NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
September 30,
2017
|
|
(Unaudited)
|
|
(In thousands, except per
share amounts)
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
398,461
|
|
|
$
|
592,299
|
|
Marketable securities
|
112,044
|
|
|
251,981
|
|
Accounts receivable, less allowances for doubtful accounts of $13,013 and $14,333
|
432,552
|
|
|
395,392
|
|
Prepaid expenses and other current assets
|
105,411
|
|
|
88,269
|
|
Total current assets
|
1,048,468
|
|
|
1,327,941
|
|
Marketable securities
|
42,115
|
|
|
29,844
|
|
Land, building and equipment, net
|
172,748
|
|
|
176,548
|
|
Goodwill
|
3,600,768
|
|
|
3,590,608
|
|
Intangible assets, net
|
627,556
|
|
|
664,474
|
|
Other assets
|
145,902
|
|
|
142,508
|
|
Total assets
|
$
|
5,637,557
|
|
|
$
|
5,931,923
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
Current portion of long-term debt
|
$
|
—
|
|
|
$
|
376,121
|
|
Contingent and deferred acquisition payments
|
15,506
|
|
|
28,860
|
|
Accounts payable
|
82,674
|
|
|
94,604
|
|
Accrued expenses and other current liabilities
|
193,406
|
|
|
245,901
|
|
Deferred revenue
|
427,541
|
|
|
366,042
|
|
Total current liabilities
|
719,127
|
|
|
1,111,528
|
|
Long-term debt
|
2,299,594
|
|
|
2,241,283
|
|
Deferred revenue, net of current portion
|
453,106
|
|
|
423,929
|
|
Deferred tax liabilities
|
35,769
|
|
|
131,320
|
|
Other liabilities
|
104,830
|
|
|
92,481
|
|
Total liabilities
|
3,612,426
|
|
|
4,000,541
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.001 par value per share; 560,000 shares authorized; 297,243 and 293,938 shares issued and 293,492 and 290,187 shares outstanding, respectively
|
297
|
|
|
294
|
|
Additional paid-in capital
|
2,669,291
|
|
|
2,629,245
|
|
Treasury stock, at cost (3,751 shares)
|
(16,788
|
)
|
|
(16,788
|
)
|
Accumulated other comprehensive loss
|
(99,988
|
)
|
|
(101,342
|
)
|
Accumulated deficit
|
(527,681
|
)
|
|
(580,027
|
)
|
Total stockholders’ equity
|
2,025,131
|
|
|
1,931,382
|
|
Total liabilities and stockholders’ equity
|
$
|
5,637,557
|
|
|
$
|
5,931,923
|
|
See accompanying notes.
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2017
|
|
2016
|
|
(Unaudited)
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
Net income (loss)
|
$
|
53,228
|
|
|
$
|
(23,929
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
54,315
|
|
|
58,006
|
|
Stock-based compensation
|
37,986
|
|
|
39,130
|
|
Non-cash interest expense
|
13,341
|
|
|
13,039
|
|
Deferred tax (benefit) provision
|
(97,226
|
)
|
|
2,006
|
|
Other
|
631
|
|
|
1,856
|
|
Changes in operating assets and liabilities, excluding effects of acquisitions:
|
|
|
|
Accounts receivable
|
(36,340
|
)
|
|
(9,713
|
)
|
Prepaid expenses and other assets
|
(18,972
|
)
|
|
(15,999
|
)
|
Accounts payable
|
(11,856
|
)
|
|
(21,244
|
)
|
Accrued expenses and other liabilities
|
3,099
|
|
|
5,841
|
|
Deferred revenue
|
87,899
|
|
|
75,907
|
|
Net cash provided by operating activities
|
86,105
|
|
|
124,900
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures
|
(12,543
|
)
|
|
(11,399
|
)
|
Payments for business and asset acquisitions, net of cash acquired
|
(8,648
|
)
|
|
(22,949
|
)
|
Purchases of marketable securities and other investments
|
(32,447
|
)
|
|
(72,797
|
)
|
Proceeds from sales and maturities of marketable securities and other investments
|
159,805
|
|
|
10,105
|
|
Net cash provided by (used in) investing activities
|
106,167
|
|
|
(97,040
|
)
|
Cash flows from financing activities:
|
|
|
|
Payments and redemption of debt
|
(331,172
|
)
|
|
—
|
|
Proceeds from issuance of long-term debt, net of issuance costs
|
—
|
|
|
495,000
|
|
Acquisition payments with extended payment terms
|
(16,880
|
)
|
|
—
|
|
Net payments on other long-term liabilities
|
(65
|
)
|
|
(87
|
)
|
Proceeds from issuance of common stock from employee stock plans
|
6
|
|
|
45
|
|
Cash used to net share settle employee equity awards
|
(38,617
|
)
|
|
(40,360
|
)
|
Net cash (used in) provided by financing activities
|
(386,728
|
)
|
|
454,598
|
|
Effects of exchange rate changes on cash and cash equivalents
|
618
|
|
|
(2,471
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(193,838
|
)
|
|
479,987
|
|
Cash and cash equivalents at beginning of period
|
592,299
|
|
|
481,620
|
|
Cash and cash equivalents at end of period
|
$
|
398,461
|
|
|
$
|
961,607
|
|
See accompanying notes.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Presentation
The condensed consolidated financial statements include the accounts of Nuance Communications, Inc. (“Nuance”, “we”, "our", or “the Company”) and our wholly-owned subsidiaries. We prepared the unaudited interim condensed 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 normal and recurring adjustments that, in our opinion, are necessary to present fairly our financial position, results of operations and cash flows for the periods presented. 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, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period.
