Item 1.
Condensed Consolidated Financial Statements (unaudited)
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
|
(Unaudited)
(In thousands, except per share amounts)
|
Revenues:
|
|
|
|
Professional services and hosting
|
$
|
253,417
|
|
|
$
|
227,135
|
|
Product and licensing
|
151,752
|
|
|
179,050
|
|
Maintenance and support
|
82,489
|
|
|
79,930
|
|
Total revenues
|
487,658
|
|
|
486,115
|
|
Cost of revenues:
|
|
|
|
Professional services and hosting
|
164,892
|
|
|
153,259
|
|
Product and licensing
|
18,378
|
|
|
23,412
|
|
Maintenance and support
|
13,598
|
|
|
13,296
|
|
Amortization of intangible assets
|
15,542
|
|
|
15,631
|
|
Total cost of revenues
|
212,410
|
|
|
205,598
|
|
Gross profit
|
275,248
|
|
|
280,517
|
|
Operating expenses:
|
|
|
|
Research and development
|
66,322
|
|
|
70,525
|
|
Sales and marketing
|
101,516
|
|
|
100,590
|
|
General and administrative
|
39,790
|
|
|
40,501
|
|
Amortization of intangible assets
|
27,859
|
|
|
27,033
|
|
Acquisition-related costs, net
|
9,026
|
|
|
2,480
|
|
Restructuring and other charges, net
|
6,703
|
|
|
7,888
|
|
Total operating expenses
|
251,216
|
|
|
249,017
|
|
Income from operations
|
24,032
|
|
|
31,500
|
|
Other income (expense):
|
|
|
|
Interest income
|
1,023
|
|
|
883
|
|
Interest expense
|
(38,021
|
)
|
|
(29,880
|
)
|
Other expense, net
|
(610
|
)
|
|
(6,801
|
)
|
Loss before income taxes
|
(13,576
|
)
|
|
(4,298
|
)
|
Provision for income taxes
|
10,353
|
|
|
7,767
|
|
Net loss
|
$
|
(23,929
|
)
|
|
$
|
(12,065
|
)
|
Net loss per share:
|
|
|
|
Basic
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
Weighted average common shares outstanding:
|
|
|
|
Basic
|
288,953
|
|
|
307,794
|
|
Diluted
|
288,953
|
|
|
307,794
|
|
See accompanying notes.
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
|
(Unaudited)
|
|
(In thousands)
|
Net loss
|
$
|
(23,929
|
)
|
|
$
|
(12,065
|
)
|
Other comprehensive (loss) income:
|
|
|
|
Foreign currency translation adjustment
|
(30,566
|
)
|
|
(8,904
|
)
|
Pension adjustments
|
118
|
|
|
74
|
|
Unrealized loss on marketable securities
|
(31
|
)
|
|
(67
|
)
|
Total other comprehensive loss, net
|
(30,479
|
)
|
|
(8,897
|
)
|
Comprehensive loss
|
$
|
(54,408
|
)
|
|
$
|
(20,962
|
)
|
See accompanying notes.
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
(Unaudited)
|
|
(In thousands, except per
share amounts)
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
961,607
|
|
|
$
|
481,620
|
|
Marketable securities
|
133,684
|
|
|
98,840
|
|
Accounts receivable, less allowances for doubtful accounts of $11,492 and $11,038
|
384,639
|
|
|
380,004
|
|
Prepaid expenses and other current assets
|
93,640
|
|
|
78,126
|
|
Total current assets
|
1,573,570
|
|
|
1,038,590
|
|
Marketable securities
|
42,174
|
|
|
27,632
|
|
Land, building and equipment, net
|
178,220
|
|
|
185,169
|
|
Goodwill
|
3,503,442
|
|
|
3,508,879
|
|
Intangible assets, net
|
762,322
|
|
|
762,220
|
|
Other assets
|
135,402
|
|
|
138,980
|
|
Total assets
|
$
|
6,195,130
|
|
|
$
|
5,661,470
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
Current portion of long-term debt
|
$
|
977,458
|
|
|
$
|
—
|
|
Contingent and deferred acquisition payments
|
67,363
|
|
|
9,468
|
|
Accounts payable
|
70,758
|
|
|
94,599
|
|
Accrued expenses and other current liabilities
|
183,442
|
|
|
237,659
|
|
Deferred revenue
|
399,299
|
|
|
349,173
|
|
Total current liabilities
|
1,698,320
|
|
|
690,899
|
|
Long-term portion of debt
|
1,961,230
|
|
|
2,433,152
|
|
Deferred revenue, net of current portion
|
403,155
|
|
|
386,960
|
|
Deferred tax liabilities
|
120,189
|
|
|
115,435
|
|
Other liabilities
|
86,532
|
|
|
103,694
|
|
Total liabilities
|
4,269,426
|
|
|
3,730,140
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.001 par value per share; 560,000 shares authorized; 295,187 and 291,384 shares issued and 291,436 and 287,633 shares outstanding, respectively
|
295
|
|
|
291
|
|
Additional paid-in capital
|
2,541,770
|
|
|
2,492,992
|
|
Treasury stock, at cost (3,751 shares)
|
(16,788
|
)
|
|
(16,788
|
)
|
Accumulated other comprehensive loss
|
(146,613
|
)
|
|
(116,134
|
)
|
Accumulated deficit
|
(452,960
|
)
|
|
(429,031
|
)
|
Total stockholders’ equity
|
1,925,704
|
|
|
1,931,330
|
|
Total liabilities and stockholders’ equity
|
$
|
6,195,130
|
|
|
$
|
5,661,470
|
|
See accompanying notes.
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
|
(Unaudited)
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(23,929
|
)
|
|
$
|
(12,065
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
58,006
|
|
|
58,275
|
|
Stock-based compensation
|
39,130
|
|
|
42,348
|
|
Non-cash interest expense
|
13,039
|
|
|
8,636
|
|
Deferred tax provision (benefit)
|
2,006
|
|
|
(351
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
4,851
|
|
Other
|
1,856
|
|
|
393
|
|
Changes in operating assets and liabilities, net of effects from acquisitions:
|
|
|
|
Accounts receivable
|
(9,713
|
)
|
|
(3,894
|
)
|
Prepaid expenses and other assets
|
(15,999
|
)
|
|
(20,097
|
)
|
Accounts payable
|
(21,244
|
)
|
|
(5,940
|
)
|
Accrued expenses and other liabilities
|
5,841
|
|
|
305
|
|
Deferred revenue
|
75,907
|
|
|
68,680
|
|
Net cash provided by operating activities
|
124,900
|
|
|
141,141
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures
|
(11,399
|
)
|
|
(20,555
|
)
|
Payments for business and technology acquisitions, net of cash acquired
|
(22,949
|
)
|
|
(674
|
)
|
Purchases of marketable securities and other investments
|
(72,797
|
)
|
|
(17,070
|
)
|
Proceeds from sales and maturities of marketable securities and other investments
|
10,105
|
|
|
14,128
|
|
Net cash used in investing activities
|
(97,040
|
)
|
|
(24,171
|
)
|
Cash flows from financing activities:
|
|
|
|
Payments of debt
|
—
|
|
|
(511,844
|
)
|
Proceeds from issuance of long-term debt, net of issuance costs
|
495,000
|
|
|
664,605
|
|
Payments for repurchase of common stock
|
—
|
|
|
(189,580
|
)
|
Net payments on other long-term liabilities
|
(87
|
)
|
|
(851
|
)
|
Proceeds from issuance of common stock from employee stock plans
|
45
|
|
|
36
|
|
Cash used to net share settle employee equity awards
|
(40,360
|
)
|
|
(52,171
|
)
|
Net cash provided by (used in) financing activities
|
454,598
|
|
|
(89,805
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
(2,471
|
)
|
|
39
|
|
Net increase in cash and cash equivalents
|
479,987
|
|
|
27,204
|
|
Cash and cash equivalents at beginning of period
|
481,620
|
|
|
479,449
|
|
Cash and cash equivalents at end of period
|
$
|
961,607
|
|
|
$
|
506,653
|
|
See accompanying notes.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization and Presentation
|
The consolidated financial statements include the accounts of Nuance Communications, Inc. (“Nuance”, “we”, "our", or “the Company”) and our wholly-owned subsidiaries. We prepared these unaudited interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (the “U.S.” or the "United States") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed consolidated financial statements reflect all adjustments that, in our opinion, are necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
During the second quarter of fiscal year 2016, we reclassified certain government payroll incentive credits previously reported in the general and administrative expense to research and development expense, cost of revenue and sales and marketing. These changes had no impact on consolidated net income or cash flows in any period.
Although we believe the disclosures in these financial statements are adequate to make the information presented not misleading, certain information in the footnote disclosures of the financial statements has been condensed or omitted where it substantially duplicates information provided in our latest audited consolidated financial statements, in accordance with the rules and regulations of the SEC. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2016
. The results of operations for the
three months ended
December 31, 2016
and 2015, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.
We have evaluated subsequent events from
December 31, 2016
through the date of the issuance of these consolidated financial statements and have determined that no material subsequent events have occurred that would affect the information presented in these consolidated financial statements.
|
|
2.
|
Summary of Significant Accounting Policies
|
Recently Adopted Accounting Standards
Effective October 1, 2016, we implemented Accounting Standards Update ("ASU") No. 2015-02, “Amendments to the Consolidation Analysis” ("ASU 2015-02"). The amendments in ASU 2015-02 provide guidance on evaluating whether a company should consolidate certain legal entities. In accordance with the guidance, all legal entities are subject to reevaluation under the revised consolidation model. The implementation of ASU 2015-02 had no impact on our consolidated financial statements.
Effective October 1, 2016, we implemented ASU No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"), to provide guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and to provide related footnote disclosures. The implementation of ASU 2014-15 had no impact on our consolidated financial statements.
Effective October 1, 2016, we implemented ASU No. 2014-12,
"
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The implementation of ASU 2014-12 had no impact on our consolidated financial statements.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations and cash flows or do not apply to our operations.
In August 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASC 2016-15"), which provides guidance on the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. The standard requires the use of a retrospective approach to all periods
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
presented, but may be applied prospectively if retrospective application would be impracticable. ASU 2016-15 is effective for us in the first quarter of fiscal year 2019, and early application is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-15 on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for us in the first quarter of fiscal year 2018, and early application is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-09 on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for us in the first quarter of fiscal year 2020, and early application is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. Although ASU 2016-01 retains many current requirements, it significantly revises accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments and is effective for us in the first quarter of fiscal year 2019. We do not believe that ASU 2016-01 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 permits two methods of adoption: (i) retrospective to each prior reporting period presented; or (ii) retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for us in the first quarter of fiscal 2019 and we do not plan to early adopt. In the first quarter of fiscal 2017, we commenced a project to assess the potential impact of the new standard on our consolidated financial statements and related disclosures. This project also includes the assessment and enhancement of our internal processes and systems to address the new standard. At this time, we have not yet selected a transition method.
As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our products and service offerings.
Fiscal Year 2017 Acquisitions
During the first quarter of fiscal year 2017, we acquired several businesses in our Enterprise and Healthcare segments that were not significant individually or in the aggregate. The total aggregate consideration for these acquisitions was
$26.1 million
including an estimated fair value for future contingent payments. The results of operations of these acquisitions have been included in our financial results since their respective acquisition dates.
Pro forma results of operations have not been presented because the effects of the business combinations completed in the first quarter of fiscal year 2017, individually and in aggregate, were neither material nor significant to our consolidated financial
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
results. We have also not presented revenue or the results of operations for each of these business combinations, from the date of acquisition, as they were similarly neither material nor significant to our consolidated financial results.
The fair value estimates for the assets acquired and liabilities assumed for acquisitions completed during the first quarter of fiscal year 2017 were based upon preliminary calculations and valuations, and our estimates and assumptions for each of these acquisitions are subject to change as we obtain additional information during the respective measurement periods (up to
one
year from the respective acquisition dates). The primary areas of preliminary estimates that were not yet finalized related to certain assets and liabilities acquired. There were no significant changes to the fair value estimates during the current year.
Fiscal Year 2016 Acquisitions
Acquisition of TouchCommerce, Inc.
In August 2016, we acquired all of the outstanding stock of TouchCommerce. TouchCommerce is a provider of omni-channel solutions to engage their customers on any device through online chat, guides, personalized content, and other automated tools, resulting in enhanced customer experience, increased revenue and reduced support costs. We expect this acquisition to expand our customer care solutions with a range of new digital engagement offerings, including live chat, customer analytics and personalization solutions within our Enterprise segment. We expect to be able to provide an end-to-end engagement platform that merges intelligent self-service with assisted service to increase customer satisfaction, strengthen customer loyalty and improve business results. The aggregate consideration for this transaction was
$218.1 million
, and included
$113.0 million
paid in cash and
$85.0 million
paid in our common stock. The remaining
$20.1 million
is expected to be paid in November 2017 at the conclusion of an indemnity period in either cash or our common stock, at our election. The acquisition was a stock purchase and the goodwill resulting from this acquisition is not deductible for tax purposes. The results of operations for this acquisition have been included in our Enterprise segment from the acquisition date.
