UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-53413
_____________________________________________________________
Rovi Corporation
(Exact name of registrant as specified in its charter)_____________________________________________________________
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| | |
Delaware | | 26-1739297 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2830 De La Cruz Boulevard, Santa Clara, CA | | 95050 |
(Address of principal executive offices) | | (Zip Code) |
(408) 562-8400
(Registrant's telephone number, including area code)
_____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class | | Outstanding as of October 23, 2015 |
Common Stock | | 82,645,267 |
ROVI CORPORATION AND SUBSIDIARIES
INDEX
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ITEM 1. | | |
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ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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ITEM 1. | | |
ITEM 1A. | | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
ITEM 5. | | |
ITEM 6. | | |
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PART I. Financial Information
Item 1. Financial Statements
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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| | | | | | | |
| September 30, 2015 |
| December 31, 2014 |
ASSETS | (unaudited) |
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Current assets: |
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|
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Cash and cash equivalents | $ | 65,177 |
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| $ | 154,568 |
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Short-term marketable securities | 82,608 |
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| 183,074 |
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Accounts receivable, net | 66,398 |
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| 83,514 |
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Deferred tax assets, net | 10,435 |
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| 18,553 |
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Prepaid expenses and other current assets | 16,004 |
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| 12,851 |
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Total current assets | 240,622 |
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| 452,560 |
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Long-term marketable securities | 141,706 |
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| 131,378 |
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Property and equipment, net | 32,726 |
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| 37,227 |
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Intangible assets, net | 405,817 |
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| 463,348 |
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Goodwill | 1,343,706 |
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| 1,343,652 |
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Other long-term assets | 19,254 |
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| 17,225 |
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Total assets | $ | 2,183,831 |
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| $ | 2,445,390 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses | $ | 59,882 |
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| $ | 83,208 |
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Deferred revenue | 18,927 |
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| 18,399 |
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Current portion of long-term debt | 7,000 |
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| 302,375 |
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Total current liabilities | 85,809 |
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| 403,982 |
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Taxes payable, less current portion | 8,757 |
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| 10,100 |
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Deferred revenue, less current portion | 12,001 |
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| 15,722 |
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Long-term debt, less current portion | 969,180 |
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| 804,557 |
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Long-term deferred tax liabilities, net | 75,816 |
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| 80,751 |
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Other long-term liabilities | 38,563 |
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| 24,014 |
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Total liabilities | 1,190,126 |
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| 1,339,126 |
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Commitments and contingencies (Note 9) |
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Stockholders' equity: |
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Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding | — |
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| — |
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Common stock, $0.001 par value, 250,000 shares authorized; 131,038 shares issued and 82,648 shares outstanding as of September 30, 2015, and 130,627 shares issued and 91,729 shares outstanding as of December 31, 2014 | 131 |
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| 131 |
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Treasury stock, 48,390 shares and 38,898 shares at September 30, 2015 and December 31, 2014, respectively, at cost | (1,163,386 | ) |
| (1,013,218 | ) |
Additional paid-in capital | 2,408,312 |
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| 2,339,817 |
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Accumulated other comprehensive loss | (5,603 | ) |
| (5,307 | ) |
Accumulated deficit | (245,749 | ) |
| (215,159 | ) |
Total stockholders’ equity | 993,705 |
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| 1,106,264 |
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Total liabilities and stockholders’ equity | $ | 2,183,831 |
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| $ | 2,445,390 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 |
| 2014 | | 2015 | | 2014 |
Revenues | $ | 114,882 |
|
| $ | 128,582 |
| | $ | 376,727 |
| | $ | 408,094 |
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Costs and expenses: |
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Cost of revenues, excluding amortization of intangible assets | 24,608 |
|
| 23,437 |
| | 78,407 |
| | 81,973 |
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Research and development | 23,945 |
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| 25,369 |
| | 79,087 |
| | 79,859 |
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Selling, general and administrative | 32,148 |
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| 33,172 |
| | 110,002 |
| | 105,576 |
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Depreciation | 4,280 |
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| 4,256 |
| | 13,098 |
| | 13,207 |
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Amortization of intangible assets | 19,189 |
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| 20,158 |
| | 57,789 |
| | 58,178 |
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Restructuring and asset impairment charges | 218 |
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| 2,722 |
| | 1,757 |
| | 8,404 |
|
Gain on sale of patents | — |
| | (500 | ) | | — |
| | (500 | ) |
Total costs and expenses | 104,388 |
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| 108,614 |
| | 340,140 |
| | 346,697 |
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Operating income from continuing operations | 10,494 |
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| 19,968 |
| | 36,587 |
| | 61,397 |
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Interest expense | (11,348 | ) |
| (13,962 | ) | | (35,421 | ) | | (40,721 | ) |
Interest income and other, net | 586 |
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| — |
| | 1,089 |
| | 1,835 |
|
Loss on interest rate swaps | (11,787 | ) |
| (229 | ) | | (17,106 | ) | | (7,565 | ) |
Loss on debt extinguishment | (2,695 | ) |
| (5,159 | ) | | (2,815 | ) | | (5,159 | ) |
Loss on debt modification | — |
| | (3,775 | ) | | — |
| | (3,775 | ) |
(Loss) income from continuing operations before income taxes | (14,750 | ) |
| (3,157 | ) | | (17,666 | ) | | 6,012 |
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Income tax expense | 3,708 |
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| 3,458 |
| | 12,924 |
| | 13,658 |
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Loss from continuing operations, net of tax | (18,458 | ) |
| (6,615 | ) | | (30,590 | ) | | (7,646 | ) |
Loss from discontinued operations, net of tax | — |
|
| (417 | ) | | — |
| | (56,291 | ) |
Net loss | $ | (18,458 | ) |
| $ | (7,032 | ) | | $ | (30,590 | ) | | $ | (63,937 | ) |
| | | | | | | |
Basic loss per share: |
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|
| | | | |
Continuing operations | $ | (0.22 | ) |
| $ | (0.07 | ) | | $ | (0.36 | ) | | $ | (0.08 | ) |
Discontinued operations | — |
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| (0.01 | ) | | — |
| | (0.62 | ) |
Basic loss per share | $ | (0.22 | ) |
| $ | (0.08 | ) | | $ | (0.36 | ) | | $ | (0.70 | ) |
Weighted average shares used in computing basic loss per share | 82,404 |
| | 91,468 |
| | 85,297 |
| | 91,975 |
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Diluted loss per share: |
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| | | | |
Continuing operations | $ | (0.22 | ) |
| $ | (0.07 | ) | | $ | (0.36 | ) | | $ | (0.08 | ) |
