance sheet.
A summary of the Company’s restructuring accrual at
September 30, 2016
and changes during the
nine
months ended
September 30, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
Charges
|
|
Payments
|
|
Balance at September 30, 2016
|
Employment termination costs
|
$
|
—
|
|
|
$
|
5,139
|
|
|
$
|
(4,816
|
)
|
|
$
|
323
|
|
Facilities consolidation
|
54
|
|
|
—
|
|
|
(10
|
)
|
|
44
|
|
Total
|
$
|
54
|
|
|
$
|
5,139
|
|
|
$
|
(4,826
|
)
|
|
$
|
367
|
|
11. Income Taxes
The Company recognized approximately
$6.9 million
and
$14.9 million
in related income tax expense during the
three and nine
months ended
September 30, 2016
, respectively. The effective tax rate was approximately
59%
and
1,143%
for the
three and nine
months ended
September 30, 2016
, which was higher than the U.S. federal statutory rate primarily due to the unfavorable impact of losses in foreign jurisdictions which have lower tax rates than the U.S. as well as the unfavorable impact of the fair market value adjustment for the Razorsight contingent consideration. Additionally, the effective tax rate for the nine months ended
September 30, 2016
was impacted by the recording of a non-cash income tax provision to establish a
$2.9 million
valuation allowance, which reduced the deferred tax asset related to the current net operating losses of certain foreign subsidiaries. The Company reviews the expected annual effective income tax rate and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes. The early adoption of ASU 2016-09 resulted in a decrease in the effective tax rate for the three months ended
September 30, 2016
of
2%
and an increase in the effective tax rate for the
nine
months ended
September 30, 2016
of
51%
.
12. Legal Matters
On October 7, 2014, the Company filed an amended complaint in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, several of the Company’s patents. In February 2015, Synchronoss entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby the Company granted each of these companies (but not their subsidiaries or affiliates) a limited license to Synchronoss’ patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulation to dismiss the above complaint.
The Company’s 2011 acquisition agreement with Miyowa SA provided that former shareholders of Miyowa SA would be eligible for earn-out payments, to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar,
two
former shareholders of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement. The Company was served with a copy of this complaint in January 2014. On December 3, 2015, the Court dismissed all claims in the complaint against the Company. On December 19, 2015, the former shareholders of Miyowa filed an appeal with the Court of Appeal of Paris, France, appealing the Court’s decision. Although the Company cannot predict the outcome of the appeal, or estimate any potential loss if the outcome is adverse, due to the inherent uncertainties of litigation, the Company believes the positions of Eurowebfund and Bakamar are without merit, and the Company intends to vigorously defend all claims brought by them.
The Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all of such counterclaims.
13. Subsequent Events Review
The Company has evaluated all subsequent events through
November 8, 2016
.
ITEM 2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the information set forth in our consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and in our annual report Form 10-K for the year ended
December 31, 2015
. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this report. These statements speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments. All numbers are expressed in thousands unless otherwise stated.
Overview
We are a leading innovator of cloud solutions, software-based activation, secure mobility, identity management and secure messaging for mobile carriers, enterprises, retailers and OEMs across the globe. Our software provides innovative service provider and enterprise solutions that drive billions of transactions on a wide range of connected devices across the world’s leading networks. Our solutions include: activation and provisioning software for devices and services, cloud-based sync, backup, storage and content management capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management and secure mobility management that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs) and original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and MIDs, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, medium and large enterprises and their consumers as well as other customers to accelerate and monetize value-added services for secure and broadband networks and connected devices.
Our Activation Software, Synchronoss Personal Cloud™ and Enterprise products and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Our customers rely on our solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services.
Our Synchronoss Activation solution navigates the variety of complex back-end systems of CSPs to provide a best-in-class ordering system by orchestrating the workflow and consolidated automated customer care services. This allows CSPs using our platforms to realize the full benefits of their offerings. The platforms also support, among other automated transaction areas, credit card billing, inventory management, and trouble ticketing. In addition to this, the platform supports customer activation related transactions and other and other services which include managing access service requests, local service requests, local number portability, and directory listings.