A summary of the preliminary allocation of the purchase consideration for our TouchCommerce acquisition is as follows (dollars in thousands):
|
|
|
|
|
|
Touch-Commerce
|
Purchase consideration:
|
|
Cash
|
$
|
113,008
|
|
Common stock
(a)
|
85,000
|
|
Deferred acquisition payment
|
20,140
|
|
Total purchase consideration
|
$
|
218,148
|
|
|
|
Allocation of the purchase consideration:
|
|
Cash
|
$
|
137
|
|
Accounts receivable
(b)
|
14,897
|
|
Goodwill
|
117,924
|
|
Identifiable intangible assets
(c)
|
110,800
|
|
Other assets
|
1,521
|
|
Total assets acquired
|
245,279
|
|
Current liabilities
|
(4,198
|
)
|
Deferred tax liability
|
(19,515
|
)
|
Deferred revenue
|
(2,784
|
)
|
Other long term liabilities
|
(634
|
)
|
Total liabilities assumed
|
(27,131
|
)
|
Net assets acquired
|
$
|
218,148
|
|
|
|
(a)
|
5,749,807
shares of our common stock valued at
$14.78
per share were issued at closing.
|
|
|
(b)
|
Accounts receivable have been recorded at their estimated fair values and the fair value reserve was not material.
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
(c)
|
The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on preliminary valuations (dollars in thousands):
|
|
|
|
|
|
|
|
|
TouchCommerce
|
|
Amount
|
|
Weighted
Average
Life
(Years)
|
Core and completed technology
|
$
|
26,000
|
|
|
6.0
|
Customer relationships
|
81,600
|
|
|
10.0
|
Trade names
|
3,200
|
|
|
5.0
|
Total
|
$
|
110,800
|
|
|
|
Other Fiscal Year 2016 Acquisitions
During fiscal year 2016, we acquired several other businesses in our Healthcare segment that were not significant individually or in the aggregate. The total aggregate cash consideration for these acquisitions was
$50.1 million
including an estimated fair value for future contingent payments. The results of operations of these acquisitions have been included in our financial results since their respective acquisition dates.
Acquisition-Related Costs, net
Acquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well as the costs of integration-related activities, including services provided by third-parties; (ii) professional service fees and expenses, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) adjustments to acquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended, such as gains or losses on settlements of pre-acquisition contingencies.
The components of acquisition-related costs, net are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2016
|
|
2015
|
Transition and integration costs
|
$
|
3,710
|
|
|
$
|
996
|
|
Professional service fees
|
5,017
|
|
|
1,403
|
|
Acquisition-related adjustments
|
299
|
|
|
81
|
|
Total
|
$
|
9,026
|
|
|
$
|
2,480
|
|
|
|
4.
|
Goodwill and Intangible Assets
|
The changes in the carrying amount of goodwill and intangible assets for the
three months ended
December 31, 2016
, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Intangible
Assets
|
Balance at September 30, 2016
|
$
|
3,508,879
|
|
|
$
|
762,220
|
|
Acquisitions
|
15,783
|
|
|
45,133
|
|
Purchase accounting adjustments
|
(431
|
)
|
|
—
|
|
Amortization
|
—
|
|
|
(43,401
|
)
|
Effect of foreign currency translation
|
(20,789
|
)
|
|
(1,630
|
)
|
Balance at December 31, 2016
|
$
|
3,503,442
|
|
|
$
|
762,322
|
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the first quarter of fiscal year 2017, we acquired a speech patent portfolio for total cash consideration of
$35.0 million
which was paid in January 2017.
|
|
5.
|
Financial Instruments and Hedging Activities
|
Derivatives Not Designated as Hedges
Forward Currency Contracts
We operate our business in countries throughout the world and transact business in various foreign currencies. Our foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency of our operations. We have a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effect of certain foreign currency exposures. Our program is designed so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Generally, we enter into such contracts for less than
90
days and have no cash requirements until maturity. At
December 31, 2016
and
September 30, 2016
, we had outstanding contracts with a total notional value of
$196.1 million
and
$215.2 million
, respectively.
We have not designated these forward contracts as hedging instruments pursuant to the authoritative guidance for derivatives and hedging, and accordingly, we record the fair value of these contracts at the end of each reporting period in our consolidated balance sheet, with the unrealized gains and losses recognized immediately in earnings as
other expense, net
in our consolidated statements of operations. The cash flows related to the settlement of these contracts are included in cash flows from investing activities within our consolidated statement of cash flows.
Security Price Guarantees
From time to time we enter into agreements that allow us to issue shares of our common stock as part or all of the consideration related to business acquisitions, partnering and technology acquisition activities. Some of these shares are issued subject to security price guarantees, which are accounted for as derivatives. We have determined that these instruments would not be considered equity instruments if they were freestanding. Certain of the security price guarantees require payment from either us to a third party, or from a third party to us, based upon the difference between the price of our common stock on the issue date and an average price of our common stock approximately six months following the issue date. We have also issued minimum price guarantees that may require payments from us to a third party based on the average share price of our common stock approximately six months following the issue date if our stock price falls below the minimum price guarantee. Changes in the fair value of these security price guarantees are reported in
other expense, net
in our consolidated statements of operations. We have no outstanding shares subject to security price guarantees at
December 31, 2016
.
The following table provides a quantitative summary of the fair value of our derivative instruments as of
December 31, 2016
and
September 30, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges:
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
December 31, 2016
|
|
September 30, 2016
|
Foreign currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
2,235
|
|
|
$
|
335
|
|
Net fair value of non-hedge derivative instruments
|
|
$
|
2,235
|
|
|
$
|
335
|
|
The following tables summarize the activity of derivative instruments for the
three months ended
December 31, 2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
Derivatives Not Designated as Hedges
|
|
Location of Gain (Loss) Recognized in Income
|
|
2016
|
|
2015
|
Foreign currency contracts
|
|
Other expense, net
|
|
$
|
(11,615
|
)
|
|
$
|
(3,373
|
)
|
Other Financial Instruments
Financial instruments including cash equivalents, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximate their fair value based on the short maturities of those instruments. Marketable securities and derivative instruments are carried at fair value.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6.
Fair Value Measures
Fair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third is considered unobservable:
|
|
•
|
Level 1.
Quoted prices for identical assets or liabilities in active markets which we can access.
|
|
|
•
|
Level 2.
Observable inputs other than those described as Level 1.
|
|
|
•
|
Level 3.
Unobservable inputs based on the best information available, including management’s estimates and assumptions.
|
Assets and liabilities measured at fair value on a recurring basis at
December 31, 2016
and
September 30, 2016
consisted of (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(a)
|
$
|
815,794
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
815,794
|
|
US government agency securities
(a)
|
1,003
|
|
|
—
|
|
|
—
|
|
|
1,003
|
|
Time deposits
(b)
|
—
|
|
|
44,573
|
|
|
—
|
|
|
44,573
|
|
Commercial paper, $59,158 at cost
(b)
|
—
|
|
|
59,192
|
|
|
—
|
|
|
59,192
|
|
Corporate notes and bonds, $72,105 at cost
(b)
|
—
|
|
|
72,094
|
|
|
—
|
|
|
72,094
|
|
Foreign currency exchange contracts
(b)
|
—
|
|
|
2,235
|
|
|
—
|
|
|
2,235
|
|
Total assets at fair value
|
$
|
816,797
|
|
|
$
|
178,094
|
|
|
$
|
—
|
|
|
$
|
994,891
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent acquisition payments
(c)
|
—
|
|
|
—
|
|
|
(8,961
|
)
|
|
(8,961
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8,961
|
)
|
|
$
|
(8,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(a)
|
$
|
331,419
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
331,419
|
|
US government agency securities
(a)
|
1,002
|
|
|
—
|
|
|
—
|
|
|
1,002
|
|
Time deposits
(b)
|
—
|
|
|
33,794
|
|
|
—
|
|
|
33,794
|
|
Commercial paper, $38,108 at cost
(b)
|
—
|
|
|
38,142
|
|
|
—
|
|
|
38,142
|
|
Corporate notes and bonds, $54,484 at cost
(b)
|
—
|
|
|
54,536
|
|
|
—
|
|
|
54,536
|
|
Foreign currency exchange contracts
(b)
|
—
|
|
|
335
|
|
|
—
|
|
|
335
|
|
Total assets at fair value
|
$
|
332,421
|
|
|
$
|
126,807
|
|
|
$
|
—
|
|
|
$
|
459,228
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent acquisition payments
(c)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8,240
|
)
|
|
$
|
(8,240
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8,240
|
)
|
|
$
|
(8,240
|
)
|
|
|
(a)
|
Money market funds and U.S. government agency securities, included in cash and cash equivalents in the accompanying balance sheets, are valued at quoted market prices in active markets.
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
(b)
|
The fair values of our time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. Time deposits are generally for terms of one year or less. The commercial paper and corporate notes and bonds mature within three years and have a weighted average maturity of
0.76 years
as of
December 31, 2016
.
|
|
|
(c)
|
The fair value of our contingent consideration arrangements are determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity.
|
The following table provides a summary of changes in fair value of our Level 3 financial instruments for the
three months ended
December 31, 2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
8,240
|
|
|
$
|
15,961
|
|
Earn-out liabilities established at time of acquisition
|
1,653
|
|
|
—
|
|
Payments and foreign currency translation
|
(1,498
|
)
|
|
462
|
|
Adjustments to fair value included in acquisition-related costs, net
|
566
|
|
|
478
|
|
Balance at end of period
|
$
|
8,961
|
|
|
$
|
16,901
|
|
Our financial liabilities valued based upon Level 3 inputs are composed of contingent consideration arrangements relating to our acquisitions. We are contractually obligated to pay contingent consideration to the selling shareholders upon the achievement of specified objectives, including the achievement of future bookings and sales targets related to the products of the acquired entities and therefore are recorded as contingent consideration liabilities at the time of the acquisitions. We update our assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the consideration is paid upon the achievement of the specified objectives or eliminated upon failure to achieve the specified objectives.
Contingent acquisition payment liabilities are scheduled to be paid in periods throug
h
fiscal year 2019
. As of
December 31, 2016
, we could be required to pay up to
$17.4 million
for contingent consideration arrangements if the specified objectives are achieved. We have determined the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future payments was based on several factors, the most significant of which are the estimated cash flows projected from future product sales and the risk adjusted discount rate for the fair value measurement.
|
|
7.
|
Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
Compensation
|
$
|
86,894
|
|
|
$
|
154,028
|
|
Accrued interest payable
|
34,322
|
|
|
20,409
|
|
Cost of revenue related liabilities
|
18,723
|
|
|
19,351
|
|
Consulting and professional fees
|
18,251
|
|
|
18,001
|
|
Facilities related liabilities
|
7,934
|
|
|
7,382
|
|
Sales and marketing incentives
|
3,949
|
|
|
6,508
|
|
Sales and other taxes payable
|
2,488
|
|
|
2,708
|
|
Other
|
10,881
|
|
|
9,272
|
|
Total
|
$
|
183,442
|
|
|
$
|
237,659
|
|
Deferred maintenance revenue consists of prepaid fees received for post-contract customer support for our products, including telephone support and the right to receive unspecified upgrades/updates on a when-and-if-available basis. Unearned
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
revenue includes fees for up-front set-up of the service environment; fees charged for on-demand service; certain software arrangements for which we do not have fair value of post-contract customer support, resulting in ratable revenue recognition for the entire arrangement on a straight-line basis; and fees in excess of estimated earnings on percentage-of-completion service contracts.
Deferred revenue consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
Current liabilities:
|
|
|
|
Deferred maintenance revenue
|
$
|
167,704
|
|
|
$
|
165,902
|
|
Unearned revenue
|
231,595
|
|
|
183,271
|
|
Total current deferred revenue
|
$
|
399,299
|
|
|
$
|
349,173
|
|
Long-term liabilities:
|
|
|
|
Deferred maintenance revenue
|
$
|
56,210
|
|
|
$
|
59,955
|
|
Unearned revenue
|
346,945
|
|
|
327,005
|
|
Total long-term deferred revenue
|
$
|
403,155
|
|
|
$
|
386,960
|
|
|
|
9.
|
Restructuring and Other Charges, net
|
Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of continuing operations. Restructuring expenses consist of employee severance costs and may also include charges for excess facility space and other contract termination costs. Other charges may include gains or losses on non-controlling strategic equity interests, litigation contingency reserves, costs related to a transition agreement for our Chief Executive Officer, and gains or losses on the sale or disposition of certain non-strategic assets or product lines.