Discontinued operations | — |
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| (0.01 | ) | | — |
| | (0.62 | ) |
Diluted loss per share | $ | (0.22 | ) |
| $ | (0.08 | ) | | $ | (0.36 | ) | | $ | (0.70 | ) |
Weighted average shares used in computing diluted loss per share | 82,404 |
| | 91,468 |
| | 85,297 |
| | 91,975 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net loss | $ | (18,458 | ) | | $ | (7,032 | ) | | $ | (30,590 | ) | | $ | (63,937 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment | 288 |
| | (741 | ) | | (230 | ) | | (221 | ) |
Unrealized (losses) gains on marketable securities | (20 | ) | | (131 | ) | | (66 | ) | | 41 |
|
Other comprehensive income (loss), net of tax | 268 |
| | (872 | ) | | (296 | ) | | (180 | ) |
Comprehensive loss | $ | (18,190 | ) | | $ | (7,904 | ) | | $ | (30,886 | ) | | $ | (64,117 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Nine Months Ended September 30, |
| 2015 | | 2014 |
Cash flows from operating activities: | | | |
Net loss | $ | (30,590 | ) | | $ | (63,937 | ) |
Adjustments to reconcile net loss to net cash provided by operations: | | | |
Loss from discontinued operations, net of tax | — |
| | 56,291 |
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Depreciation | 13,098 |
| | 13,207 |
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Amortization of intangible assets | 57,789 |
| | 58,178 |
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Asset impairment charge | — |
| | 1,115 |
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Amortization of convertible note discount and note issuance costs | 10,462 |
| | 12,993 |
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Decrease in fair value of interest rate swaps, net of settlements | 14,055 |
| | 285 |
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Loss on debt extinguishment | 2,815 |
| | 5,159 |
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Loss on debt modification | — |
| | 3,775 |
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Equity-based compensation | 31,044 |
| | 31,818 |
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Deferred income taxes | 3,676 |
| | (4,458 | ) |
Other operating, net | 4,182 |
| | 4,245 |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 16,429 |
| | 26,620 |
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Prepaid expenses and other current assets and other long-term assets | (2,230 | ) | | 3,722 |
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Accounts payable and accrued expenses and other long-term liabilities | (16,652 | ) | | (24,276 | ) |
Accrued income taxes | 153 |
| | 4,316 |
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Deferred revenue | (3,193 | ) | | 21,569 |
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Net cash provided by operating activities of continuing operations | 101,038 |
| | 150,622 |
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Net cash used in operating activities of discontinued operations | (199 | ) | | (5,300 | ) |
Net cash provided by operating activities | 100,839 |
| | 145,322 |
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Cash flows from investing activities: | | | |
Purchases of short- and long-term marketable securities | (169,986 | ) | | (229,255 | ) |
Sales or maturities of short- and long-term marketable securities | 258,430 |
| | 356,214 |
|
Purchases of property and equipment | (8,345 | ) | | (13,891 | ) |
Payments for acquisitions, net of cash acquired | (5,140 | ) | | (60,707 | ) |
Payments for purchase of patents | — |
| | (28,000 | ) |
Proceeds from sale of business | — |
| | 50,298 |
|
Other investing, net | 3 |
| | (812 | ) |
Net cash provided by investing activities of continuing operations | 74,962 |
| | 73,847 |
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Net cash provided by investing activities of discontinued operations | — |
| | — |
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Net cash provided by investing activities | 74,962 |
| | 73,847 |
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Cash flows from financing activities: | | | |
Proceeds from revolving credit facility | 100,000 |
| | — |
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Payments on revolving credit facility | (100,000 | ) | | — |
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Proceeds from issuance of long-term debt, net of issuance costs | 335,616 |
| | 812,001 |
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Principal payments on long-term debt | (421,240 | ) | | (915,756 | ) |
Proceeds from sale of warrants | 31,326 |
| | — |
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Payments for purchase of call options | (64,825 | ) | | — |
|
Payments for purchase of treasury stock | (154,519 | ) | | (123,139 | ) |
Proceeds from exercise of options and employee stock purchase plan | 8,767 |
| | 16,784 |
|
Net cash used in financing activities of continuing operations | (264,875 | ) | | (210,110 | ) |
Net cash used in financing activities of discontinued operations | — |
| | — |
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Net cash used in financing activities | (264,875 | ) | | (210,110 | ) |
Effect of exchange rate changes on cash and cash equivalents | (317 | ) | | 53 |
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Net (decrease) increase in cash and cash equivalents | (89,391 | ) | | 9,112 |
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Cash and cash equivalents at beginning of period | 154,568 |
| | 156,487 |
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Cash and cash equivalents at end of period | $ | 65,177 |
| | $ | 165,599 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ROVI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and Significant Accounting Policies
Description of Business
Rovi Corporation (the “Company”) is focused on powering the discovery and personalization of digital entertainment. The Company provides a broad set of integrated solutions that are embedded in its customers' products and services, connecting consumers with entertainment. Content discovery solutions include interactive program guides (“IPGs”), search and recommendation services, cloud data services and the Company's extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). In addition to offering Company developed IPGs, customers may also license the Company's patents and deploy their own IPG or a third party IPG. The Company also offers advertising and analytics services. The Company's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are considered necessary to present fairly the results for the periods presented.
The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2015, for any future year, or for any other future interim period.
The accompanying Condensed Consolidated Financial Statements include the accounts of Rovi Corporation and subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary after the elimination of intercompany accounts and transactions.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported results of operations for the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Actual results may differ from those estimates.
Major Customers
Customers, and concentrations of customers, representing 10% or more of revenue were as follows:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
AT&T Inc. / DIRECTV | 14 | % | | 13 | % | | 13 | % | | 12 | % |
Aggregate of AT&T Inc. / DIRECTV, Comcast Corporation and Time Warner Cable Inc. | 27 | % | | 24 | % | | 25 | % | | 23 | % |
Substantially all of the Company's revenue from AT&T Inc. / DIRECTV is reported in the Intellectual Property Licensing segment. In September 2015, the Company's contract with Time Warner Cable Inc. was extended from September 2015 to March 2016. The Company's contracts with DIRECTV and Comcast Corporation expire in December 2015 and March 2016, respectively.
Related Party Transaction
During the three months ended June 30, 2015, the Company recorded $1.5 million in expenses related to the reimbursement of costs incurred by Engaged Capital, LLC (“Engaged”) in connection with the contested proxy election. Such costs were paid to Engaged during the three months ended September 30, 2015. Engaged is a related party as Glenn W. Welling is a member of the Company’s Board of Directors and is also a Principal and the Chief Investment Officer at Engaged.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (the "FASB") issued guidance to help entities evaluate whether fees paid in a cloud computing arrangement include a software license. Pursuant to this guidance, when a cloud computing arrangement includes a software license, the customer accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. When a cloud computing arrangement does not include a software license, the customer accounts for the arrangement as a service contract. The guidance is effective beginning January 1, 2016, with early adoption permitted. The guidance can be applied prospectively to all arrangements entered into or materially modified after the effective date or on a retrospective basis. The Company is currently evaluating the effect the guidance and transition alternatives will have on its Condensed Consolidated Financial Statements.
In April 2015, the FASB amended its existing accounting standards for the presentation of debt issuance costs in the statement of financial position. The amendments generally require that debt issuance costs related to a recognized debt obligation be presented as a deduction from the carrying amount of the debt obligation, with the associated amortization recognized as a component of interest expense. The Company expects to retrospectively apply the amendments in the first quarter of 2016. As of September 30, 2015 and December 31, 2014, the Company presented $10.8 million and $7.6 million, respectively, of debt issuance costs in Other long-term assets in the Condensed Consolidated Balance Sheets.