Although we believe the disclosures included herein are adequate to ensure that the condensed consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2017
. The results of operations for the
three months ended
December 31, 2017
and
2016
, are not necessarily indicative of the results for the entire fiscal year or any future period.
2. Summary of Significant Accounting Policies
Recently Adopted Accounting Standards
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires income tax consequences of inter-company transfers of assets other than inventory to be recognized when the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We early adopted the guidance during the first quarter of fiscal year 2018. As a result, deferred tax liabilities of
$0.9 million
arising from inter-company transfers in prior years were recognized and recorded against the beginning balance of accumulated deficit in the first quarter of fiscal year 2018. The adoption of the guidance does not have a material impact on our consolidated financial statements for any period presented.
Recently Issued Accounting Standards
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which is effective for fiscal years beginning after December 15, 2017 and the interim periods therein, with early adoption permitted. The guidance requires cash flows with multiple characteristics to be classified using a three-step process, including (i) determining whether explicit guidance is applicable, (ii) separating each identifiable source or use of cash flows, and (iii) determining the predominant source or use of cash flows when the source or use of cash flows cannot be separately identifiable. We are still evaluating the impact of the guidance on our consolidated financial statement.
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, and we currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02, which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption.
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. Based on the composition of our investment portfolio, we do not believe the adoption of ASU 2016-01 will have a material impact on our consolidated financial statements.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In May 2014, the FASB issued ASU 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. While we are continuing to assess all potential impacts of the new standard, we currently believe the most significant impact relates to our accounting for arrangements that include term-based software licenses bundled with maintenance and support. Under current GAAP, the revenue attributable to these software licenses is recognized ratably over the term of the arrangement because vendor-specific objective evidence ("VSOE") does not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. Accordingly, under the new standard we will be required to recognize as revenue a portion of the arrangement fee upon delivery of the software license. While we currently expect revenue related to our professional services and cloud offerings to remain substantially unchanged, we are still in the process of evaluating the impact of the new standard on these arrangements. We plan to adopt this guidance beginning on October 1, 2018 and apply the cumulative catch-up transition method, with a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods.
3. Business Acquisitions
We continue to expand our solutions and integrate our technologies in new offerings through acquisitions. A summary of our acquisition activities for the three months ended December 31, 2017 and December 31, 2016 is as follows:
Fiscal Year 2018
In the first quarter of fiscal year 2018, we completed an acquisition in our Healthcare segment for a total cash consideration of
$8.7 million
and contingent payments at fair value of
$0.5 million
. As a result, we recognized goodwill of
$6.8 million
, and other intangible assets of
$2.0 million
, with a weighted average life of
2.0 years
. The acquisition does not have a material impact on our condensed consolidated financial statements for the period.
Fiscal Year 2017
In the first quarter of fiscal year 2017, we completed several acquisitions in our Enterprise and Healthcare segments for a total cash consideration of
$24.2 million
and contingent payments at fair value of
$1.7 million
. As a result, we recognized goodwill of
$15.7 million
, and other intangible assets of
$10.4 million
, with a weighted average life of
6.0 years
. Such acquisitions were not significant individually or in the aggregate.
Acquisition-Related Costs, net
Acquisition-related costs include costs related to business acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities; (ii) professional service fees, 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) fair value adjustments to acquisition-related contingencies.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of acquisition-related costs, net is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2017
|
|
2016
|
Transition and integration costs
|
$
|
4,062
|
|
|
$
|
3,710
|
|
Professional service fees
|
511
|
|
|
5,017
|
|
Acquisition-related adjustments
|
988
|
|
|
299
|
|
Total
|
$
|
5,561
|
|
|
$
|
9,026
|
|
4. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and intangible assets for the
three months ended
December 31, 2017
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Intangible
Assets
|
Balance at September 30, 2017
|
$
|
3,590,608
|
|
|
$
|
664,474
|
|
Acquisitions (Note 3)
|
6,790
|
|
|
2,000
|
|
Purchase accounting adjustments
|
(348
|
)
|
|
—
|
|
Amortization
|
—
|
|
|
(38,420
|
)
|
Effect of foreign currency translation
|
3,718
|
|
|
(498
|
)
|
Balance at December 31, 2017
|
$
|
3,600,768
|
|
|
$
|
627,556
|
|
5. Financial Instruments and Hedging Activities
Derivatives Not Designated as Hedges
Forward Currency Contracts
We utilize foreign currency forward contracts to mitigate the risks associated with changes in foreign currency exchange rates. Generally, we enter into such contracts for less than
90
days and have no cash requirements until maturity. At
December 31, 2017
and
September 30, 2017
, we had outstanding contracts with a total notional value of
$82.4 million
and
$69.0 million
, respectively.