The following table sets forth accrual activity relating to restructuring reserves for the
three months ended
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
Facilities
|
|
Total
|
Balance at September 30, 2016
|
$
|
2,661
|
|
|
$
|
11,132
|
|
|
$
|
13,793
|
|
Restructuring charges, net
|
3,651
|
|
|
1,899
|
|
|
5,550
|
|
Non-cash adjustment
|
—
|
|
|
89
|
|
|
89
|
|
Cash payments
|
(4,749
|
)
|
|
(1,894
|
)
|
|
(6,643
|
)
|
Balance at December 31, 2016
|
$
|
1,563
|
|
|
$
|
11,226
|
|
|
$
|
12,789
|
|
Restructuring and other charges, net by component and segment are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
Healthcare
|
$
|
1,984
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
—
|
|
|
$
|
2,261
|
|
|
$
|
701
|
|
|
$
|
—
|
|
|
$
|
701
|
|
|
$
|
—
|
|
|
$
|
701
|
|
Mobile
|
213
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
213
|
|
|
2,182
|
|
|
602
|
|
|
2,784
|
|
|
—
|
|
|
2,784
|
|
Enterprise
|
424
|
|
|
607
|
|
|
1,031
|
|
|
—
|
|
|
1,031
|
|
|
1,084
|
|
|
20
|
|
|
1,104
|
|
|
—
|
|
|
1,104
|
|
Imaging
|
361
|
|
|
351
|
|
|
712
|
|
|
—
|
|
|
712
|
|
|
213
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
213
|
|
Corporate
|
669
|
|
|
664
|
|
|
1,333
|
|
|
1,153
|
|
|
2,486
|
|
|
378
|
|
|
2,708
|
|
|
3,086
|
|
|
—
|
|
|
3,086
|
|
Total
|
$
|
3,651
|
|
|
$
|
1,899
|
|
|
$
|
5,550
|
|
|
$
|
1,153
|
|
|
$
|
6,703
|
|
|
$
|
4,558
|
|
|
$
|
3,330
|
|
|
$
|
7,888
|
|
|
$
|
—
|
|
|
$
|
7,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
2017
During the
three months ended
December 31, 2016
, we recorded restructuring charges of
$5.6 million
. The restructuring
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
charges for the
three months ended
December 31, 2016
included
$3.7 million
for severance related to the reduction of approximately
90
employees as part of our initiatives to reduce costs and optimize processes. The restructuring charges also included a
$1.9 million
charge for the closure of certain excess facility space. In addition, during the
three months ended
December 31, 2016
, we have recorded certain other charges that totaled
$1.2 million
for costs related to a transition agreement for our Chief Executive Officer as communicated on our Form 8-K filed on November 17, 2016.
We expect that the remaining severance payments of
$1.6 million
will be substantially paid by the end of fiscal year
2017
. We expect that the remaining payments of
$11.2 million
for the closure of excess facility space will be paid through fiscal year
2025
, in accordance with the terms of the applicable leases.
Fiscal
Year
2016
During the
three months ended
December 31, 2015
, we recorded restructuring charges of
$7.9 million
. The restructuring charges for the
three months ended
December 31, 2015
included
$4.6 million
for severance related to the reduction of approximately
110
employees as part of our initiatives to reduce costs and optimize processes. The restructuring charges also included a
$3.3 million
charge for the closure of certain excess facility space.
|
|
10.
|
Debt and Credit Facilities
|
At
December 31, 2016
and
September 30, 2016
, we had the following long-term borrowing obligations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
5.375% Senior Notes due 2020, net of unamortized premium of $2.8 million and $3.0 million, respectively, and deferred issuance costs of $6.9 million and $7.3 million, respectively. Effective interest rate 5.28%.
|
$
|
1,045,968
|
|
|
$
|
1,046,851
|
|
5.625% Senior Notes due 2026, net of deferred issuance costs of $6.5 million. Effective interest rate 5.625%.
|
493,471
|
|
|
—
|
|
6.000% Senior Notes due 2024, net of deferred issuance costs of $2.3 million and $2.4 million, respectively. Effective interest rate 6.00%.
|
297,678
|
|
|
297,601
|
|
1.00% Convertible Debentures due 2035, net of unamortized discount of $158.0 million and $163.5 million, respectively, and deferred issuance costs of $7.9 million and $8.2 million, respectively. Effective interest rate 5.62%.
|
510,589
|
|
|
504,712
|
|
2.75% Convertible Debentures due 2031, net of unamortized discount of $14.9 million and $19.2 million, respectively, and deferred issuance costs of $0.9 million and $1.1 million, respectively. Effective interest rate 7.43%.
|
379,762
|
|
|
375,208
|
|
1.50% Convertible Debentures due 2035, net of unamortized discount of $49.5 million and $51.7 million, respectively, and deferred issuance costs of $1.8 million and $1.9 million, respectively. Effective interest rate 5.39%.
|
212,643
|
|
|
210,286
|
|
Deferred issuance costs related to our Revolving Credit Facility
|
(1,423
|
)
|
|
(1,506
|
)
|
Total long-term debt
|
$
|
2,938,688
|
|
|
$
|
2,433,152
|
|
Less: current portion
|
977,458
|
|
|
—
|
|
Non-current portion of long-term debt
|
$
|
1,961,230
|
|
|
$
|
2,433,152
|
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the maturities of our borrowing obligations as of
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Convertible Debentures
(1)
|
|
Senior Notes
|
|
Total
|
2017
|
|
$
|
—
|
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
2018
|
|
395,534
|
|
|
—
|
|
|
395,534
|
|
2019
|
|
—
|
|
|
—
|
|
|
—
|
|
2020
|
|
—
|
|
|
450,000
|
|
|
450,000
|
|
2021
|
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
|
940,383
|
|
|
800,000
|
|
|
1,740,383
|
|
Total before unamortized discount
|
|
1,335,917
|
|
|
1,850,000
|
|
|
3,185,917
|
|
Less: unamortized discount and issuance costs
|
|
(232,923
|
)
|
|
(14,306
|
)
|
|
(247,229
|
)
|
Total long-term debt
|
|
$
|
1,102,994
|
|
|
$
|
1,835,694
|
|
|
$
|
2,938,688
|
|
|
|
(1)
|
Holders of the 1.0% 2035 Debentures have the right to require us to redeem the debentures on December 15, 2022, 2027 and 2032. Holders of the 2031 Debentures have the right to require us to redeem the debentures on November 1, 2017, 2021, and 2026. Holders of the 1.5% 2035 Debentures have the right to require us to redeem the debentures on November 1, 2021, 2026, and 2031.
|
The estimated fair value of our long-term debt approximated
$3,152.6 million
(face value
$3,185.9 million
) and
$2,630.3 million
(face value
$2,687.1 million
) at
December 31, 2016
and
September 30, 2016
, respectively. These fair value amounts represent the value at which our lenders could trade our debt within the financial markets and do not represent the settlement value of these long-term debt liabilities to us at each reporting date. The fair value of the long-term debt will continue to vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Senior Notes and the Convertible Debentures are traded and the fair values of each borrowing was estimated using the averages of the bid and ask trading quotes at each respective reporting date. We had no outstanding balance on the Revolving Credit Facility at
December 31, 2016
or
September 30, 2016
.
5.375% Senior Notes due 2020
In
August 2012
, we issued
$700.0 million
aggregate principal amount of
5.375%
Senior Notes due on
August 15, 2020
in a private placement. In
October 2012
, we issued an additional
$350.0 million
aggregate principal amount of our
5.375%
Senior Notes (collectively the “2020 Senior Notes”). The 2020 Senior Notes bear interest at
5.375%
per year, payable in cash semi-annually in arrears. The 2020 Senior Notes are our unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries, ("the Subsidiary Guarantors"). The 2020 Senior Notes and guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors' future unsecured subordinated debt. The 2020 Senior Notes and guarantees effectively rank junior to all secured debt of our and the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2020 Senior Notes.
In January 2017, we repurchased
$600.0 million
in aggregate principal amount of our 2020 Senior Notes using cash and cash equivalents and the net proceeds from our 2026 Senior Notes issued in December 2015. In January 2017, we recorded an extinguishment loss of
$18.4 million
. In accordance with the authoritative guidance for debt instruments, a loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt, including any unamortized debt discount or issuance costs. Following this activity,
$450.0 million
in aggregate principal amount of our 2020 Senior Notes remain outstanding. The aggregate debt discount is being amortized to interest expense using the effective interest rate method through August 2020.
5.625% Senior Notes due 2026
In
December 2016
, we issued
$500.0 million
aggregate principal amount of
5.625%
Senior Notes due on
December 15, 2026
(the "2026 Senior Notes") in a private placement. The proceeds from the 2026 Senior Notes were approximately
$495.0 million
, net of issuance costs, and we used the proceeds to repurchase a portion of our 2020 Senior Notes. The 2026 Senior Notes bear interest at
5.625%
per year, payable in cash semi-annually in arrears, beginning on June 15, 2017.
The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by our Subsidiary Guarantors. The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unsecured subordinated debt. The 2026 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2026 Senior Notes.
At any time before
December 15, 2021
, we may redeem all or a portion of the 2026 Senior Notes at a redemption price equal to
100%
of the aggregate principal amount of the 2026 Senior Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or after
December 15, 2021
, we may redeem all or a portion of the 2026 Senior Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before
December 15, 2021
, we may redeem up to
35%
of the aggregate outstanding principal amount of the 2026 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price equal to
105.625%
of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than
120 days
after the closing of the related equity offering, and at least
50%
of the original aggregate principal amount of the 2026 Senior Notes remains outstanding immediately thereafter.
Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the 2026 Senior Notes at a price equal to
100%
in the case of an asset sale, or
101%
in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date.
6.0% Senior Notes due 2024
In
June 2016
, we issued
$300.0 million
aggregate principal amount of
6.0%
Senior Notes due on
July 1, 2024
(the "2024 Senior Notes") in a private placement. The proceeds from the 2024 Senior Notes were approximately
$297.5 million
, net of issuance costs. The 2024 Senior Notes bear interest at
6.0%
per year, payable in cash semi-annually in arrears. The 2024 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by our Subsidiary Guarantors. The 2024 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt, and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2024 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2024 Senior Notes.
1.0%
Convertible Debentures due 2035
In December 2015, we issued
$676.5 million
in aggregate principal amount of
1.0%
Senior Convertible Debentures due in 2035 (the “1.0% 2035 Debentures”). We used a portion of the proceeds to repurchase
$38.3 million
in aggregate principal on our
2.75%
Senior Convertible Debentures due in 2031 (the “2031 Debentures”) and to repay the aggregate principal balance of
$472.5 million
on the term loan. The
1.0%
2035 Debentures bear interest at
1.0%
per year, payable in cash semi-annually in arrears. The
1.0%
2035 Debentures mature on
December 15, 2035
, subject to the right of the holders to require us to redeem the
1.0%
2035 Debentures on
December 15, 2022, 2027, or 2032
. The
1.0%
2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the
1.0%
2035 Debentures. The
1.0%
2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. The initial conversion price is approximately
$27.22
per share. At issuance, we allocated
$495.4 million
to long-term debt, and
$181.1 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through
December 2022
. As of
December 31, 2016
and
September 30, 2016
, none of the conversion criteria were met for the
1.0%
2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
2.75%
Convertible Debentures due 2031
In
October 2011
, we issued
$690.0 million
in aggregate principal amount of
2.75%
Senior Convertible Debentures due in 2031 in a private placement. The 2031 Debentures bear interest at
2.75%
per year, payable in cash semi-annually in arrears. The 2031 Debentures mature on
November 1, 2031
, subject to the right of the holders to require us to redeem the 2031 Debentures on
November 1, 2017, 2021, and 2026
. The 2031 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2031 Debentures. The 2031 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. The initial conversion price is approximately
$32.30
per share. At issuance, we allocated
$533.6 million
to long-term debt, and
$156.4 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through
November 2017
.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to exchange, in a private placement,
$256.2 million
in aggregate principal amount of our 2031 Debentures for approximately
$263.9 million
in aggregate principal amount of our 1.5% 2035 Debentures. In December 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to repurchase
$38.3 million
in aggregate principal with proceeds received from the issuance of our
1.0%
2035 Debentures. Upon repurchase we recorded an extinguishment loss of
$2.4 million
in
other expense, net
, in the accompanying consolidated statements of operations. In accordance with the authoritative guidance for convertible debt instruments, a loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt for our 2031 Debentures, including any unamortized debt discount or issuance costs. Following this activity,
$395.5 million
in aggregate principal amount of our 2031 Debentures remain outstanding. As of
December 31, 2016
, the remaining aggregate outstanding principal balance has been classified as current portion of long-term debt on the consolidated balance sheet as the holders have the right to require us to redeem on November 1, 2017. The aggregate debt discount is being amortized to interest expense using the effective interest rate method through
November 2017
. As of
December 31, 2016
and
September 30, 2016
, none of the conversion criteria were met for the 2031 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
1.50%
Convertible Debentures due 2035
In June 2015, we issued
$263.9 million
in aggregate principal amount of
1.50%
Senior Convertible Debentures due in 2035 (the “1.5% 2035 Debentures”) in exchange for
$256.2 million
in aggregate principal amount of our 2031 Debentures. The 1.5% 2035 Debentures were issued at
97.09%
of the principal amount, which resulted in a discount of
$7.7 million
. The 1.5% 2035 Debentures bear interest at
1.50%
per year, payable in cash semi-annually in arrears. The 1.5% 2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 1.5% 2035 Debentures on November 1, 2021, 2026, or 2031. The 1.5% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.5% 2035 Debentures. The 1.5% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. The initial conversion price is approximately
$23.26
per share. At issuance, we allocated
$208.6 million
to long-term debt, and
$55.3 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through November 2021. As of
December 31, 2016
and
September 30, 2016
, none of the conversion criteria were met for the 1.5% 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
Revolving Credit Facility
In April 2016, we entered into a credit agreement that provides for a
$242.5 million
revolving credit line, including letters of credit (together, the “Revolving Credit Facility”). The Revolving Credit Facility matures on April 15, 2021. As of
December 31, 2016
, issued letters of credit in the aggregate amount of
$4.3 million
were treated as issued and outstanding when calculating the borrowing availability under the Revolving Credit Facility. As of
December 31, 2016
, we had
$238.2 million
available for additional borrowing under the Revolving Credit Facility. Any amounts outstanding under the Revolving Credit Facility will bear interest, at either (i) LIBOR plus an applicable margin of
1.50%
or
1.75%
, or (ii) the alternative base rate plus an applicable margin of
0.50%
or
0.75%
. The Revolving Credit Facility is secured by substantially all assets of ours and our Subsidiary Guarantors. The Revolving Credit Facility contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default.
