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.
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:
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our future bookings, revenues, cost of revenues, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin;
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•
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our strategy relating to our segments;
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•
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our transformation program to reduce costs and optimize processes;
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•
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technological advancements;
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•
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the potential of future product releases;
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•
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our product development plans and the timing, amount and impact of investments in research and development;
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•
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future acquisitions, and anticipated benefits from acquisitions;
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•
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international operations and localized versions of our products; and
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•
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the conduct, timing and outcome of legal proceedings and litigation matters.
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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.
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•
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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
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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.
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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.
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•
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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.
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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.
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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
six months ended
March 31, 2017
, as compared to the
six months ended
March 31, 2016
:
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•
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Total revenues increased by
$22.4 million
to
$987.2 million
;
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•
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Net loss increased by
$38.6 million
to a loss of
$57.7 million
;
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•
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Gross margins decreased by
0.5
percentage points to
56.9%
;
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•
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Operating margins decreased by
1.0
percentage points to
5.6%
; and
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•
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Cash provided by operating activities decreased
$50.7 million
to
$250.3 million
.
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As of
March 31, 2017
, as compared to
March 31, 2016
:
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•
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Total deferred revenue increased
7.2%
from
$748.5 million
to
$802.4 million
driven primarily by our hosting solutions, most notably for our automotive connected services in our Mobile segment.
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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
March 31, 2017
, as compared to the quarter ended
March 31, 2016
, is as follows:
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•
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Net new bookings increased
30.8%
from one year ago to
$410.4 million
. The net new bookings growth benefited from strong bookings performance in our Healthcare and Mobile segments.
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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;
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•
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Recurring revenue represented
73.3%
and
69.0%
of total revenue for
six months ended
March 31, 2017
and
March 31, 2016
, 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;
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Annualized line run-rate in our on-demand healthcare solutions decreased
8%
from one year ago to approximately
4.7 billion
lines per year. The decrease was primarily due to continued erosion in our transcription services. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four; and
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•
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Estimated three-year value of total on-demand contracts at
March 31, 2017
increased
19%
from one year ago to approximately
$2.6 billion
. The increase was primarily due to our Enterprise omni-channel solutions and Dragon Medical cloud offerings. 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
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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):
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|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
|
March 31,
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Professional services and hosting
|
$
|
258.7
|
|
|
$
|
240.2
|
|
|
$
|
18.5
|
|
|
7.7
|
%
|
|
$
|
512.1
|
|
|
$
|
467.3
|
|
|
$
|
44.8
|
|
|
9.6
|
%
|
Product and licensing
|
159.3
|
|
|
158.6
|
|
|
0.6
|
|
|
0.4
|
%
|
|
311.0
|
|
|
337.7
|
|
|
(26.7
|
)
|
|
(7.9
|
)%
|
Maintenance and support
|
81.6
|
|
|
79.9
|
|
|
1.7
|
|
|
2.1
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%
|
|
164.1
|
|
|
159.8
|
|
|
4.3
|
|
|
2.7
|
%
|
Total Revenues
|
$
|
499.6
|
|
|
$
|
478.7
|
|
|
$
|
20.8
|
|
|
4.4
|
%
|
|
$
|
987.2
|
|
|
$
|
964.8
|
|
|
$
|
22.4
|
|
|
2.3
|
%
|
United States
|
$
|
352.9
|
|
|
$
|
338.7
|
|
|
$
|
14.2
|
|
|
4.2
|
%
|
|
$
|
702.1
|
|
|
$
|
694.5
|
|
|
$
|
7.6
|
|
|
1.1
|
%
|
International
|
146.6
|
|
|
140.0
|
|
|
6.6
|
|
|
4.7
|
%
|
|
285.1
|
|
|
270.3
|
|
|
14.8
|
|
|
5.5
|
%
|
Total Revenues
|
$
|
499.6
|
|
|
$
|
478.7
|
|
|
$
|
20.8
|
|
|
4.4
|
%
|
|
$
|
987.2
|
|
|
$
|
964.8
|
|
|
$
|
22.4
|
|
|
2.3
|
%
|
The geographic split for the
three months ended
March 31, 2017
, was
71%
of total revenues in the United States and
29%
internationally, as compared to
71%
of total revenues in the United States and
29%
internationally for the same period last year.
The geographic split for the
six months ended
March 31, 2017
, was
71%
of total revenues in the United States and
29%
internationally, as compared to
72%
of total revenues in the United States and
28%
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, 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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
|
March 31,
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Professional services revenue
|
$
|
56.5
|
|
|
$
|
55.6
|
|
|
$
|
1.0
|
|
|
1.7
|
%
|
|
$
|
116.7
|
|
|
$
|
105.2
|
|
|
$
|
11.4
|
|
|
10.9
|
%
|
Hosting revenue
|
202.2
|
|
|
184.6
|
|
|
17.5
|
|
|
9.5
|
%
|
|
395.4
|
|
|
362.1
|
|
|
33.4
|
|
|
9.2
|
%
|
Professional services and hosting revenue
|
$
|
258.7
|
|
|
$
|
240.2
|
|
|
$
|
18.5
|
|
|
7.7
|
%
|
|
$
|
512.1
|
|
|
$
|
467.3
|
|
|
$
|
44.8
|
|
|
9.6
|
%
|
As a percentage of total revenue
|
51.8
|
%
|
|
50.2
|
%
|
|
|
|
|
|
51.9
|
%
|
|
48.4
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
In our hosting business, Enterprise hosting revenue increased $9.0 million primarily driven by strength across many of our omni-channel cloud offerings including revenue from a recent acquisition. Mobile on-demand revenue grew $6.9 million primarily driven by a continued trend toward cloud-based services in our automotive solutions and strength in our mobile operator services. Healthcare on-demand revenue grew $1.6 million with strong growth in our Dragon Medical cloud revenue as we continue to transition to cloud offerings partially offset by a revenue decrease due to continued erosion in our transcription services.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
In our hosting business, Enterprise hosting revenue increased $24.6 million primarily driven by revenue from a recent acquisition and strength across many of our omni-channel cloud offerings. Mobile on-demand revenue grew $11.0 million primarily driven by a continued trend toward cloud-based services in our automotive solutions and strength in our mobile operator services. These increases were partially offset by a $2.3 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 due to transition to cloud offerings. In our professional services business, Healthcare professional services revenue increased $7.2 million driven
by an acquisition in fiscal year 2016. In addition, professional services revenue increased $3.1 million in our Mobile segment and $1.1 million in our Enterprise segment.