We did not designate any forward contracts as hedging instruments for the three months ended December 31, 2017 or 2016. Therefore, changes in fair value of foreign currency forward contracts were recognized within
other expense, net
in our condensed consolidated statements of operations. The cash flows related to the settlement of forward contracts not designated as hedging instruments are included in cash flows from investing activities within our consolidated statement of cash flows.
A summary of the derivative instruments as of
December 31, 2017
and
September 30, 2017
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges:
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
December 31,
2017
|
|
September 30,
2017
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
535
|
|
|
$
|
220
|
|
Foreign currency forward contracts
|
|
Accrued expenses and other current liabilities
|
|
(65
|
)
|
|
(373
|
)
|
A summary of loss related to the derivative instruments for the
three months ended
December 31, 2017
and
2016
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
Derivatives Not Designated as Hedges
|
|
Classification of Loss Recognized in Income
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
|
Other expense, net
|
|
$
|
(397
|
)
|
|
$
|
(11,615
|
)
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Fair Value Measurements
Fair value is defined as the price that would be received to sell 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 determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs that are significant to the fair value measurement as of the measurement date as follows:
|
|
•
|
Level 1:
Quoted prices for identical assets or liabilities in active markets.
|
|
|
•
|
Level 2:
Observable inputs other than those described as Level 1.
|
|
|
•
|
Level 3:
Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.
|
Assets and liabilities measured at fair value on a recurring basis at
December 31, 2017
and
September 30, 2017
consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(a)
|
$
|
245,036
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245,036
|
|
Time deposits
(b)
|
—
|
|
|
99,774
|
|
|
—
|
|
|
99,774
|
|
Commercial paper, $38,069 at cost
(b)
|
—
|
|
|
38,182
|
|
|
—
|
|
|
38,182
|
|
Corporate notes and bonds, $83,827 at cost
(b)
|
—
|
|
|
83,532
|
|
|
—
|
|
|
83,532
|
|
Foreign currency exchange contracts
(b)
|
—
|
|
|
535
|
|
|
—
|
|
|
535
|
|
Total assets at fair value
|
$
|
245,036
|
|
|
$
|
222,023
|
|
|
$
|
—
|
|
|
$
|
467,059
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
(b)
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
Contingent acquisition payments
(c)
|
—
|
|
|
—
|
|
|
(10,431
|
)
|
|
(10,431
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
(10,431
|
)
|
|
$
|
(10,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(a)
|
$
|
381,899
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
381,899
|
|
Time deposits
(b)
|
—
|
|
|
85,570
|
|
|
—
|
|
|
85,570
|
|
Commercial paper, $41,805 at cost
(b)
|
—
|
|
|
41,968
|
|
|
—
|
|
|
41,968
|
|
Corporate notes and bonds, $74,150 at cost
(b)
|
—
|
|
|
74,067
|
|
|
—
|
|
|
74,067
|
|
Foreign currency exchange contracts
(b)
|
—
|
|
|
220
|
|
|
—
|
|
|
220
|
|
Total assets at fair value
|
$
|
381,899
|
|
|
$
|
201,825
|
|
|
$
|
—
|
|
|
$
|
583,724
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
(b)
|
$
|
—
|
|
|
$
|
(373
|
)
|
|
$
|
—
|
|
|
$
|
(373
|
)
|
Contingent acquisition payments
(c)
|
—
|
|
|
—
|
|
|
(8,648
|
)
|
|
(8,648
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(373
|
)
|
|
$
|
(8,648
|
)
|
|
$
|
(9,021
|
)
|
|
|
(a)
|
Money market funds and time deposits with original maturity of 90 days or less are included within cash and cash equivalents in the consolidated balance sheets, are valued at quoted market prices in active markets.
|
|
|
(b)
|
Time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are recorded at fair market values, which are determined 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
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or less. Commercial paper and corporate notes and bonds generally mature within three years and have a weighted average maturity of 0.54 years as of
December 31, 2017
and
0.72 years
as of
September 30, 2017
.
|
|
(c)
|
The fair values of our contingent consideration arrangements were determined using either the option pricing model with Monte Carlo simulation or probability-weighted discounted cash flow method.
|
As of September 30, 2017,
$80.2 million
of debt securities included within marketable securities were designated as held-to-maturity investments, which had a weighted average maturity of
0.27 years
and an estimated fair value of
$80.4 million
based on Level 2 measurements. No debt securities were designated as held-to-maturity investments as of December 31, 2017.