Share Repurchases
On
April 29, 2013
, our Board of Directors approved a share repurchase program for up to
$500.0 million
of our outstanding shares of common stock. On April 29, 2015, our Board of Directors approved an additional
$500.0 million
under our share repurchase program. Since the commencement of the program, we have repurchased
40.7 million
shares for
$707.5 million
. These shares were retired upon repurchase. Approximately
$292.5 million
remained available for share repurchases as of
December 31, 2016
pursuant to our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of
December 31, 2016
and
2015
, diluted weighted average common shares outstanding is equal to basic weighted average common shares due to our net loss position. Common equivalent shares are excluded from the computation of diluted net loss per share if their effect is anti-dilutive. Potentially dilutive common equivalent shares aggregating to
9.9 million
and
10.0 million
shares for the
three months ended
December 31, 2016
and
2015
, respectively, have been excluded from the computation of diluted net loss per share because their inclusion would be anti-dilutive.
|
|
13.
|
Stock-Based Compensation
|
We recognize stock-based compensation expense over the requisite service period. Our share-based awards are accounted for as equity instruments. The amounts included in the consolidated statements of operations relating to stock-based compensation are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2016
|
|
2015
|
Cost of professional services and hosting
|
$
|
8,410
|
|
|
$
|
7,757
|
|
Cost of product and licensing
|
92
|
|
|
122
|
|
Cost of maintenance and support
|
977
|
|
|
1,068
|
|
Research and development
|
8,490
|
|
|
9,933
|
|
Selling and marketing
|
11,969
|
|
|
12,837
|
|
General and administrative
|
9,192
|
|
|
10,631
|
|
Total
|
$
|
39,130
|
|
|
$
|
42,348
|
|
Stock Options
The table below summarizes activity relating to stock options for the
three months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(a)
|
Outstanding at September 30, 2016
|
1,965,826
|
|
|
$
|
15.01
|
|
|
|
|
|
Exercised
|
(915,779
|
)
|
|
$
|
13.55
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,050,047
|
|
|
$
|
16.29
|
|
|
1.0 year
|
|
$
|
0.2
|
million
|
Exercisable at December 31, 2016
|
1,050,038
|
|
|
$
|
16.29
|
|
|
1.0 year
|
|
$
|
0.2
|
million
|
Exercisable at December 31, 2015
|
2,113,030
|
|
|
$
|
14.81
|
|
|
1.4 years
|
|
$
|
10.7
|
million
|
|
|
(a)
|
The aggregate intrinsic value in this table was calculated based on the positive difference, if any, between the closing market price of our common stock on
December 31, 2016
(
$14.90
) and the exercise price of the underlying options.
|
The weighted-average intrinsic value of stock options exercised during the
three months ended
December 31, 2016
and
2015
was
$0.7 million
and
$7.6 million
, respectively.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Units
Restricted units are not included in issued and outstanding common stock until the shares are vested and released. The purchase price for vested restricted units is
$0.001
per share. The table below summarizes activity relating to restricted units for the
three months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
Number of Shares Underlying Restricted Units — Contingent Awards
|
|
Number of Shares Underlying Restricted Units — Time-Based Awards
|
Outstanding at September 30, 2016
|
4,224,488
|
|
|
5,884,023
|
|
Granted
|
2,359,758
|
|
|
4,697,434
|
|
Earned/released
|
(1,748,874
|
)
|
|
(3,728,611
|
)
|
Forfeited
|
(376,061
|
)
|
|
(226,008
|
)
|
Outstanding at December 31, 2016
|
4,459,311
|
|
|
6,626,838
|
|
Weighted average remaining recognition period of outstanding restricted units
|
1.8 years
|
|
|
1.8 years
|
|
Unearned stock-based compensation expense of outstanding restricted units
|
$63.5 million
|
|
$73.4 million
|
Aggregate intrinsic value of outstanding restricted units
(a)
|
$66.4 million
|
|
$98.8 million
|
|
|
(a)
|
The aggregate intrinsic value in this table was calculated based on the positive difference between the closing market price of our common stock on
December 31, 2016
(
$14.90
) and the purchase price of the underlying restricted units.
|
A summary of weighted-average grant-date fair value for awards granted and intrinsic value of all restricted units vested during the periods noted is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2016
|
|
2015
|
Weighted-average grant-date fair value per share
|
$
|
15.90
|
|
|
$
|
20.40
|
|
Total intrinsic value of shares vested (in millions)
|
$
|
88.3
|
|
|
$
|
115.6
|
|
Restricted Stock Awards
Restricted stock awards are included in the issued and outstanding common stock at the date of grant. The table below summarizes activity related to restricted stock awards for the
three months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
Number of Shares Underlying Restricted Stock
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at September 30, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
250,000
|
|
|
$
|
15.55
|
|
Outstanding at December 31, 2016
|
250,000
|
|
|
$
|
15.55
|
|
Weighted average remaining recognition period of outstanding restricted stock awards
|
0.8 years
|
|
|
|
Unearned stock-based compensation expense of outstanding restricted stock awards
|
$3.3 million
|
|
|
Aggregate intrinsic value of outstanding restricted stock awards
(a)
|
$3.7 million
|
|
|
|
|
(a)
|
The aggregate intrinsic value in this table was calculated based on the positive difference between the closing market price of our common stock on
December 31, 2016
(
$14.90
) and the purchase price of the underlying restricted stock awards.
|
No restricted stock awards vested during the
three months ended
December 31, 2016
. The weighted-average intrinsic value of restricted stock awards vested during the
three months ended
December 31, 2015
was
$4.3 million
.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of loss before income taxes are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2016
|
|
2015
|
Domestic
|
$
|
(47,583
|
)
|
|
$
|
(29,002
|
)
|
Foreign
|
34,007
|
|
|
24,704
|
|
Loss before income taxes
|
$
|
(13,576
|
)
|
|
$
|
(4,298
|
)
|
The components of provision from income taxes are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2016
|
|
2015
|
Domestic
|
$
|
4,159
|
|
|
$
|
4,537
|
|
Foreign
|
6,194
|
|
|
3,230
|
|
Provision for income taxes
|
$
|
10,353
|
|
|
$
|
7,767
|
|
Effective tax rate
|
(76.3
|
)%
|
|
(180.7
|
)%
|
The effective income tax rate was
(76.3)%
and
(180.7)%
for the
three months ended
December 31, 2016
and
December 31, 2015
, respectively. Our current effective income tax rate differs from the U.S. federal statutory rate of
35%
primarily due to current period losses in the United States that require an additional valuation allowance and accordingly provide no benefit to the provision as well as an increase to indefinite lived deferred tax liabilities. This is partially offset by our earnings in foreign operations that are subject to a significantly lower tax rate than the U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland.
The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States; the majority of our income before provision for income taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.
At
December 31, 2016
and
September 30, 2016
, we had gross tax effected unrecognized tax benefits of
$28.0 million
and
$27.3 million
, respectively, and is included in other long-term liabilities. If these benefits were recognized, they would impact our effective tax rate. We do
no
t expect a significant change in the amount of unrecognized tax benefits within the next 12 months.
|
|
15.
|
Commitments and Contingencies
|
Litigation and Other Claims
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. We have estimated the amount of probable losses that may result from all currently pending matters, and such amounts are reflected in our consolidated financial statements. These recorded amounts are not material to our consolidated financial position or results of operations and no additional material losses related to these pending matters are reasonably possible. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our results of operations or financial position. However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows.
Guarantees and Other
We include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages,
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered.
We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions we have agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of
six
years from the acquisition date. In certain cases we purchase director and officer insurance policies related to these obligations, which fully cover the
six
year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.
|
|
16.
|
Segment and Geographic Information
|
We operate in, and report financial information for, the following
four
reportable segments: Healthcare, Mobile, Enterprise, and Imaging. Segment profit is an important measure used for evaluating performance and for decision-making purposes and reflects the direct controllable costs of each segment together with an allocation of sales and corporate marketing expenses, and certain research and development project costs that benefit multiple product offerings. Segment profit represents
income from operations
excluding stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, costs associated with intellectual property collaboration agreements,
other expense, net
and certain unallocated corporate expenses. We believe that these adjustments allow for more complete comparisons to the financial results of the historical operations.
The Healthcare segment is primarily engaged in clinical speech and clinical language understanding solutions that improve the clinical documentation process - from capturing the complete patient record to improving clinical documentation and quality measures for reimbursement. The Mobile segment is primarily engaged in providing a broad portfolio of specialized virtual assistants and connected services built on voice recognition, text-to-speech, natural language understanding, dialog, and text input technologies. Our Enterprise segment is primarily engaged in using speech, natural language understanding, and artificial intelligence to provide automated customer solutions and services for voice, mobile, web and messaging channels. The Imaging segment is primarily engaged in software solutions and expertise that help professionals and organizations to gain optimal control of their document and information processes through scanning and print management.
During the second quarter of fiscal year 2016, we reclassified certain government payroll incentive credits previously reported in the general and administrative expense to research and development expense, cost of revenue, and sales and marketing. Accordingly, the segment results in prior periods have been recast to conform to the current period segment reporting presentation.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We do not track our assets by operating segment. Consequently, it is not practical to show assets by operating segment or by depreciation by operating segment. The following table presents segment results along with a reconciliation of segment profit to
loss before income taxes
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
December 31,
|
2016
|
|
2015
|
Segment revenues
(a)
:
|
|
|
|
Healthcare
|
$
|
239,208
|
|
|
$
|
248,084
|
|
Mobile
|
91,784
|
|
|
96,403
|
|
Enterprise
|
112,938
|
|
|
88,776
|
|
Imaging
|
52,089
|
|
|
61,607
|
|
Total segment revenues
|
496,019
|
|
|
494,870
|
|
Less: acquisition-related revenues adjustments
|
(8,361
|
)
|
|
(8,755
|
)
|
Total consolidated revenues
|
487,658
|
|
|
486,115
|
|
Segment profit:
|
|
|
|
Healthcare
|
78,567
|
|
|
81,229
|
|
Mobile
|
33,471
|
|
|
33,764
|
|
Enterprise
|
31,958
|
|
|
26,211
|
|
Imaging
|
17,616
|
|
|
26,985
|
|
Total segment profit
|
161,612
|
|
|
168,189
|
|
Corporate expenses and other, net
|
(30,959
|
)
|
|
(30,720
|
)
|
Acquisition-related revenues and cost of revenues adjustments
|
(8,361
|
)
|
|
(8,589
|
)
|
Stock-based compensation
|
(39,130
|
)
|
|
(42,348
|
)
|
Amortization of intangible assets
|
(43,401
|
)
|
|
(42,664
|
)
|
Acquisition-related costs, net
|
(9,026
|
)
|
|
(2,480
|
)
|
Restructuring and other charges, net
|
(6,703
|
)
|
|
(7,888
|
)
|
Costs associated with IP collaboration agreements
|
—
|
|
|
(2,000
|
)
|
Other expense, net
|
(37,608
|
)
|
|
(35,798
|
)
|
Loss before income taxes
|
$
|
(13,576
|
)
|
|
$
|
(4,298
|
)
|
|
|
(a)
|
Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.
|
No country outside of the United States provided greater than 10% of our total revenues. Revenues, classified by the major geographic areas in which our customers are located, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
December 31,
|
2016
|
|
2015
|
United States
|
$
|
349,170
|
|
|
$
|
355,814
|
|
International
|
138,488
|
|
|
130,301
|
|
Total revenues
|
$
|
487,658
|
|
|
$
|
486,115
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the
condensed
consolidated financial statements.