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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
|
March 31,
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Product and licensing revenue
|
$
|
159.3
|
|
|
$
|
158.6
|
|
|
$
|
0.6
|
|
|
0.4
|
%
|
|
$
|
311.0
|
|
|
$
|
337.7
|
|
|
$
|
(26.7
|
)
|
|
(7.9
|
)%
|
As a percentage of total revenue
|
31.9
|
%
|
|
33.1
|
%
|
|
|
|
|
|
31.5
|
%
|
|
35.0
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
increase
in product and licensing revenue consisted of a $6.7 million increase in our Enterprise segment and a $1.4 million increase in our Mobile segment driven by growth in our embedded speech license sales. These increases were partially offset by a $4.4 million decrease in our Healthcare segment as we continue to transition our Dragon Medical offerings from a perpetual license sales model to a cloud service model and a $3.1 million decrease in our Imaging license sales.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
decrease
in product and licensing revenue consisted of a $18.1 million decrease in our Healthcare segment, a $8.3 million decrease in our Mobile segment, and an $11.1 million decrease in our Imaging segment, partially offset by a $10.7 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
|
March 31,
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Maintenance and support revenue
|
$
|
81.6
|
|
|
$
|
79.9
|
|
|
$
|
1.7
|
|
|
2.1
|
%
|
|
$
|
164.1
|
|
|
$
|
159.8
|
|
|
$
|
4.3
|
|
|
2.7
|
%
|
As a percentage of total revenue
|
16.3
|
%
|
|
16.7
|
%
|
|
|
|
|
|
16.6
|
%
|
|
16.6
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
increase
in maintenance and support revenue was driven primarily by our Enterprise and Imaging segments.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
increase
in maintenance and support revenue was driven primarily by our Enterprise 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Cost of professional services and hosting revenue
|
$
|
164.2
|
|
|
$
|
154.7
|
|
|
$
|
9.5
|
|
|
6.1
|
%
|
|
$
|
329.1
|
|
|
$
|
308.0
|
|
|
$
|
21.1
|
|
|
6.8
|
%
|
As a percentage of professional services and hosting revenue
|
63.5
|
%
|
|
64.4
|
%
|
|
|
|
|
|
64.3
|
%
|
|
65.9
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
increase
in cost of professional services and hosting revenue was primarily driven by higher compensation expense in our Enterprise segment driven by recent acquisitions and higher cloud services costs driven by growth in our Dragon Medical cloud revenue in our Healthcare segment. Gross margins increased 0.9 percentage points primarily driven by margin expansion in our cloud-based services within our Mobile and Healthcare segments, partially offset by impact from a recent acquisition which carries a lower gross margin.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
increase
in cost of professional services and hosting revenue was primarily driven by higher compensation expense in our Enterprise segment driven by recent acquisitions. Gross margins increased 1.6 percentage points primarily driven by margin expansion in our cloud-based services within our Mobile segment, partially offset by impact from a recent acquisition 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
|
March 31,
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Cost of product and licensing revenue
|
$
|
18.8
|
|
|
$
|
20.8
|
|
|
$
|
(2.0
|
)
|
|
(9.8
|
)%
|
|
$
|
37.2
|
|
|
$
|
44.2
|
|
|
$
|
(7.1
|
)
|
|
(16.0
|
)%
|
As a percentage of product and licensing revenue
|
11.8
|
%
|
|
13.1
|
%
|
|
|
|
|
|
12.0
|
%
|
|
13.1
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
decrease
in cost of product and licensing revenue was primarily driven by lower costs in our Healthcare and Imaging segments. Gross margins increased 1.3 percentage points, primarily driven by higher revenues from higher margin license products in our Enterprise segment.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
decrease
in cost of product and licensing revenue was primarily driven by lower costs in our Healthcare and Imaging segments. Gross margins increased 1.1 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Cost of maintenance and support revenue
|
$
|
13.2
|
|
|
$
|
13.6
|
|
|
$
|
(0.4
|
)
|
|
(2.8
|
)%
|
|
$
|
26.8
|
|
|
$
|
26.9
|
|
|
$
|
(0.1
|
)
|
|
(0.3
|
)%
|
As a percentage of maintenance and support revenue
|
16.2
|
%
|
|
17.1
|
%
|
|
|
|
|
|
16.4
|
%
|
|
16.8
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
Gross margins increased 0.9 percentage points primarily driven by higher maintenance and support revenue in our Enterprise segment which carries a higher margin.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
Gross margins increased 0.4 percentage points primarily driven by higher maintenance and support revenue in our Enterprise segment which carries a higher margin.