In May 2014, the FASB amended its existing accounting standards for revenue recognition. The amendments provide enhancements to the quality and consistency of how revenue is recognized while also improving comparability between the financial statements of companies applying U.S. GAAP and International Financial Reporting Standards. The core principle of the amended standard is for an entity to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for the Company in the first quarter of 2018 and may be applied on a full retrospective or modified retrospective approach. Early adoption is permitted beginning in the first quarter of 2017. The Company is currently evaluating the effect the amendments and transition alternatives will have on its Condensed Consolidated Financial Statements.
In April 2014, the FASB issued guidance which modified the criteria for identifying a discontinued operation. The modification limited the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. Application of the modified criteria on January 1, 2015 did not have a material effect on the Condensed Consolidated Financial Statements.
(2) Acquisitions
2014 Acquisitions
Fanhattan Acquisition
On October 31, 2014, the Company acquired Fanhattan, Inc. ("Fanhattan"), and its cloud-based Fan TV branded products, for $12.0 million in cash.
The unaudited pro forma financial information presented below (in thousands, except per share amounts) presents the combined results of operations as if the acquisition of Fanhattan had been completed on January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of
future results of operations. The unaudited pro forma financial information does not include any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the companies.
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| | | | | | | |
| Three Months Ended September 30, 2014 | | Nine Months Ended September 30, 2014 |
Net revenue | $ | 128,584 |
| | $ | 408,101 |
|
Operating income from continuing operations | $ | 15,778 |
| | $ | 50,606 |
|
Loss from continuing operations, net of tax | $ | (10,836 | ) | | $ | (18,474 | ) |
Basic loss per share from continuing operations | $ | (0.12 | ) | | $ | (0.20 | ) |
Diluted loss per share from continuing operations | $ | (0.12 | ) | | $ | (0.20 | ) |
Veveo Acquisition
On February 28, 2014, the Company acquired Veveo Inc. ("Veveo") for $67.6 million in cash, plus up to an additional $7.0 million in contingent consideration if certain sales and engineering goals are met. Veveo is a provider of intuitive and personalized entertainment discovery solutions. In April 2015, a portion of the contingency period concluded and $2.1 million of contingent consideration was paid as certain engineering goals were satisfied. In September 2015, the Company determined it was no longer probable that certain post-acquisition Veveo sales goals would be met and reduced the contingent consideration liability by $0.9 million which was recognized in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At December 31, 2014, the contingent consideration was included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets at its estimated fair value of $3.0 million.
Patent Acquisition
On July 7, 2014, the Company purchased a portfolio of patents for $28.0 million in cash. The portfolio includes approximately 500 issued and pending patents, with slightly more than half being issued U.S. patents. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over ten years.
2013 Acquisition
On March 8, 2013, the Company acquired IntegralReach Corporation ("IntegralReach") for $10.0 million in cash, plus up to an additional $3.0 million in contingent consideration if certain customer attainment goals were met. IntegralReach is an analytics technology company with core technology built for analyzing large amounts of data. In March 2015, the contingency period concluded and $3.0 million of contingent consideration was paid as certain customer attainment goals were satisfied.
(3) Discontinued Operations and Assets Held for Sale
DivX and MainConcept
During the fourth quarter of 2013, the Company determined it would pursue selling its DivX and MainConcept businesses. DivX and MainConcept were providers of high-quality video compression-decompression software and a software library that enabled the distribution of content across the internet and through recordable media, in either physical or streamed forms. On March 31, 2014, the Company sold its DivX and MainConcept businesses for $52.5 million in cash, plus up to $22.5 million in additional payments based on the achievement of certain revenue milestones over the three years following the acquisition. The first revenue milestone was measured on March 31, 2015, and no additional payment was received. The results of operations and cash flows of the DivX and MainConcept businesses have been presented in discontinued operations for all periods presented.
Nowtilus
In March 2014, the Company sold its Nowtilus business. Nowtilus was a provider of video-on-demand solutions in Germany. The results of operations and cash flows of the Nowtilus business have been presented in discontinued operations for all periods presented.
Results of Discontinued Operations
The results of discontinued operations consist of the following (in thousands):
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue: | | | | | | | |
DivX and MainConcept | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14,952 |
|
Nowtilus | — |
| | — |
| | — |
| | 100 |
|
Income (loss) from operations before tax: | | | | | | | |
DivX and MainConcept | — |
| | — |
| | — |
| | 1,873 |
|
Nowtilus | — |
| | — |
| | — |
| | (562 | ) |
Loss on disposal before tax | — |
| | (471 | ) | | — |
| | (55,119 | ) |
Income tax benefit (expense) | — |
| | 54 |
| | — |
| | (2,483 | ) |
Loss from discontinued operations, net of tax | $ | — |
| | $ | (417 | ) | | $ | — |
| | $ | (56,291 | ) |
(4) Investments
The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash | $ | 19,923 |
| | $ | — |
| | $ | — |
| | $ | 19,923 |
|
Cash equivalents - Money market funds | 45,254 |
| | — |
| | — |
| | 45,254 |
|
Cash and cash equivalents | $ | 65,177 |
| | $ | — |
| | $ | — |
| | $ | 65,177 |
|
| | | | | | | |
Auction rate securities | $ | 10,800 |
| | $ | — |
| | $ | (324 | ) | | $ | 10,476 |
|
Corporate debt securities | 76,752 |
| | 18 |
| | (98 | ) | | 76,672 |
|
Foreign government obligations | 11,954 |
| | 1 |
| | (16 | ) | | 11,939 |
|
U.S. Treasuries / Agencies | 125,208 |
| | 70 |
| | (51 | ) | | 125,227 |
|
Marketable securities | $ | 224,714 |
| | $ | 89 |
| | $ | (489 | ) | | $ | 224,314 |
|
Total cash, cash equivalents and marketable securities | | | | | | | $ | 289,491 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2014 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash | $ | 63,622 |
| | $ | — |
| | $ | — |
| | $ | 63,622 |
|
Cash equivalents - Money market funds | 90,946 |
| | — |
| | — |
| | 90,946 |
|
Cash and cash equivalents | $ | 154,568 |
| | $ | — |
| | $ | — |
| | $ | 154,568 |
|
| | | | | | | |
Auction rate securities | $ | 10,800 |
| | $ | — |
| | $ | (162 | ) | | $ | 10,638 |
|
Corporate debt securities | 98,379 |
| | 13 |
| | (116 | ) | | 98,276 |
|
Foreign government obligations | 10,551 |
| | — |
| | (4 | ) | | 10,547 |
|
U.S. Treasuries / Agencies | 195,077 |
| | 37 |
| | (123 | ) | | 194,991 |
|
Marketable securities | $ | 314,807 |
| | $ | 50 |
| | $ | (405 | ) | | $ | 314,452 |
|
Total cash, cash equivalents and marketable securities | | | | | | | $ | 469,020 |
|
The Company has designated its marketable securities as available-for-sale.