Our Synchronoss Personal Cloud™ solution seamlessly transfers content from an old device to a new device, and syncs, backs up and connects consumer’s content from multiple smart devices to our cloud platform. This allows carrier customers to protect and manage their growing cache of personally generated, mobile content over long periods of time.
Our Synchronoss Enterprise solutions support an advanced mobility digital experience for businesses and consumers for accessing and protecting their information. Our identity and access management platform helps consumers and business users to securely authenticate access to online websites to conduct e-commerce transactions or access important data. Our secure mobility platforms help users safely and securely store and share important data. Our solutions are based on understanding assumptions on the behaviors of individuals through the capture of who they are, what they are doing and how, where and when they are doing it. This allows our platforms to help reduce fraud, improve cybersecurity detection/prevention and overall productivity. Our identity and access solution supports both consumers by allowing them to self-register and verify their identity, while providing non-intrusive multi-factor authentication and businesses the ability to be sure the correct person is doing the transaction. The secure mobility solution combines the identity platform with a “bring your own device” (BYOD) platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.
Our Synchronoss Messaging is a white label messaging platform for service providers and offers a full range of deployment options including full integration with on premise systems, hybrid deployment support for optimal mix of technologies and protecting existing investments, and full cloud deployment for both SaaS and hosted models. Synchronoss Messaging features a distributed systems management console (messaging security, administration console for user and domain provisioning and management, integration with Nagios for monitoring and alerts) with support for smartphones, tablets and connected devices (support for leading protocols including iCal, CalDAV, CardDAV, EAS, IMAP/IDLE), Native Mobile App for iOS and Android for mail, contacts, calendar and task management.
Our products and platforms are designed to be carrier-grade, highly available, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets allowing us to meet the rapidly changing and converging services and connected devices offered by our customers. Our products, platforms and solutions enable our Enterprise customers to acquire, retain and service subscribers quickly, reliably and cost-effectively with white label and custom-branded solutions. Our customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and enterprise-wide sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of our platforms enable new revenue streams and retention opportunities for our customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizing their cost of operations and enhancing customer experience. We currently operate in and market our solutions and services directly through our sales organizations in North America, Europe and Asia-Pacific.
Revenues
We generate a substantial portion of our revenues on a per-transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended
September 30, 2016
and
2015
, we derived approximately
66%
and
73%
, respectively, of our revenues from transactions processed and subscription arrangements.
Historically, our revenues have been directly impacted by the number of transactions processed. The future success of our business depends on the continued growth of consumer and business transactions and, as such, the volume of transactions that we process could fluctuate on a quarterly basis. See “Current Trends Affecting Our Results of Operations” for certain matters regarding future results of operations.
Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers and increase the extent of recording our international activities in local currencies, we will become subject to currency translation risk that could affect our future net sales as reported in U.S. dollars.
Each of AT&T and Verizon accounted for more than 10% of our revenues for the three months ended
September 30, 2016
and
2015
. AT&T and Verizon in the aggregate accounted for
71%
and
75%
of our revenues for the three months ended
September 30, 2016
and
2015
, respectively. Our agreements with AT&T typically run three to five years and cover both a technology fee and exception handling services. We have a Master Services Agreement, with Statements of Work for each of the AT&T businesses which we support. Each of our agreements with Verizon typically have a similar duration, subject to a Master Services Agreement, with Statements of Work. See “Risk Factors” for certain matters bearing risks on our future results of operations.
Current Trends Affecting Our Results of Operations
Growth in our service provider and enterprise solutions are being driven by the massive penetration and use of smart devices on a global basis. The following major trends drive our investment decisions in acquisitions and development of product and solutions:
Activation.
Service Provider consolidation continues in the US and Internationally. As CSP’s merge with MSOs and TV Providers there is an urgency provisioning new subscribers with devices and new value-add service bundles, while driving cost out of the business. Synchronoss Activation is poised to create new efficiencies in often underserved digital channels as a way to quickly provision combined subscriber bases and utilize traditionally underperforming and lower cost digital sales channels.