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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Research and development expense
|
$
|
66.2
|
|
|
$
|
67.2
|
|
|
$
|
(1.0
|
)
|
|
(1.5
|
)%
|
|
$
|
132.6
|
|
|
$
|
137.8
|
|
|
$
|
(5.2
|
)
|
|
(3.8
|
)%
|
As a percentage of total revenue
|
13.3
|
%
|
|
14.0
|
%
|
|
|
|
|
|
13.4
|
%
|
|
14.3
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
decrease
in research and development expense was primarily attributable to lower compensation costs, 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.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
decrease
in research and development expense was primarily attributable to lower compensation costs, 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Sales and marketing expense
|
$
|
93.7
|
|
|
$
|
92.8
|
|
|
$
|
0.8
|
|
|
0.9
|
%
|
|
$
|
195.2
|
|
|
$
|
193.4
|
|
|
$
|
1.8
|
|
|
0.9
|
%
|
As a percentage of total revenue
|
18.8
|
%
|
|
19.4
|
%
|
|
|
|
|
|
19.8
|
%
|
|
20.0
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
increase
in sales and marketing expense was primarily attributable to a $4.5 million increase in total compensation and commission costs, including stock-based compensation expense, partially offset by a $3.6 million decrease in marketing and channel program spending and a $2.0 million decrease in expense as a result of the conclusion of exclusive commercialization rights under a collaboration agreement during the second quarter of fiscal year 2016.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
increase
in sales and marketing expense was primarily attributable to a $9.6 million increase in total compensation and commission costs, including stock-based compensation expense, partially offset by a $6.8 million decrease in marketing and channel program spending and a $4.0 million decrease in expense 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
General and administrative expense
|
$
|
41.5
|
|
|
$
|
45.9
|
|
|
$
|
(4.4
|
)
|
|
(9.6
|
)%
|
|
$
|
81.3
|
|
|
$
|
86.4
|
|
|
$
|
(5.1
|
)
|
|
(5.9
|
)%
|
As a percentage of total revenue
|
8.3
|
%
|
|
9.6
|
%
|
|
|
|
|
|
8.2
|
%
|
|
9.0
|
%
|
|
|
|
|
Three Months Ended
March 31, 2017
compared with
Three Months Ended
March 31, 2016
The
decrease
in general and administrative expense was primarily attributable to the decrease in consulting and professional services fees related to assessing strategic alternatives and our transformation program.
Six Months Ended
March 31, 2017
compared with
Six Months Ended
March 31, 2016
The
decrease
in general and administrative expense was primarily attributable to the decrease in consulting and professional services fees related to assessing strategic alternatives and our transformation program.
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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Cost of revenue
|
$
|
17.2
|
|
|
$
|
16.3
|
|
|
$
|
0.9
|
|
|
5.4
|
%
|
|
$
|
32.8
|
|
|
$
|
32.0
|
|
|
$
|
0.8
|
|
|
2.5
|
%
|
Operating expenses
|
27.9
|
|
|
26.4
|
|
|
1.5
|
|
|
5.5
|
%
|
|
55.8
|
|
|
53.5
|
|
|
2.3
|
|
|
4.3
|
%
|
Total amortization expense
|
$
|
45.1
|
|
|
$
|
42.9
|
|
|
$
|
2.2
|
|
|
5.2
|
%
|
|
$
|
88.5
|
|
|
$
|
85.5
|
|
|
$
|
3.1
|
|
|
3.6
|
%
|
As a percentage of total revenue
|
9.0
|
%
|
|
9.0
|
%
|
|
|
|
|
|
9.0
|
%
|
|
8.9
|
%
|
|
|
|
|
The increase in total amortization of intangible assets for the three and
six months ended
March 31, 2017
, as compared to the three and
six months ended
March 31, 2016
, was primarily attributable to the amortization of 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Transition and integration costs
|
$
|
3.6
|
|
|
$
|
1.0
|
|
|
$
|
2.6
|
|
|
247.6
|
%
|
|
$
|
7.3
|
|
|
$
|
2.0
|
|
|
$
|
5.3
|
|
|
259.8
|
%
|
Professional service fees
|
3.0
|
|
|
1.2
|
|
|
1.8
|
|
|
148.5
|
%
|
|
8.0
|
|
|
2.6
|
|
|
5.4
|
|
|
207.3
|
%
|
Acquisition-related adjustments
|
(1.2
|
)
|
|
(1.0
|
)
|
|
(0.2
|
)
|
|
19.4
|
%
|
|
(0.9
|
)
|
|
(0.9
|
)
|
|
—
|
|
|
(2.4
|
)%
|
Total acquisition-related costs, net
|
$
|
5.4
|
|
|
$
|
1.2
|
|
|
$
|
4.2
|
|
|
339.1
|
%
|
|
$
|
14.4
|
|
|
$
|
3.7
|
|
|
$
|
10.7
|
|
|
288.8
|
%
|
As a percentage of total revenue
|
1.1
|
%
|
|
0.3
|
%
|
|
|
|
|
|
1.5
|
%
|
|
0.4
|
%
|
|
|
|
|
Included in transition and integration costs for the three and
six months ended
March 31, 2017
is
$2.5 million
and
$5.6 million
related to contingent retention payments for acquisitions closed during fiscal years 2016 and 2017.
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 litigation contingency reserves, costs related to a transition agreement for our Chief Executive Officer, asset impairment charge and gains or losses on the sale or disposition of certain non-strategic assets or product lines.