During the second quarter of fiscal year 2016, we reclassified certain government payroll incentive credits previously reported in the general and administrative expense to research and development expense, cost of revenue and sales and marketing. Accordingly, the segment results in prior periods have been recast to conform to the current period segment presentation. These changes had no impact on consolidated net income or cash flows in any period.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” under Items 2 and 3, respectively, of Part I of this report, and the sections entitled “Legal Proceedings” and “Risk Factors,” under Items 1 and 1A, respectively, of Part II of this report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements include predictions regarding:
|
|
•
|
our future bookings, revenues, cost of revenues, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin;
|
|
|
•
|
our strategy relating to our segments;
|
|
|
•
|
our transformation program to reduce costs and optimize processes;
|
|
|
•
|
technological advancements;
|
|
|
•
|
the potential of future product releases;
|
|
|
•
|
our product development plans and the timing, amount and impact of investments in research and development;
|
|
|
•
|
future acquisitions, and anticipated benefits from acquisitions;
|
|
|
•
|
international operations and localized versions of our products; and
|
|
|
•
|
the conduct, timing and outcome of legal proceedings and litigation matters.
|
You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
OVERVIEW
Business Overview
We are a leading provider of voice recognition and natural language understanding solutions. Our solutions and technologies are used in the healthcare, mobile, consumer, enterprise customer service, and imaging markets. We are seeing several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio from speech recognition to natural language understanding, semantic processing, domain-specific reasoning, dialog management capabilities, artificial intelligence, and biometric speaker authentication.
Confronted by dramatic increases in electronic information, consumers, business personnel and healthcare professionals must use a variety of resources to retrieve information, transcribe patient records, conduct transactions and perform other job-related functions. We believe that the power of our solutions can transform the way people use the Internet, telecommunications systems, electronic medical records ("EMR"), wireless and mobile networks and related corporate infrastructure to conduct business.
|
|
•
|
Healthcare.
Trends in our healthcare business include growing customer preference for hosted solutions and subscription-based license models and increased use of mobile devices to access healthcare systems and create clinical documentation within electronic health record systems. In addition, we are experiencing growing demand for integrated solutions, combining our Dragon Medical and hosted transcription offerings. The volume processed in our hosted transcription services has continued to erode as customers adopt electronic medical record systems and our Dragon Medical solutions. This decline has been partially offset by new customer wins and the increased sale of integrated solutions of our transcription and Dragon Medical offerings. We have also experienced declines in our Dragon Medical perpetual license revenue as customers shift toward Dragon Medical cloud offerings. These cloud offerings are enabling the expansion of our Dragon Medical solutions to include new clinical language understanding and artificial intelligence innovations, providing real time queries to the physician at the point of care. We believe an important trend in the healthcare market is the desire to improve efficiency in the coding and revenue cycle management process. Our solutions reduce costs by increasing automation of this important workflow and also enable hospitals to improve documentation used to support billings. The industry’s shift in international classification of diseases ("ICD") from ICD-9 to ICD-10, together with evolving reimbursement reform that is increasingly focused on clinical outcomes, has increased the complexity of the clinical documentation and coding processes. This shift is reinforcing our customers’ desire for improved efficiency. We are investing to expand our product set to address the various opportunities, including deeper integration with our clinical documentation solutions; investing in our cloud-based products and operations; entering new and adjacent markets such as ambulatory care; and expanding our international capabilities.
|
|
|
•
|
Mobile.
Trends in our mobile business include automotive original equipment manufacturers ("OEM") differentiating their offerings by using voice and content to provide an enhanced experience for drivers; consumer electronics companies and cable operators competing to develop virtual assistant technologies for the home; geographic expansion of our mobile operator services; and the adoption of our technology on a broadening scope of devices, such as televisions, set-top boxes, and third-party applications. The more powerful capabilities within automobiles and mobile devices require us to supply a broader portfolio of specialized virtual assistants and connected services providing voice recognition, content integration, text-to-speech, and natural language understanding capabilities. We continued to see increased demand for our enhanced offerings that combined speech and natural language understanding technology with artificial intelligence particularly from large automotive OEMs for our embedded and connected solutions. We are continuing to see a decline in our devices revenue resulting from the consolidation of the device market to a small number of customers as well as increased competition in voice recognition and natural language solutions and services sold to device OEMs. We continue to see demand involving the sale and delivery of both software and non-software related services, as well as products to help customers define, design and implement increasingly robust and complex custom solutions such as virtual assistants. We continue to see an increasing proportion of revenue from on-demand and transactional arrangements as opposed to traditional perpetual licensing of our Mobile products and solutions. Although this has a negative impact on near-term revenue, we believe this model will build more predictable revenues over time. We are investing in the expansion of the cloud capabilities and content of our automotive solutions; machine learning technologies, expansion across the Internet of Things in our devices solutions; and go-to market strategies with mobile operators.
|
|
|
•
|
Enterprise.
Trends in our enterprise business include increasing interest in the use of mobile applications and web sites to access customer care systems and records, voice-based authentication of users, increasing interest in coordinating actions and data across customer care channels, and the ability of a broader set of hardware providers and systems integrators to serve the market. In addition, for large enterprise businesses around the world, customer service interactions are accelerating toward more pervasive digital engagement across web, mobile and social platforms. In order to acquire and retain customers, enterprises need to be able to provide a customer service experience when and how the customer desires. This is creating a growing market opportunity for our omni-channel enterprise solutions, and with the acquisition of TouchCommerce, Inc., which closed during the fourth quarter of fiscal year 2016, we will be able to provide an end-to-end engagement platform that merges intelligent self-service with assisted service to increase customer satisfaction, strengthen customer loyalty and improve business results. In fiscal year
2016
, revenues and bookings from on-demand solutions continued to increase, as a growing proportion of customers choose our cloud-based solutions for call center, web and mobile customer care solutions. We expect these trends to continue in fiscal year
2017
. We are investing to extend our technology capabilities with intelligent self-service and artificial intelligence for customer service; extend the market for our on-demand omni-channel enterprise solutions into international markets; expand our sales and solutions for voice biometrics; and expand our on-premise product and services portfolio.
|
|
|
•
|
Imaging.
The imaging market is evolving to include more networked solutions to multi-function printing ("MFP") devices, as well as more mobile access to those networked solutions, and away from packaged software. We are investing to merge the scan and print technology platforms to improve mobile access to our solutions and technologies; expand our distribution channels and embedding relationships; and expand our language coverage for optical character recognition ("OCR") in order to drive a more comprehensive and compelling offering to our partners.
|
Key Metrics
In evaluating the financial condition and operating performance of our business, management focuses on revenues, net income, gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of these key financial metrics is as follows:
For the
three months ended
December 31, 2016
, as compared to the
three months ended
December 31, 2015
:
|
|
•
|
Total revenues increased by
$1.5 million
to
$487.7 million
;
|
|
|
•
|
Net loss increased by
$11.9 million
to a loss of
$23.9 million
;
|
|
|
•
|
Gross margins decreased by
1.3
percentage points to
56.4%
;
|
|
|
•
|
Operating margins decreased by
1.6
percentage points to
4.9%
; and
|
|
|
•
|
Cash provided by operating activities decreased
$16.2 million
to
$124.9 million
.
|
As of
December 31, 2016
, as compared to
December 31, 2015
:
|
|
•
|
Total deferred revenue increased
9.5%
from
$732.7 million
to
$802.5 million
driven primarily by our hosting solutions, most notably for our automotive connected services in our Mobile segment.
|
In addition to the above key financial metrics, we also focus on certain operating metrics. A summary of these key operating metrics for the quarter ended
December 31, 2016
, as compared to the quarter ended
December 31, 2015
, is as follows:
|
|
•
|
Net new bookings increased
23.2%
from one year ago to
$380.3 million
. The net new bookings growth benefited from strong bookings performance in our Healthcare and Mobile segments.
|
Bookings represent the estimated gross revenue value of transactions at the time of contract execution, except for maintenance and support offerings. For fixed price contracts, the bookings value represents the gross total contract value. For contracts where revenue is based on transaction volume, the bookings value represents the contract price multiplied by the estimated future transaction volume during the contract term, whether or not such transaction volumes are guaranteed under a minimum commitment clause. Actual results could be different than our initial estimate. The maintenance and support bookings value represents the amounts the customer is invoiced in the period. Because of the inherent estimates required to determine bookings and the fact that the actual resultant revenue may differ from our initial bookings estimates, we consider bookings one indicator of potential future revenue and not as an arithmetic measure of backlog.
Net new bookings represents the estimated revenue value at the time of contract execution from new contractual arrangements or the estimated revenue value incremental to the portion of value that will be renewed under pre-existing arrangements;
|
|
•
|
Recurring revenue represented
72.4%
and
67.1%
of total revenue for
three months ended
December 31, 2016
and
December 31, 2015
, respectively. Recurring revenue represents the sum of recurring product and licensing, hosting, and maintenance and support revenues as well as the portion of professional services revenue delivered under ongoing contracts. Recurring product and licensing revenue comprises term-based and ratable licenses as well as revenues from royalty arrangements;
|
|
|
•
|
Annualized line run-rate in our on-demand healthcare solutions decreased
10%
from one year ago to approximately
4.7 billion
lines per year. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four; and
|
|
|
•
|
Estimated three-year value of total on-demand contracts at
December 31, 2016
increased
11%
from one year ago to approximately
$2.5 billion
. We determine this value as of the end of the period reported, by using our estimate of three years of anticipated future revenue streams under signed on-demand contracts then in place, whether or not they are guaranteed through a minimum commitment clause. Our estimate is based on assumptions used in evaluating the contracts and determining sales compensation, adjusted for changes in estimated launch dates, actual volumes achieved and other factors deemed relevant. For contracts with an expiration date beyond three years, we include only the value expected within three years. For other contracts, we assume renewal consistent with historic renewal rates unless there is a known cancellation. Contracts are generally priced by volume of usage and typically have no or low minimum commitments. Actual revenue could vary from our estimates due to factors such as cancellations, non-renewals or volume fluctuations.
|
RESULTS OF OPERATIONS
Total Revenues
The following tables show total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Professional services and hosting
|
|
$
|
253.4
|
|
|
$
|
227.1
|
|
|
$
|
26.3
|
|
|
11.6
|
%
|
Product and licensing
|
|
151.8
|
|
|
179.1
|
|
|
(27.3
|
)
|
|
(15.2
|
)%
|
Maintenance and support
|
|
82.5
|
|
|
79.9
|
|
|
2.6
|
|
|
3.2
|
%
|
Total Revenues
|
|
$
|
487.7
|
|
|
$
|
486.1
|
|
|
$
|
1.5
|
|
|
0.3
|
%
|
United States
|
|
$
|
349.2
|
|
|
$
|
355.8
|
|
|
$
|
(6.6
|
)
|
|
(1.9
|
)%
|
International
|
|
138.5
|
|
|
130.3
|
|
|
8.2
|
|
|
6.3
|
%
|
Total Revenues
|
|
$
|
487.7
|
|
|
$
|
486.1
|
|
|
$
|
1.5
|
|
|
0.3
|
%
|
The geographic split for the
three months ended
December 31, 2016
, was
72%
of total revenues in the United States and
28%
internationally, as compared to
73%
of total revenues in the United States and
27%
internationally for the same period last year.
Professional Services and Hosting Revenue
Professional services revenue primarily consists of consulting, implementation and training services for customers. Hosting revenue primarily relates to delivering on-demand hosted services such as medical transcription, automated customer care applications, mobile operator services, and mobile infotainment, and search and transcription, over a specified term. The following table shows professional services and hosting revenue, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Professional services revenue
|
$
|
60.1
|
|
|
$
|
49.7
|
|
|
$
|
10.5
|
|
|
21.1
|
%
|
Hosting revenue
|
193.3
|
|
|
177.4
|
|
|
15.9
|
|
|
8.9
|
%
|
Professional services and hosting revenue
|
$
|
253.4
|
|
|
$
|
227.1
|
|
|
$
|
26.3
|
|
|
11.6
|
%
|
As a percentage of total revenue
|
52.0
|
%
|
|
46.7
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
increase
in professional services and hosting revenue was driven by a
$15.9 million
increase in hosting revenue and a
$10.5 million
increase in professional services revenue. In our hosting business, Enterprise hosting revenue increased $15.6 million primarily driven by strength across many of our omni-channel cloud offerings including revenue from a recent acquisition. Mobile on-demand revenue grew $4.1 million primarily driven by continued trend toward cloud-based services in our automotive solutions. These increases were partially offset by a $3.8 million decrease in the Healthcare hosting revenue as we continue to experience some erosion in our transcription services which is partially offset by growth in our Dragon Medical cloud revenue as we continued to transition to cloud offerings. In our professional services business, revenue increased $8.8 million in our Healthcare segment driven by an acquisition in fiscal year 2016.