The estimated fair value of our long-term debt approximated
$2,627.2 million
(face value
$2,587.0 million
) and
$2,930.9 million
(face value
$2,918.1 million
) as of
December 31, 2017
and
September 30, 2017
, respectively, based on Level 2 measurements. The fair value of each borrowing was estimated using the averages of the bid and ask trading quotes at each respective reporting date. There was no balance outstanding under our revolving credit agreement as of
December 31, 2017
or
September 30, 2017
.
Additionally, contingent acquisition payments are recorded at fair values upon the acquisition, and remeasured in subsequent reporting periods with the changes in fair values recorded within acquisition-related costs, net. Such payments are contingent upon the achievement of specified performance targets and are valued using the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow model.
The following table provides a summary of changes in the aggregate fair value of the contingent acquisition payments for the
three months ended
December 31, 2017
and
2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
8,648
|
|
|
$
|
8,240
|
|
Earn-out liabilities established at time of acquisition
|
500
|
|
|
1,653
|
|
Payments and foreign currency translation
|
(17
|
)
|
|
(1,498
|
)
|
Adjustments to fair value included in acquisition-related costs, net
|
1,300
|
|
|
566
|
|
Balance at end of period
|
$
|
10,431
|
|
|
$
|
8,961
|
|
Contingent acquisition payments are to be made in periods through
fiscal year 2019
. As of
December 31, 2017
, the maximum amount payable based on the agreements was
$25.1 million
if the specified performance targets are achieved.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
September 30,
2017
|
Compensation
|
$
|
103,991
|
|
|
$
|
159,951
|
|
Cost of revenue related liabilities
|
22,066
|
|
|
20,124
|
|
Accrued interest payable
|
21,733
|
|
|
26,285
|
|
Consulting and professional fees
|
19,274
|
|
|
12,649
|
|
Facilities related liabilities
|
5,540
|
|
|
7,158
|
|
Sales and marketing incentives
|
4,190
|
|
|
3,655
|
|
Sales and other taxes payable
|
3,190
|
|
|
3,125
|
|
Other
|
13,422
|
|
|
12,954
|
|
Total
|
$
|
193,406
|
|
|
$
|
245,901
|
|
8. Deferred Revenue
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 revenue includes fees for up-front setup 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.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred revenue consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
September 30,
2017
|
Current liabilities:
|
|
|
|
Deferred maintenance revenue
|
$
|
171,980
|
|
|
$
|
162,958
|
|
Unearned revenue
|
255,561
|
|
|
203,084
|
|
Total current deferred revenue
|
$
|
427,541
|
|
|
$
|
366,042
|
|
Long-term liabilities:
|
|
|
|
Deferred maintenance revenue
|
$
|
62,494
|
|
|
$
|
60,298
|
|
Unearned revenue
|
390,612
|
|
|
363,631
|
|
Total long-term deferred revenue
|
$
|
453,106
|
|
|
$
|
423,929
|
|
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, or arise outside of the ordinary course of our business.
The following table sets forth accrual activity relating to restructuring reserves for the
three months ended
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
Facilities
|
|
Total
|
Balance at September 30, 2017
|
$
|
1,546
|
|
|
$
|
9,159
|
|
|
$
|
10,705
|
|
Restructuring charges, net
|
4,883
|
|
|
1,665
|
|
|
6,548
|
|
Non-cash adjustment
|
—
|
|
|
(298
|
)
|
|
(298
|
)
|
Cash payments
|
(5,392
|
)
|
|
(1,753
|
)
|
|
(7,145
|
)
|
Balance at December 31, 2017
|
$
|
1,037
|
|
|
$
|
8,773
|
|
|
$
|
9,810
|
|
While restructuring and other charges, net are excluded from our calculation of segment profit, the table below presents the restructuring and other charges, net associated with each segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2017
|
|
2016
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
Healthcare
|
$
|
2,513
|
|
|
$
|
25
|
|
|
$
|
2,538
|
|
|
$
|
—
|
|
|
$
|
2,538
|
|
|
$
|
1,984
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
—
|
|
|
$
|
2,261
|
|
Mobile
|
400
|
|
|
11
|
|
|
411
|
|
|
—
|
|
|
411
|
|
|
213
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
213
|
|
Enterprise
|
262
|
|
|
2,360
|
|
|
2,622
|
|
|
—
|
|
|
2,622
|
|
|
424
|
|
|
607
|
|
|
1,031
|
|
|
—
|
|
|
1,031
|
|
Imaging
|
1,223
|
|
|
9
|
|
|
1,232
|
|
|
—
|
|
|
1,232
|
|
|
361
|
|
|
351
|
|
|
712
|
|
|
—
|
|
|
712
|
|
Corporate
|
485
|
|
|
(740
|
)
|
|
(255
|
)
|
|
8,253
|
|
|
7,998
|
|
|
669
|
|
|
664
|
|
|
1,333
|
|
|
1,153
|
|
|
2,486
|
|
Total
|
$
|
4,883
|
|
|
$
|
1,665
|
|
|
$
|
6,548
|
|
|
$
|
8,253
|
|
|
$
|
14,801
|
|
|
$
|
3,651
|
|
|
$
|
1,899
|
|
|
$
|
5,550
|
|
|
$
|
1,153
|
|
|
$
|
6,703
|
|
Fiscal
Year
2018
During the
three months ended
December 31, 2017
, we recorded restructuring charges of
$6.5 million
, which included
$4.9 million
related to the termination of approximately
160
employees and
$1.7 million
related to certain excess facilities. These actions were part of our initiatives to reduce costs and optimize processes. We expect the remaining outstanding severance of
$1.0 million
to be substantially paid during fiscal year
2018
, and the remaining balance of
$8.8 million
related to excess facilities to be paid through fiscal year
2025
, in accordance with the terms of the applicable leases.