Personal
Cloud
. Shorter carrier customer contracts and lease programs have resulted in faster device upgrade cycles by customers resulting in increased device order transactions and activations. With mobile devices becoming content rich and acting as a replacement for other traditional devices like PC’s, the ability to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates has become an essential need. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices. Such devices include connected cars, health and wellness devices, and connected home. The need for these devices to be activated and managed and the contents from them to be stored in a common cloud are also expected to be drivers of our businesses in the long term. Synchronoss Cloud products such as Personal Cloud, Mobile Content Transfer, Backup & Transfer and Out of Box Experience (OOBE) are poised to respond to this trend with white label, secure and scalable products for mobile devices.
Secure Mobility.
As Enterprise looks to increase productivity, it turns to mobile. Yet it finds itself confronted with the serious logistical challenges of not only managing stringent security requirements, but also accommodating the personal devices of its employees as a lower cost and more employee-friendly option. This trend of Bring Your Own Device (BYOD) is now prevalent enough that regulated industries are investigating new ways to merge Wall Street level regulated security and privacy with main stream usability standards of Facebook, Twitter, Slacker and other third party mobile services. Inherent in this challenge is managing multi-factor authentication, policy driven credential management and fraud protection as employees move in and out of “work” selves and “Home” selves – or even in, out or between companies. In addition to being able to manage different personas, the ability to create more productive work flows employing predictive analytics is taking on a higher value as a desirable function of a secure mobility platform. Our Secure Mobility platform enables Enterprise to pivot quickly into the regulated BYOD work environment and realize cost savings as well as productivity gains.
Messaging.
Messaging as a medium is moving beyond standard email. Messaging is fast becoming an interface for commerce. With the emergence of messaging giants such as What’s App, Line, Facebook and others, companies are using advanced messaging to create commerce opportunities to give subscribers visibility to smart transactions within a very sticky, high frequency environment. Chat bots, operating on AI fueled from semantic analysis of messaging content are the latest entrants to create a “messaging user interface” that is linking subscribers and third parties together across multiple channels. Service providers are not adopting new messaging clients to compete with highly competitive and viral Over the Top (OTT) players. Instead they are adopting monetization techniques used by those players to extend subscriber information into third party applications and chat interfaces creating stickier commerce opportunities. We are working closely with customers, especially in the Asia Pacific market, to evolve Service Provider messaging into a cloud-centric commerce offering utilizing personal cloud, identity management and other advanced messaging protocols that will open up new revenue streams and allow Operators to compete with OTT providers in new ways.
To support our expected growth driven by the favorable industry trends mentioned above, we continue to look for opportunities to improve our operating efficiencies, such as the utilization of offshore technical and non-technical resources for our exception handling center management as well as routine software maintenance activities. We also leverage modular components from our existing software platforms to build new products. We believe that these opportunities will continue to provide future benefits and position us to support revenue growth. In addition, we anticipate further automation of the transactions generated by our more mature customers and additional transaction types. Our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction and service types. We are also making investments in new research and development of new products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for free or bundled storage by our major Tier 1 carrier customers.
We continue to advance our plans for the expansion of our platforms' footprint with broadband carriers and international mobile carriers to support connected devices and multiple networks through our focus on transaction management and cloud-based services for back up, synchronization and sharing of content. Our initiatives with AT&T, Verizon Wireless and other CSPs continue to grow both with our current businesses as well as new products. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during a fiscal period. Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “Risk Factors” for certain matters bearing risks on our future results of operations.
We believe that of our significant accounting policies, which are described in Note 2 in our Annual Report on Form 10-K for the year ended
December 31, 2015
, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies which we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:
|
|
•
|
Revenue Recognition and Deferred Revenue
|
|
|
•
|
Allowance for Doubtful Accounts
|
|
|
•
|
Noncontrolling interest
|
|
|
•
|
Investments in Affiliates and Other Entities
|
|
|
•
|
Stock-Based Compensation
|
There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the
nine
months ended
September 30, 2016
. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2015
for a more complete discussion of our critical accounting policies and estimates.