Product and Licensing Revenue
Product and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Product and licensing revenue
|
$
|
151.8
|
|
|
$
|
179.1
|
|
|
$
|
(27.3
|
)
|
|
(15.2
|
)%
|
As a percentage of total revenue
|
31.1
|
%
|
|
36.8
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
decrease
in product and licensing revenue consisted of a $13.6 million decrease in our Healthcare segment, a $9.6 million decrease in our Mobile segment, and an $8.0 million decrease in our Imaging segment, partially offset by a $4.0 million increase in our Enterprise segment. The revenue decrease in our Healthcare segment was mainly driven by lower revenues from our Dragon Medical perpetual license sales as we transition from perpetual to cloud and subscription models. The revenue decrease in our Mobile business was driven by a decline in devices revenue resulting from deterioration in mature markets, partially offset by revenue growth in our automotive business. The revenue decrease in our Imaging segment was mainly driven by lower sales of our MFP products. These decreases were partially offset with higher license sales within our Enterprise segment.
Maintenance and Support Revenue
Maintenance and support revenue primarily consists of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Maintenance and support revenue
|
$
|
82.5
|
|
|
$
|
79.9
|
|
|
$
|
2.6
|
|
|
3.2
|
%
|
As a percentage of total revenue
|
16.9
|
%
|
|
16.4
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
increase
in maintenance and support revenue was driven primarily by our Enterprise, Healthcare and Imaging segments.
Costs and Expenses
Cost of Professional Services and Hosting Revenue
Cost of professional services and hosting revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of professional services and hosting revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Cost of professional services and hosting revenue
|
$
|
164.9
|
|
|
$
|
153.3
|
|
|
$
|
11.6
|
|
|
7.6
|
%
|
As a percentage of professional services and hosting revenue
|
65.1
|
%
|
|
67.5
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
increase
in cost of professional services and hosting revenue was primarily driven by higher compensation expense in our Healthcare and Enterprise segments driven by recent acquisitions as well as higher stock-based compensation expense. These increases were partially offset by reduction in medical transcription expense in our Healthcare segment and Mobile cloud-based services expenses as a result of our cost-savings initiatives including our on-going efforts to move costs and activities to lower-cost countries. Gross margins increased 2.4 percentage points primarily driven by margin expansion in our cloud-based services within our Mobile segment, partially offset by higher professional services revenue in our Healthcare segment which carries a lower gross margin.
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Cost of product and licensing revenue
|
$
|
18.4
|
|
|
$
|
23.4
|
|
|
$
|
(5.0
|
)
|
|
(21.5
|
)%
|
As a percentage of product and licensing revenue
|
12.1
|
%
|
|
13.1
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
decrease
in cost of product and licensing revenue was primarily driven by lower costs in our Healthcare segment. Gross margins increased 1.0 percentage points, primarily driven by higher revenues from higher margin license products in our Enterprise segment.
Cost of Maintenance and Support Revenue
Cost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table shows the cost of maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Cost of maintenance and support revenue
|
$
|
13.6
|
|
|
$
|
13.3
|
|
|
$
|
0.3
|
|
|
2.3
|
%
|
As a percentage of maintenance and support revenue
|
16.5
|
%
|
|
16.6
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
increase
in cost of maintenance and support revenue was primarily driven by higher compensation related expense with flat gross margins.
Research and Development Expense
Research and development expense primarily consists of salaries, benefits, and overhead relating to engineering staff as well as third party engineering costs. The following table shows research and development expense, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Research and development expense
|
$
|
66.3
|
|
|
$
|
70.5
|
|
|
$
|
(4.2
|
)
|
|
(6.0
|
)%
|
As a percentage of total revenue
|
13.6
|
%
|
|
14.5
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
decrease
in research and development expense was primarily attributable to a reduction of $3.2 million in total compensation costs, including stock-based compensation, as we benefited from our cost-savings initiatives including our restructuring plans and our on-going efforts to move costs and activities to lower-cost countries during the period.
Sales and Marketing Expense
Sales and marketing expense includes salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Sales and marketing expense
|
$
|
101.5
|
|
|
$
|
100.6
|
|
|
$
|
0.9
|
|
|
0.9
|
%
|
As a percentage of total revenue
|
20.8
|
%
|
|
20.7
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
increase
in sales and marketing expense was primarily attributable to a $5.0 million increase in total compensation and commission costs, including stock-based compensation expense, partially offset by a $3.1 million decrease in marketing and channel program spending and a decrease of $2.0 million as a result of the conclusion of exclusive commercialization rights under a collaboration agreement during the second quarter of fiscal year 2016.
General and Administrative Expense
General and administrative expense primarily consists of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows general and administrative expense, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
General and administrative expense
|
$
|
39.8
|
|
|
$
|
40.5
|
|
|
$
|
(0.7
|
)
|
|
(1.8
|
)%
|
As a percentage of total revenue
|
8.2
|
%
|
|
8.3
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The
decrease
in general and administrative expense was primarily attributable decrease in total compensation costs, including stock-based compensation.
Amortization of Intangible Assets
Amortization of acquired patents and core and completed technology are included in cost of revenue and the amortization of acquired customer and contractual relationships, non-compete agreements, acquired trade names and trademarks, and other intangibles are included in operating expenses. Customer relationships are amortized on an accelerated basis based upon the pattern in which the economic benefits of the customer relationships are being realized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was recorded as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Cost of revenue
|
$
|
15.5
|
|
|
$
|
15.6
|
|
|
$
|
(0.1
|
)
|
|
(0.6
|
)%
|
Operating expenses
|
27.9
|
|
|
27.0
|
|
|
0.8
|
|
|
3.1
|
%
|
Total amortization expense
|
$
|
43.4
|
|
|
$
|
42.7
|
|
|
$
|
0.7
|
|
|
1.7
|
%
|
As a percentage of total revenue
|
8.9
|
%
|
|
8.8
|
%
|
|
|
|
|
The increase in total amortization of intangible assets for the
three months ended
December 31, 2016
, as compared to the
three months ended
December 31, 2015
, was primarily attributable to acquired customer relationship assets from recent acquisitions.
Acquisition-Related Costs, Net
Acquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well as the costs of integration-related activities, including services provided by third-parties; (ii) professional service fees and expenses, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) adjustments to acquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended, such as gains or losses on settlements of pre-acquisition contingencies. Acquisition-related costs were recorded as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
2016
|
|
2015
|
Transition and integration costs
|
$
|
3.7
|
|
|
$
|
1.0
|
|
|
$
|
2.7
|
|
|
272.5
|
%
|
Professional service fees
|
5.0
|
|
|
1.4
|
|
|
3.6
|
|
|
257.6
|
%
|
Acquisition-related adjustments
|
0.3
|
|
|
0.1
|
|
|
0.2
|
|
|
269.1
|
%
|
Total acquisition-related costs, net
|
$
|
9.0
|
|
|
$
|
2.5
|
|
|
$
|
6.5
|
|
|
264.0
|
%
|
As a percentage of total revenue
|
1.9
|
%
|
|
0.5
|
%
|
|
|
|
|
Included in transition and integration costs for the
three months ended
December 31, 2016
is
$2.7 million
related to contingent retention payments for recent acquisitions closed during fiscal year 2016 and the first quarter of fiscal year 2017.
Restructuring and Other Charges, Net
Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature and are the result of unplanned events, and arise outside of the ordinary course of continuing operations. Restructuring expenses consist of employee severance costs and may also include charges for excess facility space and other contract termination costs. Other charges may include gains or losses on non-controlling strategic equity interests, litigation contingency reserves, costs related to a transition agreement for our Chief Executive Officer, and gains or losses on the sale or disposition of certain non-strategic assets or product lines.
Restructuring and other charges, net by component and segment for the
three months ended
December 31, 2016
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
Healthcare
|
$
|
1,984
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
—
|
|
|
$
|
2,261
|
|
|
$
|
701
|
|
|
$
|
—
|
|
|
$
|
701
|
|
|
$
|
—
|
|
|
$
|
701
|
|
Mobile
|
213
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
213
|
|
|
2,182
|
|
|
602
|
|
|
2,784
|
|
|
—
|
|
|
2,784
|
|
Enterprise
|
424
|
|
|
607
|
|
|
1,031
|
|
|
—
|
|
|
1,031
|
|
|
1,084
|
|
|
20
|
|
|
1,104
|
|
|
—
|
|
|
1,104
|
|
Imaging
|
361
|
|
|
351
|
|
|
712
|
|
|
—
|
|
|
712
|
|
|
213
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
213
|
|
Corporate
|
669
|
|
|
664
|
|
|
1,333
|
|
|
1,153
|
|
|
2,486
|
|
|
378
|
|
|
2,708
|
|
|
3,086
|
|
|
—
|
|
|
3,086
|
|
Total
|
$
|
3,651
|
|
|
$
|
1,899
|
|
|
$
|
5,550
|
|
|
$
|
1,153
|
|
|
$
|
6,703
|
|
|
$
|
4,558
|
|
|
$
|
3,330
|
|
|
$
|
7,888
|
|
|
$
|
—
|
|
|
$
|
7,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
During the
three months ended
December 31, 2016
, we recorded restructuring charges of
$5.6 million
. The restructuring charges for the
three months ended
December 31, 2016
included
$3.7 million
for severance related to the reduction of approximately
90
employees as part of our initiatives to reduce costs and optimize processes. The restructuring charges also included a
$1.9 million
charge for the closure of certain excess facility space. In addition, during the
three months ended
December 31, 2016
, we have recorded certain other charges that totaled
$1.2 million
for costs related to a transition agreement for our Chief Executive Officer as communicated on our Form 8-K filed on November 17, 2016.
During the
three months ended
December 31, 2015
, we recorded restructuring charges of
$7.9 million
. The restructuring charges for the
three months ended
December 31, 2015
included
$4.6 million
for severance related to the reduction of approximately
110
employees as part of our initiatives to reduce costs and optimize processes. The restructuring charges also included a
$3.3 million
charge for the closure of certain excess facility space.
Other Expense, Net
Other expense, net
consists of interest income, interest expense, gain (loss) from security price guarantee derivatives, gain (loss) from foreign exchange, and gain (loss) from other non-operating activities. The following table shows
other expense, net
, in dollars and as a percentage of total revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Interest income
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
0.1
|
|
|
15.9
|
%
|
Interest expense
|
(38.0
|
)
|
|
(29.9
|
)
|
|
(8.1
|
)
|
|
27.2
|
%
|
Other expense, net
|
(0.6
|
)
|
|
(6.8
|
)
|
|
6.2
|
|
|
(91.0
|
)%
|
Total other expense, net
|
$
|
(37.6
|
)
|
|
$
|
(35.8
|
)
|
|
|
|
5.1
|
%
|
As a percentage of total revenue
|
7.7
|
%
|
|
7.4
|
%
|
|
|
|
|
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
Interest expense for the
three months ended
December 31, 2016
increased
$8.1 million
, primarily driven by the issuance of the $300.0 million 6.000% Senior Notes in the third quarter of fiscal year 2016.
Other expense, net
for the
three months ended
December 31, 2016
decreased
$6.2 million
primarily related to extinguishment losses of
$2.5 million
and
$2.4 million
related to the repayment of the aggregate principal balance on the term loan and the repurchase of
$38.3 million
in aggregate principal of the 2031 Debentures, respectively, during the
three months ended
December 31, 2015
.
Provision for Income Taxes
The following table shows the provision for income taxes and the effective income tax rate (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Provision for income taxes
|
$
|
10.4
|
|
|
$
|
7.8
|
|
|
$
|
2.6
|
|
|
33.3
|
%
|
Effective income tax rate
|
(76.3
|
)%
|
|
(180.7
|
)%
|
|
|
|
|
The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States; the majority of our income before provision for income taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.
Three Months Ended
December 31, 2016
compared with
Three Months Ended
December 31, 2015
The effective income tax rate was
(76.3)%
and
(180.7)%
for the
three months ended
December 31, 2016
and
December 31, 2015
, respectively. Our current effective income tax rate differs from the U.S. federal statutory rate of
35%
primarily due to current period losses in the United States that require an additional valuation allowance and accordingly provide no benefit to the provision as well as an increase to indefinite lived deferred tax liabilities. This is partially offset by our earnings in foreign operations that are subject to a significantly lower tax rate than the U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland.
SEGMENT ANALYSIS
We operate in, and report financial information for, the following
four
reportable segments: Healthcare, Mobile, Enterprise, and Imaging. Segment profit is an important measure used for evaluating performance and for decision-making purposes and reflects the direct controllable costs of each segment together with an allocation of sales and corporate marketing expenses, and certain research and development project costs that benefit multiple product offerings. Segment profit represents
income from operations
excluding stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, costs associated with intellectual property collaboration agreements,
other expense, net
and certain unallocated corporate expenses. We believe that these adjustments allow for more complete comparisons to the financial results of the historical operations.