Additionally, during the
three months ended
December 31, 2017
, we recorded
$2.3 million
related to the transition agreement of our CEO, and
$6.0 million
related to our remediation and restoration efforts after the malware incident that occurred in the third quarter of fiscal year 2017. The cash payments associated with the transition agreement are expected to be made during fiscal years 2018 and 2019.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal
Year
2017
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
related to the termination of approximately
90
employees and
$1.9 million
related to certain excess facilities. These actions were part of our initiatives to reduce costs and optimize processes. The restructuring charges also included
$1.9 million
related to excess facilities. In addition, during the
three months ended
December 31, 2016
, we recorded
$1.2 million
related to the transition agreement of our CEO.
10. Debt
At
December 31, 2017
and
September 30, 2017
, we had the following long-term borrowing obligations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
September 30,
2017
|
5.625% Senior Notes due 2026, net of deferred issuance costs of $5.5 million and $5.7 million, respectively. Effective interest rate 5.625%.
|
$
|
494,453
|
|
|
$
|
494,298
|
|
5.375% Senior Notes due 2020, net of unamortized premium of $0.9 million and $1.0 million, respectively, and deferred issuance costs of $2.1 million and $2.3 million, respectively. Effective interest rate 5.375%.
|
448,748
|
|
|
448,630
|
|
6.000% Senior Notes due 2024, net of deferred issuance costs of $2.0 million and $2.1 million, respectively. Effective interest rate 6.000%.
|
297,988
|
|
|
297,910
|
|
1.00% Convertible Debentures due 2035, net of unamortized discount of $135.0 million and $140.9 million, respectively, and deferred issuance costs of $6.6 million and $6.9 million, respectively. Effective interest rate 5.622%.
|
534,885
|
|
|
528,690
|
|
2.75% Convertible Debentures due 2031, net of unamortized discount of $1.5 million and deferred issuance costs of $0.1 million as of September 30, 2017. Effective interest rate 7.432%.
|
46,568
|
|
|
376,121
|
|
1.25% Convertible Debentures due 2025, net of unamortized discount of $90.2 million and $92.7 million, respectively, and deferred issuance costs of $4.1 million and $4.3 million, respectively. Effective interest rate 5.578%.
|
255,703
|
|
|
253,054
|
|
1.50% Convertible Debentures due 2035, net of unamortized discount of $40.1 million and $42.5 million, respectively, and deferred issuance costs of $1.4 million and $1.5 million, respectively. Effective interest rate 5.394%.
|
222,340
|
|
|
219,875
|
|
Deferred issuance costs related to our Revolving Credit Facility
|
(1,091
|
)
|
|
(1,174
|
)
|
Total debt
|
2,299,594
|
|
|
2,617,404
|
|
Less: current portion
|
—
|
|
|
376,121
|
|
Total long-term debt
|
$
|
2,299,594
|
|
|
$
|
2,241,283
|
|
The following table summarizes the maturities of our borrowing obligations as of
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Convertible Debentures
(1)
|
|
Senior Notes
|
|
Total
|
2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2019
|
|
—
|
|
|
—
|
|
|
—
|
|
2020
|
|
—
|
|
|
450,000
|
|
|
450,000
|
|
2021
|
|
—
|
|
|
—
|
|
|
—
|
|
2022
|
|
310,463
|
|
|
—
|
|
|
310,463
|
|
Thereafter
|
|
1,026,488
|
|
|
800,000
|
|
|
1,826,488
|
|
Total before unamortized discount
|
|
1,336,951
|
|
|
1,250,000
|
|
|
2,586,951
|
|
Less: unamortized discount and issuance costs
|
|
(277,455
|
)
|
|
(9,902
|
)
|
|
(287,357
|
)
|
Total long-term debt
|
|
$
|
1,059,496
|
|
|
$
|
1,240,098
|
|
|
$
|
2,299,594
|
|
|
|
(1)
|
Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes that payment is due on the next redemption date after
December 31, 2017
.
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 certain of our domestic subsidiaries ("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.
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 2016. In January 2017, we recorded an extinguishment loss of
$18.6 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 remains outstanding.