Key Developments
On March 1, 2016, we acquired all outstanding shares of Openwave Messaging, Inc. for $124.5 million, net of working capital adjustments and liabilities assumed, comprised of $102.5 million paid in cash and $22 million paid in shares of our common stock, based upon the average market value of the common stock for the ten trading days prior to the acquisition date.
Openwave’s product portfolio includes its core complete messaging platform optimized for today’s most complex messaging requirements worldwide with a particular geographic strength in Asia Pacific. With this acquisition and combined with our current global footprint, we will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud platform and bolster our go-to-market efforts internationally.
Results of Operations
Three months ended
September 30, 2016
compared to the three months ended
September 30, 2015
The following table presents an overview of our results of operations for the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2016 vs 2015
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
$ Change
|
|
% Change
|
|
(in thousands)
|
Net revenues
|
$
|
176,421
|
|
|
100
|
%
|
|
$
|
150,874
|
|
|
100
|
%
|
|
$
|
25,547
|
|
|
17
|
%
|
Cost of services*
|
77,230
|
|
|
44
|
%
|
|
63,438
|
|
|
42
|
%
|
|
13,792
|
|
|
22
|
%
|
Research and development
|
28,141
|
|
|
16
|
%
|
|
23,986
|
|
|
16
|
%
|
|
4,155
|
|
|
17
|
%
|
Selling, general and administrative
|
31,600
|
|
|
18
|
%
|
|
21,003
|
|
|
14
|
%
|
|
10,597
|
|
|
50
|
%
|
Net change in contingent consideration obligation
|
572
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
572
|
|
|
100
|
%
|
Restructuring charges
|
977
|
|
|
1
|
%
|
|
399
|
|
|
—
|
%
|
|
578
|
|
|
145
|
%
|
Depreciation and amortization
|
24,692
|
|
|
14
|
%
|
|
19,754
|
|
|
13
|
%
|
|
4,938
|
|
|
25
|
%
|
Total costs and expenses
|
163,212
|
|
|
93
|
%
|
|
128,580
|
|
|
85
|
%
|
|
34,632
|
|
|
27
|
%
|
Income from operations
|
$
|
13,209
|
|
|
7
|
%
|
|
$
|
22,294
|
|
|
15
|
%
|
|
$
|
(9,085
|
)
|
|
(41
|
)%
|
|
|
|
*
|
Cost of services excludes depreciation and amortization which is shown separately.
|
Net revenues.
Net revenues
increased
$25.5 million
to
$176.4 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
. Transaction and subscription revenues as a percentage of sales were
66%
or
$117.1 million
for the three months ended
September 30, 2016
, compared to
73%
or
$109.4 million
for the same period in
2015
. The
$7.7 million
increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were
34%
or
$59.3 million
for the three months ended
September 30, 2016
, compared to
27%
or
$41.5 million
for the same period in
2015
. The increase in professional services and license revenue is primarily due to new license agreements and expansion of services with our customers.
Net revenues related to Activation Solutions
decreased
$0.3 million
to
$74.5 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
. Net revenues related to Activation Solutions represented
42%
for the three months ended
September 30, 2016
, compared to
50%
for the same period in
2015
. Net revenues related to our Cloud Solutions
increased
by
$25.8 million
to
$101.9 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
. This increase in our Cloud Solutions performance was a result of new cloud offerings with existing customers as well as increased international sales. Net revenues related to our Cloud Solutions represented
58%
for the three months ended
September 30, 2016
, compared to
50%
for the same period in
2015
.
Expenses
Cost of services.
Cost of services
increased
$13.8 million
to
$77.2 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
, due primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased
$5.0 million
due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased
$5.7 million
as a result of increased usage of third party exception handling vendors. Facility costs increased by
$2.3 million
which was primarily driven by increased costs for service contracts due to the expansion of our operational footprint.
Research and development.
Research and development expense
increased
$4.2 million
to
$28.1 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
primarily due to an increase of
$2.9 million
in outside consultant expense which was driven by the launch of our Enterprise solution.
Selling, general and administrative.