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 March 31,
|
|
2017
|
|
2016
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
Healthcare
|
$
|
577
|
|
|
$
|
593
|
|
|
$
|
1,170
|
|
|
$
|
—
|
|
|
$
|
1,170
|
|
|
$
|
613
|
|
|
$
|
8
|
|
|
$
|
621
|
|
|
$
|
—
|
|
|
$
|
621
|
|
Mobile
|
3,053
|
|
|
51
|
|
|
3,104
|
|
|
10,773
|
|
|
13,877
|
|
|
2,729
|
|
|
(652
|
)
|
|
2,077
|
|
|
46
|
|
|
2,123
|
|
Enterprise
|
388
|
|
|
257
|
|
|
645
|
|
|
—
|
|
|
645
|
|
|
(41
|
)
|
|
2,014
|
|
|
1,973
|
|
|
—
|
|
|
1,973
|
|
Imaging
|
225
|
|
|
36
|
|
|
261
|
|
|
—
|
|
|
261
|
|
|
(1
|
)
|
|
184
|
|
|
183
|
|
|
—
|
|
|
183
|
|
Corporate
|
332
|
|
|
1,318
|
|
|
1,650
|
|
|
2,308
|
|
|
3,958
|
|
|
1,691
|
|
|
—
|
|
|
1,691
|
|
|
61
|
|
|
1,752
|
|
Total
|
$
|
4,575
|
|
|
$
|
2,255
|
|
|
$
|
6,830
|
|
|
$
|
13,081
|
|
|
$
|
19,911
|
|
|
$
|
4,991
|
|
|
$
|
1,554
|
|
|
$
|
6,545
|
|
|
$
|
107
|
|
|
$
|
6,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
2017
|
|
2016
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
|
Personnel
|
|
Facilities
|
|
Total Restructuring
|
|
Other Charges
|
|
Total
|
Healthcare
|
$
|
2,561
|
|
|
$
|
870
|
|
|
$
|
3,431
|
|
|
$
|
—
|
|
|
$
|
3,431
|
|
|
$
|
1,314
|
|
|
$
|
8
|
|
|
$
|
1,322
|
|
|
$
|
—
|
|
|
$
|
1,322
|
|
Mobile
|
3,265
|
|
|
51
|
|
|
3,316
|
|
|
10,773
|
|
|
14,089
|
|
|
4,911
|
|
|
(50
|
)
|
|
4,861
|
|
|
46
|
|
|
4,907
|
|
Enterprise
|
812
|
|
|
864
|
|
|
1,676
|
|
|
—
|
|
|
1,676
|
|
|
1,043
|
|
|
2,034
|
|
|
3,077
|
|
|
—
|
|
|
3,077
|
|
Imaging
|
586
|
|
|
387
|
|
|
973
|
|
|
—
|
|
|
973
|
|
|
212
|
|
|
184
|
|
|
396
|
|
|
—
|
|
|
396
|
|
Corporate
|
1,000
|
|
|
1,982
|
|
|
2,982
|
|
|
3,463
|
|
|
6,445
|
|
|
2,069
|
|
|
2,708
|
|
|
4,777
|
|
|
61
|
|
|
4,838
|
|
Total
|
$
|
8,224
|
|
|
$
|
4,154
|
|
|
$
|
12,378
|
|
|
$
|
14,236
|
|
|
$
|
26,614
|
|
|
$
|
9,549
|
|
|
$
|
4,884
|
|
|
$
|
14,433
|
|
|
$
|
107
|
|
|
$
|
14,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and
six months ended
March 31, 2017
, we recorded restructuring charges of
$6.8 million
and
$12.4 million
, respectively. The restructuring charges for the
six months ended
March 31, 2017
included
$8.2 million
for severance cost related to approximately
220
terminated employees and
$4.2 million
charge for the closure of certain excess facility space including adjustment to sublease assumptions associated with prior abandoned facilities. These actions are part of our initiatives to reduce costs and optimize processes. We expect the remaining outstanding severance payments of
$2.6 million
will be substantially paid by the end of fiscal year
2017
. We expect 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.
In addition to the restructuring charges, during the three and
six months ended
March 31, 2017
, we recorded
$2.3 million
and
$3.5 million
, respectively, for costs related to a transition agreement for our Chief Executive Officer as communicated on our Form 8-K filed on November 17, 2016. The cash payments associated with the transition agreement are expected to be made during fiscal years 2018 and 2019. Also included in other charges was a non-cash impairment charge of
$10.8 million
resulting from our decision to cease use of a capitalized internally developed software during the three months ended
March 31, 2017
.
During the three and
six months ended
March 31, 2016
, we recorded restructuring charges of
$6.5 million
and
$14.4 million
, respectively. The restructuring charges for the
six months ended
March 31, 2016
included
$9.5 million
for severance costs related to approximately
200
terminated employees as part of our initiatives to reduce costs and optimize processes. The restructuring charges also included a
$4.9 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 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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Interest income
|
$
|
1.3
|
|
|
$
|
1.6
|
|
|
$
|
(0.3
|
)
|
|
(20.8
|
)%
|
|
$
|
2.3
|
|
|
$
|
2.5
|
|
|
$
|
(0.2
|
)
|
|
(7.8
|
)%
|
Interest expense
|
(37.9
|
)
|
|
(32.3
|
)
|
|
(5.5
|
)
|
|
17.1
|
%
|
|
(75.9
|
)
|
|
(62.2
|
)
|
|
(13.7
|
)
|
|
22.0
|
%
|
Other (expense) income, net
|
(19.6
|
)
|
|
—
|
|
|
(19.6
|
)
|
|
N/A
|
|
|
(20.2
|
)
|
|
(6.8
|
)
|
|
(13.4
|
)
|
|
197.7
|
%
|
Total other expense, net
|
$
|
(56.2
|
)
|
|
$
|
(30.7
|
)
|
|
$
|
(25.5
|
)
|
|
83.0
|
%
|
|
$
|
(93.8
|
)
|
|
$
|
(66.5
|
)
|
|
|
|
41.0
|
%
|
As a percentage of total revenue
|
11.2
|
%
|
|
6.4
|
%
|
|
|
|
|
|
9.5
|
%
|
|
6.9
|
%
|
|
|
|
|
Interest expense for the three and
six months ended
March 31, 2017
increased
$5.5 million
and
$13.7 million
, primarily driven by increase in interest expense as a result of the issuance of debt, including the 2024 Senior Notes issue in June 2016, the 2026 Senior Notes issued in December 2016 and the 1.25% 2025 Debentures in March 2017. These increases were partially offset by lower interest expense resulting from the early repayment of our Credit Facility in December 2015 and the partial repayment of 2020 Senior Notes in January 2017.