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.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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”) in a private placement. 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 and to repay the aggregate principal balance of
$472.5 million
on the term loan. Upon the repurchase and repayment of debts in December 2015, we recorded an extinguishment loss of
$4.9 million
in
other expense, net
, in the accompanying consolidated statements of operations. 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, 2017
, 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 (the “2031 Debentures”) 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. In March 2017, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to repurchase
$17.8 million
in aggregate principal with proceeds received from the issuance of our 1.25% Senior Convertible Debentures issued in March 2017. Following these activities,
$377.7 million
in aggregate principal amount of our 2031 Debentures remained outstanding as of
September 30, 2017
, which was included within the total current liabilities.
In November 2017, holders of approximately
$331.2 million
in aggregate principal amount of the outstanding 2031 Debentures exercised their right to require us to repurchase such debentures. Following the repurchase,
$46.6 million
in aggregate principal amount of the 2031 Debentures remains outstanding. On or after November 6, 2017, we have the right to call for redemption of some or all of the remaining outstanding 2031 Debentures.
1.25% Convertible Debentures due 2025
In March 2017, we issued
$350.0 million
in aggregate principal amount of 1.25% Senior Convertible Debentures due in 2025 (the “1.25% 2025 Debentures”) in a private placement. The proceeds were approximately
$343.6 million
, net of issuance costs. We used a portion of the proceeds to repurchase
5.8 million
shares of our common stock for
$99.1 million
and
$17.8 million
in aggregate principal on our 2031 Debentures. We used the remaining net proceeds, together with cash on hand to redeem and retire $331.2 million of our outstanding 2031 Debentures in November 2017. The 1.25% 2025 Debentures bear interest at 1.25% per year, payable in cash semi-annually in arrears, beginning on October 1, 2017. The 1.25% 2025 Debentures mature on April 1, 2025. The 1.25% 2025 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 1.25% 2025 Debentures. The 1.25% 2025 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We account separately for the liability and equity components of the 1.25% 2025 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated
$252.1 million
to long-term debt, and
$97.9 million
has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through April 1, 2025.
If converted, the principal amount of the 1.25% 2025 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an initial conversion rate, which represents an initial conversion price of approximately
$22.22
per share, subject to adjustment under certain circumstances) be paid in cash or shares of our common stock, at our election, only in the following circumstances and to the following extent: (i) prior to October 1, 2024, on any date during any fiscal quarter beginning after June 30, 2017 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) at any time on or after October 1, 2024, (iii) during the five consecutive business-day period immediately following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.25% 2025 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; or (iv) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.25% 2025 Debentures. We may not redeem the 1.25% 2025 Debentures prior to the maturity date. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.25% 2025 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.25% 2025 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. As of
December 31, 2017
, none of the conversion criteria were met for the 1.25% 2025 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, 2017
, 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
Our revolving credit agreement (the “Revolving Credit Facility”), which expires on April 15, 2021, provides for aggregate borrowing commitments of
$242.5 million
, including the revolving facility loans, the swingline loans and issuance of letters of credit. As of
December 31, 2017
, after taking into account the outstanding letters of credit of
$4.5 million
, we had
$238.0 million
available for additional borrowing under the Revolving Credit Facility. The borrowing outstanding under the Revolving Credit Facility bears 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 our assets. The Revolving Credit Facility contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. As of
December 31, 2017
, we are in compliance with all the debt covenants.
11. Stockholders' Equity
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. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
There were no share repurchases for the three months ended
December 31, 2017
or 2016. Since the commencement of the program, we have repurchased an aggregate of
46.5 million
shares for
$806.6 million
. The amount paid in excess of par value is recognized in additional paid in capital. Shares were retired upon repurchase. As of
December 31, 2017
, approximately
$193.4 million
remained available for future repurchases under the program.
12. Net Income (Loss) Per Share
The following table sets forth the computation for basic and diluted net income (loss) per share (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
Net income (loss)
|
|
$
|
53,228
|
|
|
$
|
(23,929
|
)
|
Denominator:
|
|
|
|
|
Weighted average common shares outstanding - Basic
|
|
291,367
|
|
|
288,953
|
|
Dilutive effect of employee stock compensation plans
|
|
4,628
|
|
|
—
|
|
Weighted average common shares outstanding — diluted
|
|
295,995
|
|
|
288,953
|
|
Net income (loss) per share:
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
(0.08
|
)
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
(0.08
|
)
|
For the
three months ended
December 31, 2017
and
2016
, respectively,
0.1 million
and
7.1 million
shares of anti-dilutive equity instruments issued under our employee stock compensation plans were excluded from the computation of diluted net income (loss) per share.
2.2 million
and
2.8 million
shares of contingently issuable awards were excluded from the determination of dilutive net income per share as the conditions were not met if the end of the reporting period would be the end of the performance period. For the
three months ended
December 31, 2016, there was no dilutive effect of equity instruments as the impact of these items was anti-dilutive due to the net loss incurred during the period.