Selling, general and administrative expense
increased
$10.6 million
to
$31.6 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
. The increase was driven by a
$3.7 million
increase in personnel and related costs which were impacted by increased headcount due to the launch of our Enterprise solution and our Openwave acquisition. There was an increase in professional services of
$1.9 million
related to accounting and legal costs resulting from our acquisitions and tax planning efforts. The remaining increase related to a
$2.5 million
increase in bad debt expense.
Net change in contingent consideration obligation
.
The net change in contingent consideration obligation was an
increase
of
$0.6 million
for the three months ended
September 30, 2016
, as compared to the three months ended
September 30, 2015
. This was due to an increase in the probability of achieving the contractual milestones associated with the Razorsight earn-out. There was no contingent consideration balance for the three months ended
September 30, 2015
due to the completion of all prior earn-out periods.
Restructuring charges.
Restructuring charges were
$1.0 million
for the three months ended
September 30, 2016
, related to employment termination costs as a result of the work‑force reduction plan started in March 2016 to reduce costs and align our resources with our key strategic priorities.
Depreciation and amortization
.
Depreciation and amortization expense
increased
$4.9 million
to
$24.7 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
. This was primarily related to the increase in depreciable assets necessary for the continued expansion of our platforms and amortization of our newly acquired intangible assets related to our recent acquisitions.
Interest income
.
Interest income
decreased
$0.3 million
to
$0.3 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
due to a change in our portfolio allocations.
Interest expense
.
Interest expense
increased
$0.1 million
to
$1.6 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
.
Other income (expense), net
. Other income (expense)
increased
$0.9 million
to
$0.2 million
for the three months ended
September 30, 2016
, compared to the same period in
2015
. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax.
We recognized approximately
$6.9 million
and
$10.7 million
in related income tax expenses during the three months ended
September 30, 2016
and
2015
, respectively. Our effective tax rate was approximately
59%
for the three months ended September 30, 2016, which was higher than our U.S. federal statutory rate primarily due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S. and the unfavorable impact of the fair market value adjustment for the contingent consideration obligation related to the Razorsight earn-out. Our effective tax rate was approximately
53%
for the three months ended
September 30, 2015
, which was higher than our U.S. federal statutory rate due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S. and the unfavorable impact of transaction costs related to the purchase of Razorsight, which are required to be capitalized for income tax purposes.
Nine months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
The following table presents an overview of our results of operations for the
nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2016 vs 2015
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
$ Change
|
|
% Change
|
|
(in thousands)
|
Net revenues
|
$
|
476,658
|
|
|
100
|
%
|
|
$
|
421,620
|
|
|
100
|
%
|
|
$
|
55,038
|
|
|
13
|
%
|
Cost of services*
|
217,004
|
|
|
46
|
%
|
|
172,013
|
|
|
41
|
%
|
|
44,991
|
|
|
26
|
%
|
Research and development
|
78,408
|
|
|
16
|
%
|
|
68,472
|
|
|
16
|
%
|
|
9,936
|
|
|
15
|
%
|
Selling, general and administrative
|
89,799
|
|
|
19
|
%
|
|
60,603
|
|
|
14
|
%
|
|
29,196
|
|
|
48
|
%
|
Net change in contingent consideration obligation
|
7,299
|
|
|
2
|
%
|
|
—
|
|
|
—
|
%
|
|
7,299
|
|
|
100
|
%
|
Restructuring charges
|
5,139
|
|
|
1
|
%
|
|
5,090
|
|
|
1
|
%
|
|
49
|
|
|
1
|
%
|
Depreciation and amortization
|
74,009
|
|
|
16
|
%
|
|
51,221
|
|
|
12
|
%
|
|
22,788
|
|
|
44
|
%
|
Total costs and expenses
|
471,658
|
|
|
99
|
%
|
|
357,399
|
|
|
85
|
%
|
|
114,259
|
|
|
32
|
%
|
Income from operations
|
$
|
5,000
|
|
|
1
|
%
|
|
$
|
64,221
|
|
|
15
|
%
|
|
$
|
(59,221
|
)
|
|
(92
|
)%
|
|
|
|
*
|
Cost of services excludes depreciation and amortization which is shown separately.
|
Net revenues.