Fair value is estimated, and realized gains and losses are calculated, based on the specific identification method.
The Company attributes the unrealized losses on its auction rate securities to liquidity issues rather than credit issues. The Company’s auction rate securities at September 30, 2015 are comprised solely of AAA-rated investments in federally insured student loans. The Company continues to earn interest on its auction rate securities and has the ability and intent to hold these securities until they recover their amortized cost.
As of September 30, 2015, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands):
|
| | | | | | | |
| Amortized Cost | | Fair Value |
Due in 1 year or less | $ | 82,598 |
| | $ | 82,608 |
|
Due in 1-2 years | 129,728 |
| | 129,658 |
|
Due in more than 2 years | 12,388 |
| | 12,048 |
|
Total | $ | 224,714 |
| | $ | 224,314 |
|
(5) Fair Value Measurements
Fair Value Hierarchy
The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Fair value measurements are classified in a hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
Level 3. Unobservable inputs for the asset or liability.
Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | September 30, 2015 |
| | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets | | | | | | | |
| Cash and cash equivalents | | | | | | | |
| Money market funds | $ | 45,254 |
| | $ | 45,254 |
| | $ | — |
| | $ | — |
|
| Short-term marketable securities | | | | | | | |
| Corporate debt securities | 33,938 |
| | — |
| | 33,938 |
| | — |
|
| Foreign government obligations | 1,009 |
| | — |
| | 1,009 |
| | — |
|
| U.S. Treasuries / Agencies | 47,661 |
| | — |
| | 47,661 |
| | — |
|
| Long-term marketable securities | | | | | | | |
| Auction rate securities | 10,476 |
| | — |
| | — |
| | 10,476 |
|
| Corporate debt securities | 42,734 |
| | — |
| | 42,734 |
| | — |
|
| Foreign government obligations | 10,930 |
| | — |
| | 10,930 |
| | — |
|
| U.S. Treasuries / Agencies | 77,566 |
| | — |
| | 77,566 |
| | — |
|
| Total Assets | $ | 269,568 |
| | $ | 45,254 |
| | $ | 213,838 |
| | $ | 10,476 |
|
Liabilities | | | | | | | |
| Accounts payable and accrued expenses | | | | | | | |
| Interest rate swaps | (869 | ) | | — |
| | (869 | ) | | — |
|
| Other long-term liabilities | | | | | | | |
| Interest rate swaps | (29,974 | ) | | — |
| | (29,974 | ) | | — |
|
| Total Liabilities | $ | (30,843 | ) | | $ | — |
| | $ | (30,843 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2014 |
| | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets | | | | | | | |
| Cash and cash equivalents | | | | | | | |
| Money market funds | $ | 90,946 |
| | $ | 90,946 |
| | $ | — |
| | $ | — |
|
| Short-term marketable securities | | | | | | | |
| Corporate debt securities | 73,499 |
| | — |
| | 73,499 |
| | — |
|
| Foreign government obligations | 9,534 |
| | — |
| | 9,534 |
| | — |
|
| U.S. Treasuries / Agencies | 100,041 |
| | — |
| | 100,041 |
| | — |
|
| Long-term marketable securities | | |
| |
| |
|
| Auction rate securities | 10,638 |
| | — |
| | — |
| | 10,638 |
|
| Corporate debt securities | 24,777 |
| | — |
| | 24,777 |
| | — |
|
| Foreign government obligations | 1,013 |
| | — |
| | 1,013 |
| | — |
|
| U.S. Treasuries / Agencies | 94,950 |
| | — |
| | 94,950 |
| | — |
|
| Total Assets | $ | 405,398 |
| | $ | 90,946 |
| | $ | 303,814 |
| | $ | 10,638 |
|
Liabilities | | | | | | | |
| Accounts payable and accrued expenses | | | | | | | |
| IntegralReach contingent consideration | $ | (3,000 | ) | | $ | — |
| | $ | — |
| | $ | (3,000 | ) |
| Veveo contingent consideration | (3,000 | ) | | — |
| | — |
| | (3,000 | ) |
| Other long-term liabilities | | | | | | | |
| Interest rate swaps (1) | (16,788 | ) | | — |
| | (16,788 | ) | | — |
|
| Total Liabilities | $ | (22,788 | ) | | $ | — |
| | $ | (16,788 | ) | | $ | (6,000 | ) |
| |
(1) | As of December 31, 2014, the fair value of interest rate swaps in an asset position was $5.8 million and in a liability position was $22.6 million. These amounts have been recorded on a net basis in the Condensed Consolidated Balance Sheets. |
The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three and nine months ended September 30, 2015 and 2014, there were no transfers between levels of the fair value hierarchy.
Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 |
| Auction rate securities | | Veveo contingent consideration | | Auction rate securities | | IntegralReach contingent consideration | | Veveo contingent consideration |
Balance at beginning of period | $ | 10,584 |
| | $ | (860 | ) | | $ | 15,145 |
| | $ | (3,000 | ) | | $ | (5,700 | ) |
Gain included in earnings | — |
| | 860 |
| | — |
| | — |
| | — |
|
Unrealized loss included in accumulated other comprehensive loss | (108 | ) | | — |
| | (66 | ) | | — |
| | — |
|
Balance at end of period | $ | 10,476 |
| | $ | — |
| | $ | 15,079 |
| | $ | (3,000 | ) | | $ | (5,700 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2015 | | Nine Months Ended September 30, 2014 |
| Auction rate securities | | IntegralReach contingent consideration | | Veveo contingent consideration | | Auction rate securities | | IntegralReach contingent consideration | | Veveo contingent consideration |
Balance at beginning of period | $ | 10,638 |
| | $ | (3,000 | ) | | $ | (3,000 | ) | | $ | 14,903 |
| | $ | (3,000 | ) | | $ | — |
|
Purchases | — |
| | — |
| | — |
| | — |
| | — |
| | (5,700 | ) |
Settlements | — |
| | 3,000 |
| | 2,140 |
| | — |
| | — |
| | — |
|
Gain included in earnings | — |
| | — |
| | 860 |
| | — |
| | — |
| | — |
|
Unrealized (loss) gain included in accumulated other comprehensive loss | (162 | ) | | — |
| | — |
| | 176 |
| | — |
| | — |
|
Balance at end of period | $ | 10,476 |
| | $ | — |
| | $ | — |
| | $ | 15,079 |
| | $ | (3,000 | ) | | $ | (5,700 | ) |
Valuation Techniques
The fair value of marketable securities, other than auction rate securities, is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets, obtained from a third party pricing service.
The fair value of auction rate securities is estimated using a discounted cash flow analysis or other type of valuation model. These estimates are highly judgmental and consider, among other items, the likelihood of redemption, credit quality, duration, insurance wraps and expected future cash flows. These securities were also compared, when possible, to other observable market data with characteristics similar to the securities held by the Company.
The fair value of interest rate swaps is estimated using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments that reflect the nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company has considered the impact of its master netting agreements.