The following table presents segment results (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Percent
Change
|
December 31,
|
|
2016
|
|
2015
|
|
Segment Revenues
(a)
:
|
|
|
|
|
|
|
|
Healthcare
|
$
|
239.2
|
|
|
$
|
248.1
|
|
|
$
|
(8.9
|
)
|
|
(3.6
|
)%
|
Mobile
|
91.8
|
|
|
96.4
|
|
|
(4.6
|
)
|
|
(4.8
|
)%
|
Enterprise
|
112.9
|
|
|
88.8
|
|
|
24.2
|
|
|
27.2
|
%
|
Imaging
|
52.1
|
|
|
61.6
|
|
|
(9.5
|
)
|
|
(15.4
|
)%
|
Total segment revenues
|
$
|
496.0
|
|
|
$
|
494.9
|
|
|
$
|
1.1
|
|
|
0.2
|
%
|
Less: acquisition related revenues adjustments
|
(8.4
|
)
|
|
(8.8
|
)
|
|
0.4
|
|
|
(4.5
|
)%
|
Total revenues
|
$
|
487.7
|
|
|
$
|
486.1
|
|
|
$
|
1.5
|
|
|
0.3
|
%
|
Segment Profit:
|
|
|
|
|
|
|
|
Healthcare
|
$
|
78.6
|
|
|
$
|
81.2
|
|
|
$
|
(2.7
|
)
|
|
(3.3
|
)%
|
Mobile
|
33.5
|
|
|
33.8
|
|
|
(0.3
|
)
|
|
(0.9
|
)%
|
Enterprise
|
32.0
|
|
|
26.2
|
|
|
5.7
|
|
|
21.9
|
%
|
Imaging
|
17.6
|
|
|
27.0
|
|
|
(9.4
|
)
|
|
(34.7
|
)%
|
Total segment profit
|
$
|
161.6
|
|
|
$
|
168.2
|
|
|
$
|
(6.6
|
)
|
|
(3.9
|
)%
|
Segment Profit Margin
|
|
|
|
|
|
|
|
Healthcare
|
32.8
|
%
|
|
32.7
|
%
|
|
0.1
|
|
|
|
Mobile
|
36.5
|
%
|
|
35.0
|
%
|
|
1.4
|
|
|
|
Enterprise
|
28.3
|
%
|
|
29.5
|
%
|
|
(1.2
|
)
|
|
|
Imaging
|
33.8
|
%
|
|
43.8
|
%
|
|
(10.0
|
)
|
|
|
Total segment profit margin
|
32.6
|
%
|
|
34.0
|
%
|
|
(1.4
|
)
|
|
|
|
|
(a)
|
Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.
|
Segment Revenues
Three Months Ended
December 31, 2016
|
|
•
|
Healthcare segment revenues
decreased
$8.9 million
for the
three months ended
December 31, 2016
, as compared to the
three months ended
December 31, 2015
. Product and licensing revenues decreased $14.5 million driven by lower revenues from our Dragon Medical perpetual license sales as we transition from perpetual to cloud offerings. Professional services and hosting revenues increased $4.7 million primarily driven by an increase of $8.7 million in professional services from a recent acquisition, partially offset by a decrease of $4.0 million in hosting revenues as we continue to experience some erosion of revenue in our transcription services which is partially offset by the growth in our Dragon Medical cloud offerings. Maintenance and support revenues increased $1.0 million driven by strong renewals.
|
|
|
•
|
Mobile segment revenues
decreased
$4.6 million
for the
three months ended
December 31, 2016
, as compared to the
three months ended
December 31, 2015
. Product and licensing revenues decreased $9.6 million and maintenance and support revenue decreased $0.9 million, owing to a decline in devices revenue from deterioration in mature markets, partially offset by the growth in recurring product and licensing revenue in our automotive business. Professional services and hosting revenues increased $5.9 million driven primarily by a continued trend toward cloud-based services in our automotive solutions.
|
|
|
•
|
Enterprise segment revenues
increased
$24.2 million
for the
three months ended
December 31, 2016
, as compared to the
three months ended
December 31, 2015
. Professional services and hosting revenues increased $15.7 million driven by strong revenue from our omni-channel offerings, including revenue from a recent acquisition. Product and licensing revenues increased $6.7 million primarily related to revenue from a recent acquisition.
|
|
|
•
|
Imaging segment revenues
decreased
$9.5 million
for the
three months ended
December 31, 2016
, as compared to the
three months ended
December 31, 2015
, primarily driven by lower sales of our MFP products.
|
Segment Profit
Three Months Ended
December 31, 2016
|
|
•
|
Healthcare segment profit for the
three months ended
December 31, 2016
decreased
3.3%
from the same period last year, primarily driven by lower gross profit, offset by lower operating expenses. Segment profit margin increased
0.1
percentage points, from
32.7%
for the same period last year to
32.8%
during the current period. The increase in segment profit margin was primarily driven by lower operating expenses with improvements of 0.7 percentage point, partially offset by lower gross margins of 0.6 percentage point due to a shift in mix towards a higher percentage of professional services revenue.
|
|
|
•
|
Mobile segment profit for the
three months ended
December 31, 2016
decreased
0.9%
from the same period last year, primarily driven by lower gross profit, partially offset by lower operating expenses. Segment profit margin increased
1.4
percentage points, from
35.0%
for the same period last year to
36.5%
during the current period. The increase in segment profit margin was primarily driven by our cost savings and process optimization initiatives with improvements of 0.7 percentage point due to lower operating expenses and a 0.7 percentage point improvement in gross margin driven by margin expansion in our cloud-based services.
|
|
|
•
|
Enterprise segment profit for the
three months ended
December 31, 2016
increased
21.9%
from the same period last year, driven by higher gross profit due to increased revenue. Segment profit margin decreased
1.2
percentage points, from
29.5%
for the same period last year to
28.3%
in the current period. The decrease in segment profit margin was primarily driven by lower gross margin and higher operating expenses from a recent acquisition.
|
|
|
•
|
Imaging segment profit for the
three months ended
December 31, 2016
decreased
34.7%
from the same period last year, primarily driven by lower revenue. Segment profit margin decreased
10.0
percentage points, from
43.8%
for the same period last year to
33.8%
during the current period. The decrease in segment profit margin was primarily driven by lower revenues and higher research and development expenses.
|
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and marketable securities totaled
$1,137.5 million
at
December 31, 2016
, an
increase
of
$529.4 million
as compared to
$608.1 million
at
September 30, 2016
. The higher level of cash and cash equivalents and marketable securities at
December 31, 2016
was a result of having received
$495.0 million
in net proceeds from the issuance of the
5.625%
Senior Notes in December 2016. These proceeds, together with approximately $100.0 million of cash, were used to repurchase outstanding debt securities in January 2017. Our working capital was a deficit of
$124.8 million
as of
December 31, 2016
, as compared to working capital of
$347.7 million
as of
September 30, 2016
. The working capital deficit as of
December 31, 2016
was driven by the short-term classification of
$395.5 million
of our 2031 Debentures as the holders have the right to require us to redeem these debentures on November 1, 2017. As of
December 31, 2016
, our total accumulated deficit was
$453.0 million
. We do not expect our accumulated deficit to impact our future ability to operate the business given our cash and strong operating cash flow positions.
Cash and cash equivalents and marketable securities held by our international operations totaled
$98.4 million
at
December 31, 2016
compared to
$116.5 million
at
September 30, 2016
. We utilize a variety of financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. We expect the cash held overseas will continue to be used for our international operations, and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources and therefore do not anticipate repatriating these funds.
The holders of our 2031 Debentures may require us to redeem the outstanding principal balance of
$395.5 million
, together with accrued interest, on November 1, 2017. We expect that we will be able to use our existing cash balances, including cash generated by our operating activities during fiscal 2017, to fund the potential redemption requests related to the 2031 Debentures, if any. However, we will assess our operating and investing cash flow requirements and the borrowing economics in the capital markets at that time to determine the appropriate funding source.
We believe our current cash and cash equivalents, marketable securities, and cash flow from operations are sufficient to meet our operating needs for at least the next twelve months.
Cash Provided by Operating Activities
Cash provided by operating activities for the
three months ended
December 31, 2016
, was
$124.9 million
, a decrease of
$16.2 million
, as compared to cash provided by operating activities of
$141.1 million
for the
three months ended
December 31, 2015
. The net decrease was primarily driven by the following factors:
|
|
•
|
A decrease in cash flows of
$12.0 million
resulting from higher net loss, exclusive of non-cash adjustment items;
|
|
|
•
|
A decrease of
$11.5 million
in cash flows generated by changes in working capital excluding deferred revenue; and
|
|
|
•
|
Partially offset by an increase in cash flows of
$7.2 million
from deferred revenue. Deferred revenue contributed cash inflow of
$75.9 million
for the
three months ended
December 31, 2016
, as compared to
$68.7 million
for the
three months ended
December 31, 2015
. The deferred revenue growth in the
three months ended
December 31, 2016
was driven primarily by our hosting solutions, most notably for our automotive connected services in our Mobile segment.
|
Cash Used in Investing Activities
Cash used in investing activities for the
three months ended
December 31, 2016
, was
$97.0 million
, an increase of
$72.9 million
, as compared to cash used in investing activities of
$24.2 million
for the
three months ended
December 31, 2015
. The net increase was primarily driven by the following factors:
|
|
•
|
An increase in cash outflows of
$55.7 million
for purchases of marketable securities and other investments;
|
|
|
•
|
An increase in cash outflows of
$22.3 million
for business and technology acquisitions; and
|
|
|
•
|
Partially offset by a decrease in cash outflows of
$9.2 million
from the purchase of capitalized expenditures.
|
Cash Provided (Used) in Financing Activities
Cash provided by financing activities for the
three months ended
December 31, 2016
, was
$454.6 million
, an increase of
$544.4 million
, as compared to cash used in financing activities of
$89.8 million
for the
three months ended
December 31, 2015
. The net increase was primarily driven by the following factors:
|
|
•
|
An increase in cash inflows of
$495.0 million
, net of issuance costs, from new debt issuance. In December 2016, we issued $500.0 million aggregate principal amount of 5.625% senior notes due on December 15, 2026 in a private placement, as compared to cash inflows of
$153.0 million
from the convertible debt issuance net of the repayment of long-term debt during the
three months ended
December 31, 2015
;
|
|
|
•
|
A decrease in cash outflows of
$189.6 million
related to our share repurchase program. During the
three months ended
December 31, 2016
, there was no repurchased shares of our common stock, as compared to
8.9 million
shares of our common stock repurchased for total cash outflows of
$189.6 million
during the same period in the prior year; and
|
|
|
•
|
A decrease in cash outflows of
$11.8 million
as a result of lower cash payments required to net share settle employee equity awards, due to a decrease in vesting value as a result of lower stock prices during the
three months ended
December 31, 2016
as compared to the same period in the prior year.
|
Debt and Credit Facilities
5.375% Senior Notes due 2020
In
August 2012
, we issued
$700.0 million
aggregate principal amount of
5.375%
Senior Notes due on
August 15, 2020
in a private placement. In
October 2012
, we issued an additional
$350.0 million
aggregate principal amount of our
5.375%
Senior Notes (collectively the “2020 Senior Notes”). The 2020 Senior Notes bear interest at
5.375%
per year, payable in cash semi-annually in arrears. The 2020 Senior Notes are our unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries, ("the Subsidiary Guarantors"). The 2020 Senior Notes and guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors' future unsecured subordinated debt. The 2020 Senior Notes and guarantees effectively rank junior to all secured debt of our and the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2020 Senior Notes.
In January 2017, we repurchased
$600.0 million
in aggregate principal amount of our 2020 Senior Notes using cash and cash equivalents and the net proceeds from our 2026 Senior Notes issued in December 2015. In January 2017, we recorded an extinguishment loss of
$18.4 million
. In accordance with the authoritative guidance for debt instruments, a loss on extinguishment
is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt, including any unamortized debt discount or issuance costs. Following this activity,
$450.0 million
in aggregate principal amount of our 2020 Senior Notes remain outstanding. The aggregate debt discount is being amortized to interest expense using the effective interest rate method through August 2020.
5.625% Senior Notes due 2026
In
December 2016
, we issued
$500.0 million
aggregate principal amount of
5.625%
Senior Notes due on
December 15, 2026
(the "2026 Senior Notes") in a private placement. The proceeds from the 2026 Senior Notes were approximately
$495.0 million
, net of issuance costs, and we used the proceeds to repurchase a portion of our 2020 Senior Notes. The 2026 Senior Notes bear interest at
5.625%
per year, payable in cash semi-annually in arrears, beginning on June 15, 2017.
The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by our Subsidiary Guarantors. The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2026 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2026 Senior Notes.