Net revenues
increased
$55.0 million
to
$476.7 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
. Transaction and subscription revenues as a percentage of sales were
69%
or
$330.9 million
for the
nine
months ended
September 30, 2016
compared to
73%
or
$306.0 million
for the same period in
2015
. The increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were
31%
or
$145.7 million
for the
nine
months ended
September 30, 2016
, compared to
27%
or
$115.6 million
for the same period in
2015
. The increase in professional services and license revenue is primarily due to new license agreements and expansion of services with our customers.
Net revenues related to Activation Solutions
decreased
$0.6 million
to
$202.0 million
for the
nine
months ended
September 30, 2016
, compared to
the same period in
2015
. Net revenues related to Activation Solutions represented
42%
for the
nine
months ended
September 30, 2016
, compared to
48%
for the same period in
2015
. Net revenues related to our Cloud Solutions
increased
by
$55.6 million
to
$274.7 million
of our revenues for the
nine
months ended
September 30, 2016
compared to the same period in
2015
. The increase in our Cloud Solution performance was a result of new cloud offerings with new and existing customers. Net revenues related to our Cloud Solutions represented
58%
for the
nine
months ended
September 30, 2016
, compared to
52%
for the same period in
2015
.
Expenses
Cost of services.
Cost of services
increased
$45.0 million
to
$217.0 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
, due primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased
$11.0 million
due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased
$15.3 million
, of which $5.7 million of costs related to the launch of our Enterprise solution and increased usage of our third-party exception handling vendors. Facility costs increased by
$16.3 million
this was primarily driven by increased costs for service contracts due to the expansion of our operational footprint.
Research and development.
Research and development expense
increased
$9.9 million
to
$78.4 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
primarily due to an increase of
$11.1 million
in outside consultant expense which was mostly driven by the launch of our Enterprise solution offset by a
$1.1 million
decrease in personnel and related costs due to the capitalization of qualified software costs.
Selling, general and administrative.
Selling, general and administrative expense
increased
$29.2 million
to
$89.8 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
. The increase was driven in part by a
$13.3 million
increase in personnel and related costs which were driven by additional headcount due to the launch of our Enterprise solution and our Openwave acquisition. There was also a
$4.5 million
increase in outside consultants, of which the most significant increase related to costs incurred for the launch of our Enterprise solution. The remaining increases included
$2.5 million
related to facilities and
$3.3 million
related to increases in bad debt expense.
Net change in contingent consideration obligation.
The net change in contingent consideration obligation was a
$7.3 million
increase
for the
nine
months ended
September 30, 2016
as compared to the
nine
months ended
September 30, 2015
. This was due to an increase in the probability of achieving the contractual milestones associated with the Razorsight earn-out. There was no contingent consideration for the
nine
months ended
September 30, 2015
due to the completion of all prior earn-out periods.
Restructuring charges.
Restructuring charges were
$5.1 million
for the
nine
months ended
September 30, 2016
, related to employment termination costs as a result of the work‑force reduction plan started in March 2016 to reduce costs and align our resources with our key strategic priorities.
Depreciation and amortization.
Depreciation and amortization expense
increased
$22.8 million
to
$74.0 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
, primarily related to the increase in depreciable assets necessary for the continued expansion of our platforms and amortization of our newly acquired intangible assets related to our recent acquisitions.
Interest expense.
Interest expense
increased
$0.8 million
to
$5.0 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
due to an increase of approximately $0.8 million related to the drawdown from the Amended Credit Facility.
Other income (expense), net.
Other income (expense)
increased
$0.4 million
to
$0.2 million
for the
nine
months ended
September 30, 2016
, compared to the same period in
2015
. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax.
We recognized approximately
$14.9 million
and
$25.5 million
in related income tax expense during the
nine
months ended
September 30, 2016
and
2015
, respectively. Our effective tax rate was approximately
1,143%
for the
nine
months ended
September 30, 2016
, which was higher than our U.S. federal statutory rate primarily due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S., the unfavorable impact of the fair market value adjustment for the Razorsight contingent consideration obligation and the recording of a non-cash income tax provision to establish a valuation allowance. We considered all available evidence, including our historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of our assessment, we recorded a $2.9 million valuation allowance which reduced the deferred tax asset related to our current net operating losses of certain foreign subsidiaries. Our effective tax rate was approximately
42%
for the
nine
months ended
September 30, 2015
, which was higher than our U.S. federal statutory rate due to the unfavorable impact of losses in foreign jurisdictions We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes.