13. Stock-Based Compensation
We recognize stock-based compensation expense over the requisite service period. Our share-based awards are classified within equity. The amounts included in the condensed consolidated statements of operations relating to stock-based compensation are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2017
|
|
2016
|
Cost of professional services and hosting
|
$
|
7,407
|
|
|
$
|
8,410
|
|
Cost of product and licensing
|
266
|
|
|
92
|
|
Cost of maintenance and support
|
1,204
|
|
|
977
|
|
Research and development
|
9,696
|
|
|
8,490
|
|
Sales and marketing
|
10,676
|
|
|
11,969
|
|
General and administrative
|
8,737
|
|
|
9,192
|
|
Total
|
$
|
37,986
|
|
|
$
|
39,130
|
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options
The table below summarizes activities related to stock options for the
three months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(a)
|
Outstanding at September 30, 2017
|
23,807
|
|
|
$
|
15.39
|
|
|
|
|
|
Exercised
|
(1,859
|
)
|
|
$
|
3.41
|
|
|
|
|
|
Outstanding at December 31, 2017
|
21,948
|
|
|
$
|
16.40
|
|
|
2.8 years
|
|
$
|
0.1
|
million
|
Exercisable at December 31, 2017
|
21,939
|
|
|
$
|
16.41
|
|
|
2.8 years
|
|
$
|
0.1
|
million
|
Exercisable at December 31, 2016
|
1,050,038
|
|
|
$
|
16.29
|
|
|
1.0 year
|
|
$
|
0.2
|
million
|
|
|
(a)
|
The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of
December 31, 2017
(
$16.35
) over the exercise price of the underlying options.
|
The aggregate intrinsic value of stock options exercised during the
three months ended
December 31, 2017
and
2016
was
$0.02 million
and
$0.7 million
, respectively.
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 activities relating to restricted units for the
three months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
Number of Shares Underlying Restricted Units — Contingent Awards
|
|
Number of Shares Underlying Restricted Units — Time-Based Awards
|
Outstanding at September 30, 2017
|
5,043,931
|
|
|
6,477,164
|
|
Granted
|
688,999
|
|
|
4,263,946
|
|
Earned/released
|
(1,687,862
|
)
|
|
(3,614,185
|
)
|
Forfeited
|
(893,287
|
)
|
|
(168,642
|
)
|
Outstanding at December 31, 2017
|
3,151,781
|
|
|
6,958,283
|
|
Weighted average remaining recognition period of outstanding restricted units
|
1.2 years
|
|
|
1.8 years
|
|
Unrecognized stock-based compensation expense of outstanding restricted units
|
$45.0 million
|
|
$79.8 million
|
Aggregate intrinsic value of outstanding restricted units
(a)
|
$51.5 million
|
|
$113.9 million
|
|
|
(a)
|
The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of
December 31, 2017
(
$16.35
) over the purchase price of the underlying restricted units.
|
A summary of the weighted-average grant-date fair value of restricted units granted, and the aggregate intrinsic value of restricted units vested during the periods noted is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2017
|
|
2016
|
Weighted-average grant-date fair value per share
|
$
|
14.92
|
|
|
$
|
15.90
|
|
Total intrinsic value of shares vested (in millions)
|
$
|
84.7
|
|
|
$
|
88.3
|
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. Income Taxes
The components of
loss before income taxes
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2017
|
|
2016
|
Domestic
|
$
|
(40,031
|
)
|
|
$
|
(47,583
|
)
|
Foreign
|
14,738
|
|
|
34,007
|
|
Loss before income taxes
|
$
|
(25,293
|
)
|
|
$
|
(13,576
|
)
|
The components of
(benefit) provision for income taxes
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
2017
|
|
2016
|
Domestic
|
$
|
(80,866
|
)
|
|
$
|
4,159
|
|
Foreign
|
2,345
|
|
|
6,194
|
|
(Benefit) provision for income taxes
|
$
|
(78,521
|
)
|
|
$
|
10,353
|
|
Effective tax rate
|
310.4
|
%
|
|
(76.3
|
)%
|
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing a hybrid territorial tax system, and imposing a one-time repatriation tax on foreign cash and earnings.
We are currently assessing the impact of the realization of deferred tax assets, remeasurement of deferred taxes at lower rates, and the provision for a one-time repatriation tax. Based on our preliminary assessment, we recorded a provisional amount of income tax benefit for the three months ended December 31, 2017, reflecting a benefit of approximately
$96 million
related to changes in the carrying value of certain deferred tax assets and liabilities, offset in part by an expense of approximately
$14 million
related to deemed repatriation of foreign cash and earnings. The provisional amounts above were based upon the estimate of (i) temporary differences at the end of the upcoming tax year, (ii) the timing of the temporary differences expected to reverse, (iii) foreign earnings and profits, and (iv) foreign income taxes. The assessment is incomplete as of December 31, 2017. As our assessment is ongoing, these amounts may materially change as we revise our assumptions and estimates based on new information available to us, changes in our interpretations, additional guidance to be issued, and actions we may take as a result of the TCJA.
Additionally, we are still evaluating the full impact of other provisions of the TCJA, which may materially increase or decrease our income tax provision. The assessment is expected to be completed no later than the first quarter of fiscal year 2019.