Other (expense) income, net
for the three and
six months ended
March 31, 2017
included debt extinguishment losses of $
18.6 million
primarily related to the partial repayment of our 2020 Senior Notes.
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
|
|
Six Months Ended
|
|
Dollar
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Provision for income taxes
|
$
|
9.1
|
|
|
$
|
9.2
|
|
|
$
|
(0.1
|
)
|
|
(1.1
|
)%
|
|
$
|
19.5
|
|
|
$
|
17.0
|
|
|
$
|
2.5
|
|
|
14.6
|
%
|
Effective income tax rate
|
(37.1
|
)%
|
|
420.4
|
%
|
|
|
|
|
|
(51.0
|
)%
|
|
(810.5
|
)%
|
|
|
|
|
The effective income tax rate was
(37.1)%
and
(51.0)%
for the three and
six months ended
March 31, 2017
, 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.
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
|
|
Six Months Ended
|
|
Change
|
|
Percent
Change
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Segment Revenues
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
$
|
238.5
|
|
|
$
|
244.4
|
|
|
$
|
(5.9
|
)
|
|
(2.4
|
)%
|
|
$
|
477.7
|
|
|
$
|
492.5
|
|
|
$
|
(14.8
|
)
|
|
(3.0
|
)%
|
Mobile
|
100.2
|
|
|
91.8
|
|
|
8.4
|
|
|
9.1
|
%
|
|
192.0
|
|
|
188.2
|
|
|
3.8
|
|
|
2.0
|
%
|
Enterprise
|
119.4
|
|
|
94.4
|
|
|
24.9
|
|
|
26.4
|
%
|
|
232.3
|
|
|
183.2
|
|
|
49.1
|
|
|
26.8
|
%
|
Imaging
|
53.0
|
|
|
56.7
|
|
|
(3.7
|
)
|
|
(6.5
|
)%
|
|
105.1
|
|
|
118.4
|
|
|
(13.2
|
)
|
|
(11.2
|
)%
|
Total segment revenues
|
$
|
511.1
|
|
|
$
|
487.4
|
|
|
$
|
23.7
|
|
|
4.9
|
%
|
|
$
|
1,007.1
|
|
|
$
|
982.3
|
|
|
$
|
24.8
|
|
|
2.5
|
%
|
Less: acquisition related revenues adjustments
|
(11.5
|
)
|
|
(8.7
|
)
|
|
(2.8
|
)
|
|
32.2
|
%
|
|
(19.9
|
)
|
|
(17.4
|
)
|
|
(2.4
|
)
|
|
14.0
|
%
|
Total revenues
|
$
|
499.6
|
|
|
$
|
478.7
|
|
|
$
|
20.9
|
|
|
4.4
|
%
|
|
$
|
987.2
|
|
|
$
|
964.8
|
|
|
$
|
22.4
|
|
|
2.3
|
%
|
Segment Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
$
|
83.3
|
|
|
$
|
78.4
|
|
|
$
|
4.9
|
|
|
6.3
|
%
|
|
$
|
161.9
|
|
|
$
|
159.6
|
|
|
$
|
2.3
|
|
|
1.4
|
%
|
Mobile
|
40.4
|
|
|
33.4
|
|
|
7.0
|
|
|
21.0
|
%
|
|
73.9
|
|
|
67.2
|
|
|
6.7
|
|
|
10.0
|
%
|
Enterprise
|
41.8
|
|
|
34.1
|
|
|
7.7
|
|
|
22.6
|
%
|
|
73.7
|
|
|
60.3
|
|
|
13.5
|
|
|
22.3
|
%
|
Imaging
|
18.5
|
|
|
22.2
|
|
|
(3.7
|
)
|
|
(16.7
|
)%
|
|
36.1
|
|
|
49.2
|
|
|
(13.1
|
)
|
|
(26.6
|
)%
|
Total segment profit
|
$
|
184.0
|
|
|
$
|
168.1
|
|
|
$
|
15.9
|
|
|
9.5
|
%
|
|
$
|
345.6
|
|
|
$
|
336.3
|
|
|
$
|
9.4
|
|
|
2.8
|
%
|
Segment Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
34.9
|
%
|
|
32.1
|
%
|
|
2.9
|
|
|
|
|
33.9
|
%
|
|
32.4
|
%
|
|
1.5
|
|
|
|
Mobile
|
40.3
|
%
|
|
36.4
|
%
|
|
3.9
|
|
|
|
|
38.5
|
%
|
|
35.7
|
%
|
|
2.8
|
|
|
|
Enterprise
|
35.0
|
%
|
|
36.1
|
%
|
|
(1.1
|
)
|
|
|
|
31.7
|
%
|
|
32.9
|
%
|
|
(1.2
|
)
|
|
|
Imaging
|
34.8
|
%
|
|
39.1
|
%
|
|
(4.3
|
)
|
|
|
|
34.3
|
%
|
|
41.6
|
%
|
|
(7.2
|
)
|
|
|
Total segment profit margin
|
36.0
|
%
|
|
34.5
|
%
|
|
1.5
|
|
|
|
|
34.3
|
%
|
|
34.2
|
%
|
|
0.1
|
|
|
|
|
|
(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
March 31, 2017
|
|
•
|
Healthcare segment revenue
decreased
$5.9 million
for the
three months ended
March 31, 2017
, as compared to the
three months ended
March 31, 2016
. Product and licensing revenue decreased $5.3 million driven by lower revenue from our Dragon Medical perpetual license sales as we transition from perpetual to cloud offerings. Professional services and hosting revenue decreased $0.3 million due to continued erosion in our transcription services partially offset by strong revenue growth in our Dragon Medical cloud services.