Liquidity and Capital Resources
Our principal source of liquidity has been cash provided by operations and borrowings on our Credit Facility. Our cash, cash equivalents and marketable securities balance was
$144.3 million
at
September 30, 2016
, a decrease of
$89.4 million
as compared to the balance at
December 31, 2015
. This decrease was primarily due to our acquisition of Openwave, the unfavorable timing of collections, purchases of fixed assets and repurchases of outstanding common stock under the Board approved repurchase program. This was offset by borrowings under the Credit Facility and cash provided by operations. We anticipate that our principal uses of cash in the future will be to fund the expansion of our business through both organic growth as well as possible acquisition activities and the expansion of our customer base. Uses of cash will also include facility and technology expansion, capital expenditures, and working capital.
At
September 30, 2016
, our non-U.S. subsidiaries held approximately
$25.0 million
of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries, except those acquired as part of the Openwave acquisition, will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
Credit Facility
In September 2013, we entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was used for general corporate purposes, was a
$100 million
unsecured revolving line of credit that matures on September 27, 2018. We paid a commitment fee in the range of
25
to
35
basis points on the unused balance of the revolving credit facility under the Credit Agreement. We had the right to request an increase in the aggregate principal amount of the Credit Facility to
$150 million
.
Interest on the borrowing were based upon LIBOR plus a
2.25
basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, which will be used for general corporate purposes, is a
$250 million
unsecured revolving line of credit that matures on July 7, 2021, subject to terms and conditions set forth therein. We pay a commitment fee in the range of
15
to
30
basis points on the unused balance of the revolving credit facility under the Credit Agreement. We have the right to request an increase in the aggregate principal amount of the Amended Credit Facility to
$350 million
.
Interest on the borrowing was based upon LIBOR plus a
1.99
basis point margin. As of
September 30, 2016
, we have an outstanding balance of
$38 million
on our Amended Credit Facility.
The Amended Credit Facility is subject to certain financial covenants. As of
September 30, 2016
, we were in compliance with all required covenants.
Convertible Senior Notes
On August 12, 2014, we issued $230.0 million aggregate principal amount of 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. We accounted for the $230 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance. At
September 30, 2016
, the carrying amount of the liability was
$225.9 million
and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately
1.39%
.
Share Repurchase Program
On February 4, 2016, we announced that our Board of Directors approved a share repurchase program under which we may repurchase up to $100 million of our outstanding common stock. We plan to make such purchases at prevailing prices over the next 12 to 18 months.
As of
September 30, 2016
, we repurchased approximately
1.3 million
shares of our common stock for
$40.0 million
in connection with our existing share repurchase program.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Net cash provided by (used in):
|
|
|
(As adjusted)
|
Operating activities
|
$
|
56,484
|
|
|
$
|
76,574
|
|
Investing activities
|
(80,479
|
)
|
|
(168,700
|
)
|
Financing activities
|
(1,915
|
)
|
|
(3,058
|
)
|
Cash flows from operations.
Net cash
provided by
operating activities for the
nine
months ended
September 30, 2016
was
$56.5 million
, as compared to
$76.6 million
for the same period in
2015
. Cash flows from operations
decreased
by approximately
$20.1 million
and was primarily impacted by the increased levels of net working capital, specifically, the unfavorable timing of collections.
Cash flows from investing.
Net cash
used in
investing activities for the
nine
months ended
September 30, 2016
was
$80.5 million
, as compared to
$168.7 million
used
for the same period in
2015
. The
decrease
of approximately
$88.2 million
was primarily due to decreased purchases of marketable securities.
Cash flows from financing.
Net cash
used in
financing activities for the
nine
months ended
September 30, 2016
was
$1.9 million
, as compared to
$3.1 million
used
by financing activities for the same period in
2015
. The
decrease
in net cash
used in
financing activities for the
nine
months ended
September 30, 2016
of
$1.1 million
as compared to
2015
was primarily due to higher net borrowings of $38 million offset by share repurchases of $40 million.