The fair value of contingent consideration related to acquisitions is estimated utilizing a probability-weighted discounted cash flow analysis based on the terms of the underlying purchase agreement. The significant unobservable inputs used in calculating the fair value of the contingent consideration include financial performance scenarios, the probability of achieving those scenarios and the discount rate.
Other Fair Value Disclosures
The carrying amount and fair value of debt issued by the Company were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Carrying Amount | | Fair Value (1) | | Carrying Amount | | Fair Value (1) |
2020 Convertible Notes | $ | 287,854 |
| | $ | 266,944 |
| | $ | — |
| | $ | — |
|
Term Loan Facility A | — |
| | — |
| | 124,580 |
| | 120,000 |
|
Term Loan Facility B | 688,326 |
| | 675,697 |
| | 693,227 |
| | 679,958 |
|
2040 Convertible Notes | — |
| | — |
| | 289,125 |
| | 291,354 |
|
Total | $ | 976,180 |
| | $ | 942,641 |
| | $ | 1,106,932 |
| | $ | 1,091,312 |
|
| |
(1) | The fair value of debt issued by the Company is estimated using quoted prices for the identical instrument in a market that is not active or an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued by the Company would be classified in Level 2 of the fair value hierarchy. |
(6) Goodwill and Intangible Assets, Net
Goodwill allocated to the reportable segments as of September 30, 2015 and changes in the carrying amount of goodwill during the nine months ended September 30, 2015 were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Balance at Beginning of Period | | Foreign Currency Translation | | Balance at End of Period |
Intellectual Property Licensing | | $ | 1,184,500 |
| | $ | — |
| | $ | 1,184,500 |
|
Product | | 159,152 |
| | 54 |
| | 159,206 |
|
Total | | $ | 1,343,652 |
| | $ | 54 |
| | $ | 1,343,706 |
|
Goodwill is evaluated for potential impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. Goodwill is evaluated annually for potential impairment at the reporting unit level as of the beginning of the fourth quarter.
Qualitative factors are first assessed to determine whether events or changes in circumstances indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a quantitative two-step impairment test is performed. In the first step of the quantitative impairment test, the fair value of each reporting unit is compared to its carrying amount. The fair value of the Intellectual Property Licensing reporting unit is estimated using an income approach and the fair value of the Product reporting unit is estimated by weighting the fair values derived from an income approach and a market approach. Under the income approach, the fair value of a reporting unit is estimated based on the present value of estimated future cash flow and considers estimated revenue growth rates, future operating margins and risk-adjusted discount rates. Under the market approach, fair value is estimated based on market multiples of revenue or earnings derived from comparable publicly-traded companies. The carrying amount of a reporting unit is determined by assigning the assets and liabilities, including goodwill and intangible assets, to the reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired and no further testing is performed.
If the fair value of the reporting unit is less than its carrying amount, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In the second step, the reporting unit's assets, including any unrecognized intangible assets, liabilities and non-controlling interests are measured at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same manner as if the reporting unit was being acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.
During the three months ended September 30, 2015, the extent and duration of the decline in our stock price, among other factors, indicated that it was more-likely-than-not that the fair value of our reporting units was less than their carrying amount and, as a result, a quantitative interim goodwill impairment test was performed. The results of the quantitative interim
goodwill impairment test indicated that the estimated fair value for each reporting unit exceeded its carrying amount and, accordingly, no impairment charges were recognized.
Intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | |
| September 30, 2015 |
| Gross | | Accumulated Amortization | | Net |
Developed technology and patents | $ | 875,187 |
| | $ | (495,084 | ) | | $ | 380,103 |
|
Existing contracts and customer relationships | 47,524 |
| | (35,712 | ) | | 11,812 |
|
Content databases and other | 58,912 |
| | (45,010 | ) | | 13,902 |
|
Trademarks / Tradenames | 8,300 |
| | (8,300 | ) | | — |
|
Total | $ | 989,923 |
| | $ | (584,106 | ) | | $ | 405,817 |
|
| | | | | |
| December 31, 2014 |
| Gross | | Accumulated Amortization | | Net |
Developed technology and patents | $ | 875,187 |
| | $ | (443,986 | ) | | $ | 431,201 |
|
Existing contracts and customer relationships | 47,524 |
| | (32,010 | ) | | 15,514 |
|
Content databases and other | 58,638 |
| | (42,005 | ) | | 16,633 |
|
Trademarks / Tradenames | 8,300 |
| | (8,300 | ) | | — |
|
Total | $ | 989,649 |
| | $ | (526,301 | ) | | $ | 463,348 |
|
As of September 30, 2015, future estimated amortization expense for finite-lived intangible assets was as follows (in thousands):
|
| | | |
Remainder of 2015 | $ | 19,190 |
|
2016 | 75,325 |
|
2017 | 73,131 |
|
2018 | 69,722 |
|
2019 | 67,895 |
|
Thereafter | 100,554 |
|
Total | $ | 405,817 |
|
(7) Restructuring and Asset Impairment Charges
In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 the Company conducted a review of its remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, the Company took cost reduction actions that resulted in restructuring and asset impairment charges. Amounts recorded in 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.
Components of the restructuring and asset impairment charges were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Present value of future minimum lease payments for abandoned office space | $ | 435 |
| | $ | 95 |
| | $ | 1,934 |
| | $ | 1,492 |
|
Severance | (217 | ) | | 2,627 |
| | (177 | ) | | 5,574 |
|
Asset impairment | — |
| | — |
| | — |
| | 1,115 |
|
Contract termination | — |
| | — |
| | — |
| | 223 |
|
Restructuring and asset impairment charges | $ | 218 |
| | $ | 2,722 |
| | $ | 1,757 |
| | $ | 8,404 |
|
As of September 30, 2015, $2.1 million in future minimum lease payments for abandoned office space and $0.4 million of severance remains accrued.
(8) Debt and Interest Rate Swaps
Details of the Company's financing arrangements were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | September 30, 2015 | | December 31, 2014 |
| Interest Rate | Issue Date | Maturity Date | Outstanding Principal | Carrying Amount | | Outstanding Principal | Carrying Amount |
2020 Convertible Notes | 0.500% | March 4, 2015 | March 1, 2020 | $ | 345,000 |
| $ | 287,854 |
| | $ | — |
| $ | — |
|
Term Loan Facility A | Variable | July 2, 2014 | July 2, 2019 | — |
| — |
| | 125,000 |
| 124,580 |
|
Term Loan Facility B | Variable | July 2, 2014 | July 2, 2021 | 691,250 |
| 688,326 |
| | 696,500 |
| 693,227 |
|
2040 Convertible Notes | 2.625% | March 17, 2010 | February 15, 2040 | — |
| — |
| | 290,990 |
| 289,125 |
|
Total Long-term debt | | | | $ | 1,036,250 |
| 976,180 |
| | $ | 1,112,490 |
| 1,106,932 |
|
Less: Current portion of long-term debt | | | | | 7,000 |
| | | 302,375 |
|
Long-term debt, less current portion | | | | | $ | 969,180 |
| | | $ | 804,557 |
|
2020 Convertible Notes
The Company issued $345.0 million in aggregate principal of 0.500% Convertible Senior Notes that mature March 1, 2020 (the “2020 Convertible Notes”) at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes were sold in a private placement and bear interest at a rate of 0.500% payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2015.