|
|
|
•
|
Mobile segment revenue
increased
$8.4 million
for the
three months ended
March 31, 2017
, as compared to the
three months ended
March 31, 2016
. Professional services and hosting revenue increased $8.4 million driven primarily by a continued trend toward cloud-based services in our automotive solutions and strength in our mobile operator services.
|
|
|
•
|
Enterprise segment revenue
increased
$24.9 million
for the
three months ended
March 31, 2017
, as compared to the
three months ended
March 31, 2016
. Product and licensing revenue increased $12.5 million primarily related to revenue from recent acquisitions and growth in our embedded speech license sales. Professional services and hosting revenue increased $10.3 million driven by strong revenue across many of our omni-channel cloud offerings, including revenue from a recent acquisition. Maintenance and support revenue increased $2.1 million.
|
|
|
•
|
Imaging segment revenues
decreased
$3.7 million
for the
three months ended
March 31, 2017
, as compared to the
three months ended
March 31, 2016
, primarily driven by lower sales of our MFP products.
|
Six Months Ended
March 31, 2017
|
|
•
|
Healthcare segment revenue
decreased
$14.8 million
for the
six months ended
March 31, 2017
, as compared to the
six months ended
March 31, 2016
. Product and licensing revenue decreased $19.9 million driven by lower revenue from our Dragon Medical perpetual license sales as we transition from perpetual to cloud offerings. Hosting revenue decreased $2.4 million due to continued erosion in our transcription services partially offset by the growth in our Dragon Medical cloud services. These decreases were partially offset by a $6.8 million increase in professional services revenue driven by a recent acquisition.
|
|
|
•
|
Mobile segment revenue
increased
$3.8 million
for the
six months ended
March 31, 2017
, as compared to the
six months ended
March 31, 2016
. Professional services and hosting revenue increased $14.3 million driven primarily by a continued trend toward cloud-based services in our automotive solutions and strength in our mobile operator services. Product and licensing revenue decreased $8.8 million and maintenance and support revenue decreased $1.7 million, due 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.
|
|
|
•
|
Enterprise segment revenue
increased
$49.1 million
for the
six months ended
March 31, 2017
, as compared to the
six months ended
March 31, 2016
. Professional services and hosting revenue increased $26.0 million driven by strong revenue across many of our omni-channel offerings, including revenue from a recent acquisition. Product and licensing revenue increased $19.2 million primarily related to revenue from recent acquisitions.
|
|
|
•
|
Imaging segment revenues
decreased
$13.2 million
for the
six months ended
March 31, 2017
, as compared to the
six months ended
March 31, 2016
, primarily driven by lower sales of our MFP products.
|
Segment Profit
Three Months Ended
March 31, 2017
|
|
•
|
Healthcare segment profit for the
three months ended
March 31, 2017
increased
6.3%
from the same period last year, primarily driven by lower operating expenses. Segment profit margin increased
2.9%
percentage points, from
32.1%
for the same period last year to
34.9%
during the current period. The increase in segment profit margin was primarily driven by lower operating expenses with improvements of 2.3 percentage point and higher gross margins of 0.6 percentage point.
|
|
|
•
|
Mobile segment profit for the
three months ended
March 31, 2017
increased
21.0%
from the same period last year, primarily driven by higher gross profit. Segment profit margin increased
3.9%
percentage points, from
36.4%
for the same period last year to
40.3%
during the current period. The increase in segment profit margin was primarily driven by our cost savings and process optimization initiatives with improvements of 2.9 percentage point due to lower operating expenses and a 1.0 percentage point improvement in gross margin driven by margin expansion in our cloud-based services.
|
|
|
•
|
Enterprise segment profit for the
three months ended
March 31, 2017
increased
22.6%
from the same period last year, driven by higher gross profit due to increased revenue. Segment profit margin decreased
1.1%
percentage points, from
36.1%
for the same period last year to
35.0%
in the current period. The decrease in segment profit margin was primarily driven by lower gross margin resulting from a shift in mix towards a higher percentage of professional services and hosting revenue.
|
|
|
•
|
Imaging segment profit for the
three months ended
March 31, 2017
decreased
16.7%
from the same period last year, primarily driven by lower revenue. Segment profit margin decreased
4.3%
percentage points, from
39.1%
for the same period last year to
34.8%
during the current period. The decrease in segment profit margin was primarily driven by lower revenues and higher research and development expenses.