At any time before
December 15, 2021
, we may redeem all or a portion of the 2026 Senior Notes at a redemption price equal to
100%
of the aggregate principal amount of the 2026 Senior Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or after
December 15, 2021
, we may redeem all or a portion of the 2026 Senior Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before
December 15, 2021
, we may redeem up to
35%
of the aggregate outstanding principal amount of the 2026 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price equal to
105.625%
of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than
120 days
after the closing of the related equity offering, and at least
50%
of the original aggregate principal amount of the 2026 Senior Notes remains outstanding immediately thereafter.
Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the 2026 Senior Notes at a price equal to
100%
in the case of an asset sale, or
101%
in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date.
6.0% Senior Notes due 2024
In
June 2016
, we issued
$300.0 million
aggregate principal amount of
6.0%
Senior Notes due on
July 1, 2024
(the "2024 Senior Notes") in a private placement. The proceeds from the 2024 Senior Notes were approximately
$297.5 million
, net of issuance costs. The 2024 Senior Notes bear interest at
6.0%
per year, payable in cash semi-annually in arrears. The 2024 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by our Subsidiary Guarantors. The 2024 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt, and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2024 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2024 Senior Notes.
1.0%
Convertible Debentures due 2035
In December 2015, we issued
$676.5 million
in aggregate principal amount of
1.0%
Senior Convertible Debentures due in 2035 (the “1.0% 2035 Debentures”). We used a portion of the proceeds to repurchase
$38.3 million
in aggregate principal on our
2.75%
Senior Convertible Debentures due in 2031 (the “2031 Debentures”) and to repay the aggregate principal balance of
$472.5 million
on the term loan. The
1.0%
2035 Debentures bear interest at
1.0%
per year, payable in cash semi-annually in arrears. The
1.0%
2035 Debentures mature on
December 15, 2035
, subject to the right of the holders to require us to redeem the
1.0%
2035 Debentures on
December 15, 2022, 2027, or 2032
. The
1.0%
2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the
1.0%
2035 Debentures. The
1.0%
2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. The initial conversion price is approximately
$27.22
per share. At issuance, we allocated
$495.4 million
to long-term debt, and
$181.1 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through
December 2022
. As of
December 31, 2016
and
September 30, 2016
, none of the conversion criteria were met for the
1.0%
2035 Debentures. If the
conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
2.75%
Convertible Debentures due 2031
In
October 2011
, we issued
$690.0 million
in aggregate principal amount of
2.75%
Senior Convertible Debentures due in 2031 in a private placement. The 2031 Debentures bear interest at
2.75%
per year, payable in cash semi-annually in arrears. The 2031 Debentures mature on
November 1, 2031
, subject to the right of the holders to require us to redeem the 2031 Debentures on
November 1, 2017, 2021, and 2026
. The 2031 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2031 Debentures. The 2031 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. The initial conversion price is approximately
$32.30
per share. At issuance, we allocated
$533.6 million
to long-term debt, and
$156.4 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through
November 2017
.
In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to exchange, in a private placement,
$256.2 million
in aggregate principal amount of our 2031 Debentures for approximately
$263.9 million
in aggregate principal amount of our 1.5% 2035 Debentures. In December 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to repurchase
$38.3 million
in aggregate principal with proceeds received from the issuance of our
1.0%
2035 Debentures. Upon repurchase we recorded an extinguishment loss of
$2.4 million
in
other expense, net
, in the accompanying consolidated statements of operations. In accordance with the authoritative guidance for convertible debt instruments, a loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt for our 2031 Debentures, including any unamortized debt discount or issuance costs. Following this activity,
$395.5 million
in aggregate principal amount of our 2031 Debentures remain outstanding. The aggregate debt discount is being amortized to interest expense using the effective interest rate method through
November 2017
. As of
December 31, 2016
and
September 30, 2016
, none of the conversion criteria were met for the 2031 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
1.50%
Convertible Debentures due 2035
In June 2015, we issued
$263.9 million
in aggregate principal amount of
1.50%
Senior Convertible Debentures due in 2035 (the “1.5% 2035 Debentures”) in exchange for
$256.2 million
in aggregate principal amount of our 2031 Debentures. The 1.5% 2035 Debentures were issued at
97.09%
of the principal amount, which resulted in a discount of
$7.7 million
. The 1.5% 2035 Debentures bear interest at
1.50%
per year, payable in cash semi-annually in arrears. The 1.5% 2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 1.5% 2035 Debentures on November 1, 2021, 2026, or 2031. The 1.5% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.5% 2035 Debentures. The 1.5% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. The initial conversion price is approximately
$23.26
per share. At issuance, we allocated
$208.6 million
to long-term debt, and
$55.3 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through November 2021. As of
December 31, 2016
and
September 30, 2016
, none of the conversion criteria were met for the 1.5% 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
Revolving Credit Facility
In April 2016, we entered into a credit agreement that provides for a
$242.5 million
revolving credit line, including letters of credit (together, the “Revolving Credit Facility”). The Revolving Credit Facility matures on April 15, 2021. As of
December 31, 2016
, issued letters of credit in the aggregate amount of
$4.3 million
were treated as issued and outstanding when calculating the borrowing availability under the Revolving Credit Facility. As of
December 31, 2016
, we had
$238.2 million
available for additional borrowing under the Revolving Credit Facility. Any amounts outstanding under the Revolving Credit Facility will bear interest, at either (i) LIBOR plus an applicable margin of
1.50%
or
1.75%
, or (ii) the alternative base rate plus an applicable margin of
0.50%
or
0.75%
. The Revolving Credit Facility is secured by substantially all assets of ours and our Subsidiary Guarantors. The Revolving Credit Facility contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default.
Share Repurchase Program
On
April 29, 2013
, our Board of Directors approved a share repurchase program for up to
$500.0 million
of our outstanding shares of common stock. On April 29, 2015, our Board of Directors approved an additional
$500.0 million
under our share repurchase program. Since the commencement of the program, we have repurchased
40.7 million
shares for
$707.5 million
. These
shares were retired upon repurchase. Approximately
$292.5 million
remained available for share repurchases as of
December 31, 2016
pursuant to our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors.
Off-Balance Sheet Arrangements, Contractual Obligations
Contractual Obligations
The following table outlines our contractual payment obligations (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year Ended September 30,
|
Contractual Obligations
|
|
Total
|
|
2017
|
|
2018 and 2019
|
|
2020 and 2021
|
|
Thereafter
|
Convertible debentures
(1)
|
|
1,335.9
|
|
|
—
|
|
|
395.5
|
|
|
—
|
|
|
940.4
|
|
Senior notes
|
|
1,850.0
|
|
|
600.0
|
|
|
—
|
|
|
450.0
|
|
|
800.0
|
|
Interest payable on long-term debt
(2)
|
|
592.0
|
|
|
65.8
|
|
|
167.5
|
|
|
137.8
|
|
|
220.9
|
|
Letters of credit
(3)
|
|
4.3
|
|
|
3.3
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
Lease obligations and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
181.2
|
|
|
20.1
|
|
|
40.5
|
|
|
30.2
|
|
|
90.4
|
|
Operating leases under restructuring
(4)
|
|
61.8
|
|
|
8.9
|
|
|
17.0
|
|
|
12.5
|
|
|
23.4
|
|
Purchase commitments for inventory, property and equipment
(5)
|
|
3.9
|
|
|
3.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual cash obligations
|
|
$
|
4,029.1
|
|
|
$
|
702.0
|
|
|
$
|
621.5
|
|
|
$
|
630.5
|
|
|
$
|
2,075.1
|
|
|
|
(1)
|
Holders of the 2.75% 2031 Debentures have the right to require us to redeem the debentures on November 1, 2017, 2021, and 2026. Holders of the 1.5% 2035 Debentures have the right to require us to redeem the debentures on November 1, 2021, 2026, and 2031. Holders of the 1.0% 2035 Debentures have the right to require us to redeem the debentures on December 15, 2022, 2027 and 2032.
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|
|
(2)
|
Interest per annum is due and payable semi-annually under 1.0% 2035 Debentures at a rate of 1.0%, under 2031 Debentures at a rate of 2.75%, and under 1.5% 2035 Debentures at a rate of 1.5%. Interest per annum is due and payable semi-annually on the 5.375% Senior Notes at a rate of 5.375%, 5.625% Senior Notes at a rate of 5.625%, and 6.0% Senior Notes at a rate of 6.0%.
|
|
|
(3)
|
Letters of Credit are in place primarily to secure future operating lease payments.
|
|
|
(4)
|
Obligations include contractual lease commitments related to facilities that were part of restructuring plans. As of
December 31, 2016
, we have subleased certain of the facilities with total sublease income of
$56.3 million
through fiscal year
2025
.
|
|
|
(5)
|
These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customers’ orders currently scheduled in our backlog.
|
The gross liability for unrecognized tax benefits as of
December 31, 2016
was
$28.0 million
. We do not expect a significant change in the amount of unrecognized tax benefits within the next 12 months. We estimate that none of this amount will be paid within the next year and we are currently unable to reasonably estimate the timing of payments for the remainder of the liability.
Contingent Liabilities and Commitments
In connection with certain acquisitions, we may be required to make up to
$17.4 million
of additional payments to the selling shareholders contingent upon the achievement of specified objectives, including the achievement of future bookings and sales targets related to the products of the acquired entities. In addition, there are deferred payment obligations to certain former shareholders, contingent upon their continued employment. These deferred payment obligations, totaling
$20.1 million
, will be recorded as compensation expense over the applicable employment period.
Off-Balance Sheet Arrangements
Through
December 31, 2016
, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to: revenue recognition; allowance for doubtful accounts and sales returns; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations, including contingent consideration; accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes and related valuation allowances; and loss contingencies. Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
Information about those accounting policies we deem to be critical to our financial reporting may be found in the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2016
. Based on events occurring subsequent to
September 30, 2016
, we are updating certain of the Critical Accounting Policies, Judgments and Estimates.
RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Refer to Note 2 to the unaudited consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
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We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.
Exchange Rate Sensitivity
We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.
Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Brazilian real, Canadian dollar, Japanese yen, Indian rupee and Hungarian forint.
A hypothetical change of 10% in appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at
December 31, 2016
would not have a material impact on our revenue, operating results or cash flows in the coming year.
Periodically, we enter into forward exchange contracts to hedge against foreign currency fluctuations. These contracts may or may not be designated as cash flow hedges for accounting purposes. We have in place a program which primarily uses forward contracts to offset the risks associated with foreign currency exposures that arise from transactions denominated in currencies other than the functional currencies of our worldwide operations. The program is designed so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts. The outstanding contracts are not designated as accounting hedges and generally are for periods less than 90 days. The notional contract amount of outstanding foreign currency exchange contracts not designated as cash flow hedges was
$196.1 million
at
December 31, 2016
. Based on the nature of the transactions for which the contracts were purchased, a hypothetical change of 10% in exchange rates would not have a material impact on our financial results.
Interest Rate Sensitivity
We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities.
At
December 31, 2016
, we held approximately
$1,137.5 million
of cash and cash equivalents and marketable securities primarily consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would increase by approximately
$9.9 million
per annum, based on the
December 31, 2016
reported balances of our investment accounts.
At
December 31, 2016
, we had no outstanding debt exposed to variable interest rates.
Equity Price Risk
We are exposed to equity price risk as a result of security price guarantees that we enter into from time to time. Generally, these price guarantees are for a period of six months or less, and require payment from either us to a third party, or from the third party to us, based upon changes in our stock price during the contract term. As of
December 31, 2016
, we have no security price guarantees outstanding.
2031 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures
The fair values of our 2031 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures are dependent on the price and volatility of our common stock as well as movements in interest rates. The fair market values of these debentures will generally increase as the market price of our common stock increases and will decrease as the market price of our common stock decreases. The fair market values of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect the fair market values of these debentures, but do not impact our financial position, results of operations or cash flows due to the fixed nature of the debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may provide the holders of these debentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement.
Our debentures trade in the financial markets, and the fair value at
December 31, 2016
was
$398.5 million
for the 2031 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
December 31, 2016
was approximately
$185.8 million
. A 10% increase in the stock price over the
December 31, 2016
closing price of
$14.90
would cause an estimated
$1.4 million
increase to the fair value and an
$18.6 million
increase to the conversion value of the debentures. The fair value at
December 31, 2016
was
$256.8 million
for the 1.5% 2035 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
December 31, 2016
was approximately
$169.1 million
. A 10% increase in the stock price over the
December 31, 2016
closing price of
$14.90
would cause an estimated
$7.2 million
increase to the fair value and a
$16.9 million
increase to the conversion value of the debentures. The fair value at
December 31, 2016
was
$612.2 million
for the 1.0% 2035 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
December 31, 2016
was approximately
$377.0 million
. A 10% increase in the stock price over the
December 31, 2016
closing price of
$14.90
would cause an estimated
$15.4 million
increase to the fair value and a
$37.7 million
increase to the conversion value of the debentures.
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|
Item 4.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to meet the requirements of Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal controls over financial reporting as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) identified in connection with the evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.