The 2020 Convertible Notes are convertible at an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes, which is equivalent to an initial conversion price of $28.9044 per share of common stock. Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
| |
• | during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; |
| |
• | during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or |
| |
• | on the occurrence of specified corporate events. |
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.
On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of the Company’s common stock over a specified observation period. On conversion, the Company will pay cash up to the aggregate principal amount of the 2020 Convertible Notes converted and deliver shares of the Company’s common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.
The initial conversion rate will be subject to adjustment in certain events, including certain events that constitute a make-whole fundamental change (as defined in the 2015 Indenture). In addition, if the Company undergoes a fundamental change (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require the Company to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The initial conversion rate is also subject to customary anti-dilution adjustments.
The 2020 Convertible Notes are not redeemable prior to maturity by the Company and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by the Company. The 2015 Indenture includes customary
terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.
The Company has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using the Company’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal amount of the 2020 Convertible Notes. The difference between the principal amount of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets include the following (in thousands):
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Liability Component | | | |
Principal outstanding | $ | 345,000 |
| | $ | — |
|
Less: Unamortized debt discount | 57,146 |
| | — |
|
Carrying amount | $ | 287,854 |
| | $ | — |
|
| | | |
Equity Component | $ | 63,854 |
| | $ | — |
|
Components of interest expense related to the 2020 Convertible Notes were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stated interest | $ | 417 |
| | $ | — |
| | $ | 992 |
| | $ | — |
|
Amortization of debt discount | 2,897 |
| | — |
| | 6,708 |
| | — |
|
Total interest expense | $ | 3,314 |
| | $ | — |
| | $ | 7,700 |
| | $ | — |
|
The Company incurred $9.3 million in transaction costs related to the issuance of the 2020 Convertible Notes which were allocated to liability and equity components based on the relative amounts calculated for the 2020 Convertible Notes at the date of issuance. Transaction costs of $7.6 million attributable to the liability component were recorded in Other long-term assets in the Condensed Consolidated Balance Sheets and are being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. Transaction costs of $1.7 million attributable to the equity component were recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets.
Purchased Call Options and Sold Warrants
Concurrent with the issuance of the 2020 Convertible Notes, the Company paid $64.8 million to purchase call options with respect to its common stock. The call options give the Company the right, but not the obligation, to purchase up to 11.9 million shares of the Company's common stock at a strike price of $28.9044 per share, which corresponds to the initial conversion price of the 2020 Convertible Notes, and are exercisable by the Company on conversion of the 2020 Convertible Notes. The call options are intended to reduce the potential dilution from conversion of the 2020 Convertible Notes. The purchased call options are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the purchased call options.
Concurrent with the issuance of the 2020 Convertible Notes, the Company received $31.3 million from the sale of warrants that provide the holder of the warrant the right, but not the obligation, to purchase up to 11.9 million shares of common stock at a strike price of $40.1450 per share. The warrants are exercisable beginning June 1, 2020 and can be settled in cash or shares at the Company's election. The warrants were entered into to offset the cost of the purchased call options. The warrants are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the warrants.
The amounts paid to purchase the call options and received to sell the warrants were recorded in Additional paid-in capital in the Condensed Consolidated Balance Sheets.
Senior Secured Credit Facility
On July 2, 2014, the Company, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (“Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (“Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). Loans under Term Loan Facility A bore interest, at the Company's option, at a rate equal to either the London Interbank Offering Rate ("LIBOR"), plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum. Loans under Term Loan Facility B bear interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum. Loans under the Revolving Facility bore interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum, subject to reduction by 0.25% or 0.50% based upon the Company's total secured leverage ratio (as defined in the Credit Agreement).
In June 2015 and September 2015, the Company made voluntary principal prepayments of $50.0 million and $75.0 million, respectively, on Term Loan Facility A. The September 2015 voluntary principal prepayment extinguished Term Loan Facility A. As of September 30, 2015, no amounts related to Term Loan Facility A remain outstanding.
In February 2015, $100.0 million was borrowed against the Revolving Facility, in part, to extinguish a portion of the 2040 Convertible Notes. In March 2015, using a portion of the proceeds from the 2020 Convertible Notes issuance, all outstanding borrowings under the Revolving Facility were repaid. In September 2015, the Revolving Facility was terminated at the Company's election.
The voluntary principal prepayments on Term Loan Facility A and the termination of the Revolving Facility resulted in a Loss on debt extinguishment of $2.7 million for the three and nine months ended September 30, 2015 related to the unamortized debt discount and unamortized debt issuance costs.
The July 2014 issuance of the Senior Secured Credit Facility and the subsequent repayment of a previous credit facility were accounted for partially as a debt extinguishment and partially as a debt modification. Creditors in the previous credit facility that elected not to participate in the Senior Secured Credit Facility were extinguished and a $5.2 million Loss on debt extinguishment was recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 related to unamortized debt issuance costs and unamortized debt discount.
Creditors in the previous credit facility that elected to participate in the Senior Secured Credit Facility and the present value of future cash flows were not substantially different, were accounted for as a debt modification with $1.0 million and $1.7 million of unamortized debt issuance costs related to the previous credit facility to be amortized to Term Loan Facility A and Term Loan Facility B interest expense, respectively, using the effective interest method. Additionally, debt issuance costs of $3.8 million related to the issuance of the Senior Secured Credit Facility to creditors from the previous credit facility were recognized as a Loss on debt modification in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. Term Loan Facility A and the Revolving Facility contained financial covenants that required the Company to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. Term Loan Facility B does not contain a minimum consolidated interest coverage ratio or a maximum total leverage ratio covenant. The Company may be required to make an additional payment on the Term Loan Facility each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No additional payment was required in February 2015.
Convertible Senior Notes Due 2040
The Company issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par (the “2040 Convertible Notes”) pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015,
holders of $287.4 million of outstanding principal exercised their right to require the Company to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, the Company redeemed the remaining $3.6 million of outstanding principal. In connection with these transactions, $0.1 million was recorded as Loss on debt extinguishment in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2015. As of September 30, 2015, no amounts related to the 2040 Convertible Notes remain outstanding.
In accounting for the 2040 Convertible Notes, the Company separately accounted for the liability and equity components to reflect its non-convertible borrowing rate of 7.75% at the time the instrument was issued. The debt discount was amortized through February 2015, which was first date the 2040 Convertible Notes could be called by the Company or put to the Company by the holders.