|
Six Months Ended
March 31, 2017
|
|
•
|
Healthcare segment profit for the
six months ended
March 31, 2017
increased
1.4%
from the same period last year, primarily driven by lower operating expenses. Segment profit margin increased
1.5
percentage points, from
32.4%
for the same period last year to
33.9%
during the current period. The increase in segment profit margin was primarily driven by lower operating expenses with improvements of 1.5 percentage point.
|
|
|
•
|
Mobile segment profit for the
six months ended
March 31, 2017
increased
10.0%
from the same period last year, primarily driven by higher gross profit and lower operating expenses. Segment profit margin increased
2.8
percentage
|
points, from
35.7%
for the same period last year to
38.5%
during the current period. The increase in segment profit margin was primarily driven by our cost savings and process optimization initiatives with improvements of 1.9 percentage point due to lower operating expenses and a 0.9 percentage point improvement in gross margin driven by margin expansion in our cloud-based services.
|
|
•
|
Enterprise segment profit for the
six months ended
March 31, 2017
increased
22.3%
from the same period last year, driven by higher gross profit, partially offset by higher operating expenses from a recent acquisition. Segment profit margin decreased
1.2
percentage points, from
32.9%
for the same period last year to
31.7%
in the current period. The decrease in segment profit margin was primarily driven by lower gross margin resulting from a shift in mix towards a higher percentage of professional services and hosting revenue.
|
|
|
•
|
Imaging segment profit for the
six months ended
March 31, 2017
decreased
26.6%
from the same period last year, primarily driven by lower revenue. Segment profit margin decreased
7.2
percentage points, from
41.6%
for the same period last year to
34.3%
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
$831.2 million
at
March 31, 2017
, an
increase
of
$223.1 million
as compared to
$608.1 million
at
September 30, 2016
. The higher level of cash and cash equivalents and marketable securities at
March 31, 2017
was a result of having received $226.6 million in net proceeds from the issuance of the 1.25% 2025 Debentures after giving effect to the repurchase of our common stock for
$99.1 million
and repayment of $17.8 million in aggregate principal on our 2031 Debentures. Our working capital was
$185.1 million
as of
March 31, 2017
, as compared to working capital of
$347.7 million
as of
September 30, 2016
. As of
March 31, 2017
, our total accumulated deficit was
$486.8 million
. We do not expect our accumulated deficit to impact our future ability to operate the business given our cash balance and strong operating cash flow positions.
Cash and cash equivalents and marketable securities held by our international operations totaled
$129.9 million
at
March 31, 2017
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
$377.7 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
six months ended
March 31, 2017
, was
$250.3 million
, a decrease of
$50.7 million
, as compared to cash provided by operating activities of
$301.1 million
for the
six months ended
March 31, 2016
. The net decrease was primarily driven by the following factors:
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•
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A decrease of
$40.7 million
in cash flows generated by changes in working capital excluding deferred revenue;
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•
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A decrease in cash flows of
$5.8 million
from deferred revenue. Deferred revenue contributed cash inflow of
$73.0 million
for the
six months ended
March 31, 2017
, as compared to
$78.8 million
for the
six months ended
March 31, 2016
. The deferred revenue growth in the
six months ended
March 31, 2017
was driven primarily by our hosting solutions, most notably for our automotive connected services in our Mobile segment; and
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•
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A decrease in cash flows of
$4.2 million
resulting from higher net loss, exclusive of non-cash adjustment items.
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Cash Used in Investing Activities
Cash used in investing activities for the
six months ended
March 31, 2017
, was
$176.0 million
, an increase of
$116.3 million
, as compared to cash used in investing activities of
$59.7 million
for the
six months ended
March 31, 2016
. The net increase was primarily driven by the following factors:
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•
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An increase in cash outflows of
$121.1 million
for purchases of marketable securities and other investments;
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|
•
|
An increase in cash outflows of
$45.6 million
for business and asset acquisitions; and
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|
•
|
Partially offset by an increase in cash inflows of
$37.0 million
from the sale of marketable securities and other investments.
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Cash Provided (Used) in Financing Activities
Cash provided by financing activities for the
six months ended
March 31, 2017
, was
$70.9 million
, a increase of
$542.9 million
, as compared to cash used in financing activities of
$472.0 million
for the
six months ended
March 31, 2016
. The net increase was primarily driven by the following factors:
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•
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A decrease in cash outflows of
$475.3 million
related to share repurchases. During the
six months ended
March 31, 2017
, we repurchased
5.8 million
shares of our common stock for
$99.1 million
under our share repurchase program, as compared to
9.4 million
shares repurchased under our share repurchase program and
26.3 million
shares repurchased from the Icahn Group for total cash outflows of
$574.3 million
during the same period in the prior year;
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•
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An increase in cash inflows of $53.0 million from debt activities. During the
six months ended
March 31, 2017
, the net cash inflows from debt activities was $204.9 million including approximately
$495.0 million
net proceeds from the issuance of our 2026 Senior Notes, approximately
$343.6 million
net proceeds from the issuance of our 1.25% 2025 Debentures, offset by the repurchase of
$600.0 million
in aggregate principal of our 2020 Senior Notes and the repurchase of $17.8 million in aggregate principal of our 2031 Debentures. During the
six months ended
March 31, 2016
, the net cash inflows from debt activities was $151.9 million including
$676.5 million
in aggregate principal from the issuance of our 1.0% 2035 Debentures offset by the $472.5 million repayment of our term loan and the repurchase of $38.3 million in aggregate principal on our 2031 Debentures; and
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•
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A decrease in cash outflows of
$13.6 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
six months ended
March 31, 2017
as compared to the same period in the prior year.
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Debt and Credit Facilities
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.