We believe that our existing cash and cash equivalents, cash generated from our existing operations, our available credit facilities and other available sources of financing will be sufficient to fund our operations for the next twelve months based on our current business plans.
Effect of Inflation
Although inflation generally affects us by increasing our cost of labor and equipment, we do not believe that inflation has had any material effect on our results of operations for the
nine
months ended
September 30, 2016
or
2015
.
Impact of Recently Issued Accounting Standards
In August 2016, the Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,
“Statement of Cash Flows
” (“ASU 2016-15). This new guidance will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Management is currently evaluating the impact of ASU 2016-15 on our condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers,”
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08,
“Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”
which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10,
“Identifying Performance Obligations and Licensing,”
which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. Management is currently evaluating the effect that these ASUs will have on our consolidated financial statements and related disclosures. Management has not yet selected a transition method nor has it determined the effect of these standards on our ongoing financial reporting.
Impact of New Accounting Pronouncements
In March, 2016, the FASB released Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments may significantly impact net income, earnings per share, and the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. Management elected to early adopt this standard in the second quarter ended June 30, 2016.
ASU 2016-09 eliminates the requirement to estimate and apply a forfeiture rate to reduce stock compensation expense during the vesting period and, instead, account for forfeitures as they occur. ASU 2016-09 requires that this change be adopted using the modified retrospective approach. As such, we recorded a cumulative-effect adjustment of
$1.0 million
to adjust our retained earnings.
Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. We applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, retrospectively. This change increased the net cash provided by operating activities and decreased net cash provided by financing activities by
$4.7 million
for the
nine
months ended
September 30, 2015
.
Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are classified as a financing activity in the statement of cash flows. ASU 2016-09 requires that this change be adopted retrospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares increased the net cash provided by operating activities and decreased net cash provided by financing activities by
$15.5 million
for the
nine
months ended
September 30, 2015
.
ASU 2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This decreased our effective tax rate for the three months ended
September 30, 2016
by
2%
and increased our effective tax rate by
51%
for the
nine
months ended
September 30, 2016
. The ASU requires that this change be adopted prospectively. We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in our computation of diluted earnings per share for the three months ended
September 30, 2016
. This increased our diluted weighted average common shares outstanding by
43,762
shares and decreased the diluted weighted average common shares outstanding by
121,041
for the three and
nine
months ended
September 30, 2016
, respectively.
ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before they can be recognized. Previously unrecognized deferred tax assets were recognized on a modified retrospective basis which resulted in a cumulative-effect adjustment to our retained earnings of
$0.5 million
.
Adoption of the new standard impacted our previously reported quarterly results as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016,
|
|
As reported
|
|
As adjusted
|
Income statement:
|
|
|
|
|
|
Provision for income taxes
|
$
|
(3,965
|
)
|
|
$
|
(4,588
|
)
|
Cash flows statement:
|
|
|
|
|
|
Net cash from operations
|
$
|
37,731
|
|
|
$
|
40,489
|
|
Net cash used in financing
|
(35,253
|
)
|
|
(32,495
|
)
|
Balance sheet:
|
|
|
|
|
|
Deferred tax liability
|
$
|
23,096
|
|
|
$
|
22,864
|
|
Additional paid-in capital
|
535,326
|
|
|
536,659
|
|
Retained earnings
|
194,012
|
|
|
192,911
|
|
Management adopted ASU 2015-03, “Interest- Imputation of Interest (subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associate with Line of Credit Arrangements, during the first quarter of 2016, concurrently. The adoption of these ASUs required us to reclassify the deferred financing costs associated with our Convertible Senior Notes from other assets to long-term debt on a retrospective basis. Our consolidated balance sheets included deferred financing costs of
$4.1 million
and
$5.1 million
as of
September 30, 2016
and
December 31, 2015
, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with our Credit Facility and Amended Credit Facility continue to be presented in other assets on the condensed consolidated balance sheets.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of
September 30, 2016
and
December 31, 2015
that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.