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 at times actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date we evaluate contingent liabilities associated with these matters in accordance with ASC 450 “Contingencies.” If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes, and estimates are based only on the best information available at the time. Due to the inherent uncertainties involved in claims and legal proceedings and in estimating losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods, which may have a material impact on our results of operations and financial position. As of
December 31, 2017
, accrued losses were not material to our condensed consolidated financial statements, and we do not expect any pending matter to have a material impact on our condensed consolidated financial statements.
Guarantees and Other
We include indemnification provisions in the contracts we enter 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, 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
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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
During the first quarter of fiscal year 2018, we commenced a reorganization of our segment reporting structure based on the growth of each business and the evolving industry vertical in which it participates. Such reorganization will allow our Chief Operating Decision Maker ("CODM") greater focus on implementing strategic initiatives and identifying future investment opportunities. In January 2018, we publicly announced that, in addition to the previously communicated intent to establish the automotive business as a separate reportable segment and business line, we will also merge the Communications Service Provider (CSP, or Mobile Operator Services) business line into the Enterprise segment to form a consolidated focus on our business in the telecommunications market. In connection with the ongoing reorganization, we are currently implementing changes to our reporting processes to facilitate operating segment reporting. As a transition, during the first quarter of fiscal year 2018, segment information compiled and presented to our CODM still reflects the existing segment structure. As a result, segment information for the three months ended December 31, 2017 and 2016 below was presented in manner consistent with the level of discrete financial information included within our CODM review package. We expect that the reorganization efforts will be completed in the second quarter of fiscal year 2018, and the presentation of our segment information will reflect the reorganized segment reporting structure upon completion of the reorganization. Additionally, we are continuing the process of identifying and assessing other initiatives to better align our segment reporting structure with our long-term strategies.
Our CODM regularly reviewed segment revenues and segment profits for performance evaluation and resources allocation. Segment revenues include certain acquisition-related adjustments for revenues that would otherwise have been recognized without the acquisition. Segment profits reflect controllable costs directly related to each segment and the allocation of certain corporate expenses such as, corporate sales and marketing expenses and research and development project costs that benefit multiple segments. Certain items such as stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net,
other expenses, net
and certain unallocated corporate expenses are excluded from segment profits, which allow for more meaningful comparisons to the financial results of the historical operations for the performance evaluation and resources allocation by our CODM.
|
|
•
|
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.
|
|
|
•
|
The 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.
|
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 or 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,
|
|
2017
|
|
2016
|
Segment revenues
:
|
|
|
|
Healthcare
|
$
|
245,535
|
|
|
$
|
239,208
|
|
Mobile
|
89,829
|
|
|
91,784
|
|
Enterprise
|
117,831
|
|
|
112,938
|
|
Imaging
|
55,630
|
|
|
52,089
|
|
Total segment revenues
|
508,825
|
|
|
496,019
|
|
Less: acquisition-related revenues adjustments
|
(7,180
|
)
|
|
(8,361
|
)
|
Total revenues
|
501,645
|
|
|
487,658
|
|
Segment profit:
|
|
|
|
Healthcare
|
77,419
|
|
|
78,567
|
|
Mobile
|
25,423
|
|
|
33,471
|
|
Enterprise
|
38,935
|
|
|
31,958
|
|
Imaging
|
15,643
|
|
|
17,616
|
|
Total segment profit
|
157,420
|
|
|
161,612
|
|
Corporate expenses and other, net
|
(44,665
|
)
|
|
(30,959
|
)
|
Acquisition-related revenues
|
(7,180
|
)
|
|
(8,361
|
)
|
Stock-based compensation
|
(37,986
|
)
|
|
(39,130
|
)
|
Amortization of intangible assets
|
(38,420
|
)
|
|
(43,401
|
)
|
Acquisition-related costs, net
|
(5,561
|
)
|
|
(9,026
|
)
|
Restructuring and other charges, net
|
(14,801
|
)
|
|
(6,703
|
)
|
Other expenses, net
|
(34,100
|
)
|
|
(37,608
|
)
|
Loss before income taxes
|
$
|
(25,293
|
)
|
|
$
|
(13,576
|
)
|
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,
|
|
2017
|
|
2016
|
United States
|
$
|
364,286
|
|
|
$
|
349,170
|
|
International
|
137,359
|
|
|
138,488
|
|
Total revenues
|
$
|
501,645
|
|
|
$
|
487,658
|
|
NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. Supplemental Cash Flow Information
Cash paid for Interest and Income Taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Interest paid
|
$
|
27,281
|
|
|
$
|
11,069
|
|
Income taxes paid
|
$
|
4,600
|
|
|
$
|
4,205
|
|
Non-Cash Investing and Financing Activities:
From time to time, we issue shares of our common stock in connection with our business and asset acquisitions, including shares issued as payment for acquisitions, shares initially held in escrow, and shares issued as payment for contingent consideration, which is discussed in Note
3
.