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 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
$18.4 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.
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”) 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
March 31, 2017
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 (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 remain outstanding. As of
March 31, 2017
, 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. As of
March 31, 2017
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.
1.25% 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 intend to use the remaining net proceeds, together with cash on hand, to repurchase, redeem, retire or otherwise repay all of our remaining 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.
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
March 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
March 31, 2017
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
March 31, 2017
, issued letters of credit in the aggregate amount of
$4.5 million
were treated as issued and outstanding when calculating the borrowing availability under the Revolving Credit Facility. As of
March 31, 2017
, we had
$238.0 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. In March 2017, in connection with the issuance of our 1.25% 2025 Debentures, we used a portion of the net proceeds to repurchase
5.8 million
shares of our common stock for
$99.1 million
under the approved program. Since the commencement of the program, we have repurchased
46.5 million
shares for
$806.6 million
. These shares were retired upon repurchase. Approximately
$193.4 million
remained available for share repurchases as of
March 31, 2017
pursuant to our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors.
Off-Balance Sheet Arrangements, Contractual Obligations
Contractual Obligations
The following table outlines our contractual payment obligations (dollars in millions):
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Payments Due by Fiscal Year Ended September 30,
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Contractual Obligations
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Total
|
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2017
|
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2018 and 2019
|
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2020 and 2021
|
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Thereafter
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Convertible debentures
(1)
|
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$
|
1,668.1
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|
|
$
|
—
|
|
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$
|
377.7
|
|
|
$
|
—
|
|
|
$
|
1,290.4
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Senior notes
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|
1,250.0
|
|
|
—
|
|
|
—
|
|
|
450.0
|
|
|
800.0
|
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Interest payable on long-term debt
(2)
|
|
605.1
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|
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44.2
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|
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176.0
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|
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146.6
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|
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238.3
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Letters of credit
(3)
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4.5
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0.6
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3.9
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—
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—
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Lease obligations and other liabilities:
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Operating leases
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176.3
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|
|
10.7
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|
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43.8
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31.3
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90.5
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Operating leases under restructuring
(4)
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57.9
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5.9
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16.2
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12.4
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23.4
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Purchase commitments
(5)
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36.6
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|
6.6
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12.0
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14.4
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|
3.6
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Total contractual cash obligations
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$
|
3,798.5
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|
|
$
|
68.0
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|
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$
|
629.6
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$
|
654.7
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$
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2,446.2
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(1)
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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.
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(2)
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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%, under 1.25% 2025 Debentures at a rate of 1.25% and under 1.5% 2035 Debentures at a rate of 1.5%. Interest per annum is due and payable semi-annually on the 5.625% Senior Notes at a rate of 5.625%, 5.375% Senior Notes at a rate of 5.375%, and 6.0% Senior Notes at a rate of 6.0%.
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(3)
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Letters of Credit are in place primarily to secure future operating lease payments.
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(4)
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Obligations include contractual lease commitments related to facilities that were part of restructuring plans. As of
March 31, 2017
, we have subleased certain of the facilities with total sublease income of
$52.6 million
through fiscal year
2025
.
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(5)
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Purchase commitments include non-cancelable purchase commitments for property and equipment, inventory, and services in the normal course of business. These amounts also include arrangements that require a minimum purchase commitment by us.
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The gross liability for unrecognized tax benefits as of
March 31, 2017
was
$28.3 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
$22.3 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
$21.4 million
, will be recorded as compensation expense over the applicable employment period.
Off-Balance Sheet Arrangements
Through
March 31, 2017
, 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.
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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
March 31, 2017
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 cash flow 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
$69.3 million
at
March 31, 2017
. 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
March 31, 2017
, we held approximately
$831.2 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
$7.1 million
per annum, based on the
March 31, 2017
reported balances of our investment accounts.
At
March 31, 2017
, we had no outstanding debt exposed to variable interest rates.
2031 Debentures, 1.5% 2035 Debentures, 1.0% 2035 Debentures and 1.25% 2025 Debentures
The fair values of our 2031 Debentures, 1.5% 2035 Debentures, 1.0% 2035 Debentures and 1.25% 2025 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
March 31, 2017
was
$380.5 million
for the 2031 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
March 31, 2017
was approximately
$202.4 million
. A 10% increase in the stock price over the
March 31, 2017
closing price of
$17.31
would cause an estimated
$1.0 million
increase to the fair value and an
$20.2 million
increase to the conversion value of the debentures. The fair value at
March 31, 2017
was
$272.1 million
for the 1.5% 2035 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
March 31, 2017
was approximately
$196.4 million
. A 10% increase in the stock price over the
March 31, 2017
closing price of
$17.31
would cause an estimated
$11.0 million
increase to the fair value and a
$19.6 million
increase to the conversion value of the debentures. The fair value at
March 31, 2017
was
$643.9 million
for the 1.0% 2035 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
March 31, 2017
was approximately
$430.2 million
. A 10% increase in the stock price over the
March 31, 2017
closing price of
$17.31
would cause an estimated
$23.5 million
increase to the fair value and a
$43.0 million
increase to the conversion value of the debentures. The fair value at
March 31, 2017
was
$349.9 million
for the 1.25% 2025 Debentures, based on an average of the bid and ask prices on that day. The conversion value on
March 31, 2017
was approximately
$272.7 million
. A 10% increase in the stock price over the
March 31, 2017
closing price of
$17.31
would cause an estimated
$19.9 million
increase to the fair value and a
$27.3 million
increase to the conversion value of the debentures.
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Item 4.
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Controls and Procedures
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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.