Related to the 2040 Convertible Notes, the Condensed Consolidated Balance Sheets include the following (in thousands):
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Principal outstanding | $ | — |
| | $ | 290,990 |
|
Less: Unamortized debt discount | — |
| | 1,865 |
|
Carrying amount | $ | — |
| | $ | 289,125 |
|
Components of interest expense related to the 2040 Convertible Notes were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stated interest | $ | — |
| | $ | 1,910 |
| | $ | 1,114 |
| | $ | 5,729 |
|
Amortization of debt discount | — |
| | 3,521 |
| | 1,865 |
| | 10,365 |
|
Total interest expense | $ | — |
| | $ | 5,431 |
| | $ | 2,979 |
| | $ | 16,094 |
|
Debt Maturities
As of September 30, 2015, aggregate future principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
|
| | | |
Remainder of 2015 | $ | 1,750 |
|
2016 | 7,000 |
|
2017 | 7,000 |
|
2018 | 7,000 |
|
2019 (1) | 352,000 |
|
Thereafter | 661,500 |
|
Total | $ | 1,036,250 |
|
| |
(1) | Aggregate future principal payments on the 2020 Convertible Notes have been included based on the date they can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances. |
Interest Rate Swaps
The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into interest rate swaps or may terminate a previously executed swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recorded as Loss on interest rate swaps in the Condensed Consolidated Statements of Operations. During the three months ended September 30, 2015 and 2014, the Company recorded losses of $11.8 million and $0.2 million, respectively, on its interest rate swaps. During the nine months ended September 30, 2015 and 2014, the Company recorded losses of $17.1 million and $7.6 million, respectively, on its interest rate swaps.
In connection with the repayment of the Company's previous credit facility during the third quarter of 2014, $7.6 million was paid to terminate interest rate swaps with a notional of $300.0 million.
Details of the Company's interest rate swaps as of September 30, 2015 and December 31, 2014 were as follows (dollars in thousands):
|
| | | | | | | | | | |
| | | Notional | | |
Contract Inception | Contract Effective Date | Contract Maturity | September 30, 2015 | December 31, 2014 | Interest Rate Paid | Interest Rate Received |
2040 Convertible Notes | | | | | |
March 2010 | March 2010 | February 2015 | $ | — |
| $ | 460,000 |
| (1) | 2.625% |
November 2010 | August 2010 | February 2015 | — |
| 460,000 |
| (2) | (3) |
Senior Secured Credit Facility | | | | |
May 2012 | January 2014 | January 2016 | 197,000 |
| 197,000 |
| (4) | One month USD-LIBOR |
May 2012 | April 2014 | March 2017 | 215,000 |
| 215,000 |
| (5) | One month USD-LIBOR |
June 2013 | January 2016 | March 2019 | 250,000 |
| 250,000 |
| 2.23% | One month USD-LIBOR |
September 2014 | January 2016 | July 2021 | 125,000 |
| 125,000 |
| 2.66% | One month USD-LIBOR |
September 2014 | March 2017 | July 2021 | 200,000 |
| 200,000 |
| 2.93% | One month USD-LIBOR |
| |
(1) | The Company paid a weighted average of six month USD-LIBOR minus 0.342%, set in arrears. |
| |
(2) | The Company paid a fixed interest rate which gradually increased from 0.203% for the six-month settlement period ended in February 2011 to 2.619% for the six-month settlement period ended February 2015. |
| |
(3) | The Company received a weighted average of six month USD-LIBOR minus 0.342%, set in arrears. |
| |
(4) | The Company pays a fixed interest rate which gradually increases from 0.58% for the three-month settlement period ended in June 2014 to 1.65% for the settlement period ending in January 2016. |
| |
(5) | The Company pays a fixed interest rate which gradually increases from 0.65% for the three-month settlement period ended in June 2014 to 2.11% for the settlement period ending in March 2017. |
(9) Commitments and Contingencies
Lease Commitments
The Company leases facilities and certain equipment pursuant to noncancelable operating lease agreements expiring through 2025. Rent expense is recognized on a straight-line basis over the lease term. Lease incentives are amortized over the lease term on a straight-line basis. Leasehold improvements are capitalized and amortized over the shorter of the useful life of the asset or the remaining term of the lease.
Future minimum payments for operating leases as of September 30, 2015 were as follows (in thousands):
|
| | | |
Remainder of 2015 | $ | 5,493 |
|
2016 | 17,842 |
|
2017 | 13,286 |
|
2018 | 11,863 |
|
2019 | 10,023 |
|
Thereafter | 42,963 |
|
Gross future minimum lease payments | $ | 101,470 |
|
Less: Sublease revenues | (7,609 | ) |
Net future minimum lease payments | $ | 93,861 |
|
Indemnifications
In the normal course of business, the Company provides indemnifications of varying scopes and amounts to certain of its licensees against claims made by third parties arising out of the use and / or incorporation of the Company's products, intellectual property, services and / or technologies into the licensees' products and services. In some cases, the Company may
receive tenders of defense and indemnity arising out of products, intellectual property services and / or technologies that are no longer provided by the Company due to having divested certain assets, but which were previously licensed or provided by the Company. The Company's indemnification obligations are typically limited to the cumulative amount paid to the Company by the licensee under the license agreement; however, some license agreements, including those with the Company's largest multiple system operators and digital broadcast satellite providers, have larger limits or do not specify a limit on amounts that may be payable under the indemnity arrangements. The Company cannot estimate the possible range of losses that may affect its financial position, results of operations or cash flows in a given period or the maximum potential impact of these indemnification provisions on its financial position, results of operations or cash flows.
Legal Proceedings
The Company is party to various legal actions, claims and proceedings as well as other actions, claims and proceedings incidental to its business. The Company accrues a liability for matters in which losses are considered probable and the amount of loss can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims or sanctions, that, if granted, could require the Company to pay damages or make other expenditures in amounts that could have a material adverse effect on its financial position, results of operations or cash flows. As of September 30, 2015, the Company does not believe any litigation matters, individually or in the aggregate, will have a material adverse effect on its Condensed Consolidated Financial Statements.
(10) Stockholders' Equity
Changes in Stockholders' Equity
Stockholders’ equity as of September 30, 2015 and 2014 and changes in stockholders’ equity during the three months ended September 30, 2015 and 2014 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Treasury stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | |
Balances as of June 30, 2015 | | 130,756 |
| | $ | 131 |
| | (43,898 | ) | | $ | (1,113,386 | ) | | $ | 2,397,069 |
| | $ | (5,871 | ) | | $ | (227,291 | ) | | $ | 1,050,652 |
|
Net loss | | | | | | | | | | | | | | (18,458 | ) | | (18,458 | ) |
Other comprehensive income | | | | | | | | | | | | 268 |
| | | | 268 |
|
Issuance of common stock upon exercise of options | | 13 |
| | — |
| | | | | | 184 |
| | | | | | 184 |
|
Issuance of common stock under employee stock purchase plan | | 291 |
| | — |
| | | | | | 2,716 |
| | | | | | 2,716 |
|
Cancellation of restricted stock, net | | (22 | ) | | — |
| | | | | | — |
| | | | | | — |
|
Equity-based compensation | | | | | | | | | | 8,328 |
| | | | | | 8,328 |
|
Excess tax benefit associated with stock plans | | | | | | | | | | 15 |
| | | | | | 15 |
|
Stock repurchases | | | | | | (4,492 | ) | | (50,000 | ) | | | | | | | | (50,000 | ) |
Balances as of September 30, 2015 | | 131,038 |
| | $ | 131 |
| | (48,390) |
| | $ | (1,163,386 | ) | | $ | 2,408,312 |
| | $ | (5,603 | ) | | $ | (245,749 | ) | | $ | 993,705 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Treasury stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | |
Balances as of June 30, 2014 | | 130,407 |
| | $ | 130 |
| | (35,570 | ) | | $ | (939,833 | ) | | $ | 2,313,770 |
| | $ | (3,307 | ) | | $ | (202,320 | ) | | $ | 1,168,440 |
|
Net loss | | | | | | | | | | | | | | (7,032 | ) | | (7,032 | ) |
Other comprehensive loss | | | | | | | | | | | | (872 | ) | | | | (872 | ) |
Issuance of common stock upon exercise of options | | 44 |
| | — |
| | | | | | 757 |
| | | | | | 757 |
|
Issuance of common stock under employee stock purchase plan | | 350 |
| | — |
| | | | | | 4,387 |
| | | | | | 4,387 |
|
Cancellation of restricted stock, net | | (83 | ) | | 1 |
| | | | | | (1 | ) | | | | | | — |
|
Equity-based compensation | | | | | | | | | | 9,658 |
| | | | | | 9,658 |
|
Excess tax benefit associated with stock plans | | | | | | | | | | 37 |
| | | | | | 37 |
|
Balances as of September 30, 2014 | | 130,718 |
| | $ | 131 |
| | (35,570) |
| | $ | (939,833 | ) | | $ | 2,328,608 |
| | $ | (4,179 | ) | | $ | (209,352 | ) | | $ | 1,175,375 |
|
Stockholders’ equity as of September 30, 2015 and 2014 and changes in stockholders’ equity during the nine months ended September 30, 2015 and 2014 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Treasury stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | |
Balances as of December 31, 2014 | | 130,627 |
| | $ | 131 |
| | (38,898 | ) | | $ | (1,013,218 | ) | | $ | 2,339,817 |
| | $ | (5,307 | ) | | $ | (215,159 | ) | | $ | 1,106,264 |
|
Net loss | | | | | | | | | | | | | | (30,590 | ) | | (30,590 | ) |
Other comprehensive loss | | | | | | | | | | | | (296 | ) | | | | (296 | ) |
Issuance of common stock upon exercise of options | | 85 |
| | — |
| | | | | | 1,478 |
| | | | | | 1,478 |
|
Issuance of common stock under employee stock purchase plan | | 543 |
| | — |
| | | | | | 7,289 |
| | | | | | 7,289 |
|
Cancellation of restricted stock, net | | (217 | ) | | — |
| | | | | | — |
| | | | | | — |
|
Equity-based compensation | | | | | | | | | | 31,044 |
| | | | | | 31,044 |
|
Excess tax benefit associated with stock plans | | | | | | | | | | 66 |
| | | | | | 66 |
|
Equity component related to issuance of 2020 Convertible Notes | | | | | | | | | | 63,854 |
| | | | | | 63,854 |
|
Equity component related to 2020 Convertible Notes issuance costs | | | | | | | | | | (1,737 | ) | | | | | | (1,737 | ) |
Issuance of warrants related to 2020 Convertible Notes | | | | | | | | | | 31,326 |
| | | | | | 31,326 |
|
Purchase of call options related to 2020 Convertible Notes | | | | | | | | | | (64,825 | ) | | | | | | (64,825 | ) |
Stock repurchases | | | | | | (9,492 | ) | | (150,168 | ) | | | | | | | | (150,168 | ) |
Balances as of September 30, 2015 | | 131,038 |
| | $ | 131 |
| | (48,390) |
| | $ | (1,163,386 | ) | | $ | 2,408,312 |
| | $ | (5,603 | ) | | $ | (245,749 | ) | | $ | 993,705 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Treasury stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | |
Balances as of December 31, 2013 | | 128,351 |
| | $ | 128 |
| | (30,570 | ) | | $ | (816,694 | ) | | $ | 2,279,196 |
| | $ | (3,999 | ) | | $ | (145,415 | ) | | $ | 1,313,216 |
|
Net loss | | | | | | | | | | | | | | (63,937 | ) | | (63,937 | ) |
Other comprehensive loss | | | | | | | | | | | | (180 | ) | | | | (180 | ) |
Issuance of common stock upon exercise of options | | 259 |
| | 1 |
| | | | | | 4,207 |
| | | | | | 4,208 |
|
Issuance of common stock under employee stock purchase plan | | 1,043 |
| | 1 |
| | | | | | 12,573 |
| | | | | | 12,574 |
|
Issuance of restricted stock, net | | 1,065 |
| | 1 |
| | | | | | (1 | ) | | | | | | — |
|
Equity-based compensation | | | | | | | | | | 32,506 |
| | | | | | 32,506 |
|
Excess tax benefit associated with stock plans | | | | | | | | | | 127 |
| | | | | | 127 |
|
Stock repurchases | | | | | | (5,000 | ) | | (123,139 | ) | | | | | | | | (123,139 | ) |
Balances as of September 30, 2014 | | 130,718 |
| | $ | 131 |
| | (35,570) |
| | $ | (939,833 | ) | | $ | 2,328,608 |
| | $ | (4,179 | ) | | $ | (209,352 | ) | | $ | 1,175,375 |
|
(Loss) Earnings Per Share
Basic earnings per share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period, except for periods of a loss from continuing operations. In periods of a loss from continuing operations, no common share equivalents are included in Diluted EPS because their effect would be anti-dilutive.
The following is a reconciliation between the number of shares used to calculate Basic EPS and Diluted EPS (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Weighted average shares used to calculate Basic EPS | 82,404 |
| | 91,468 |
| | 85,297 |
| | 91,975 |
|
Dilutive effect of equity-based compensation awards | — |
| | — |
| | — |
| | — |
|
Weighted average shares used to calculate Diluted EPS | 82,404 |
| | 91,468 |
| | 85,297 |
| | 91,975 |
|
Weighted average potential shares excluded from the computation of Diluted EPS as their effect would have been anti-dilutive were as follows (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock options | 4,124 |
| | 4,436 |
| | 4,236 |
| | 4,589 |
|
Restricted stock and restricted stock units | 2,832 |
| | 2,985 |
| | 2,887 |
| | 3,119 |
|
2020 Convertible Notes (1) | 11,936 |
| | — |
| | 9,181 |
| | — |
|
2040 Convertible Notes (1) | — |
| | 6,144 |
| | 1,162 |
| | 6,144 |
|
Weighted average potential shares excluded from the calculation of Diluted EPS | 18,892 |
| | 13,565 |
| | 17,466 |
| | 13,852 |
|
| |
(1) | See Note 8 for additional details. |
For the three months ended September 30, 2015 and 2014, the Company excluded 0.9 million and 0.9 million and for the nine months ended September 30, 2015 and 2014, the Company excluded 0.9 million and 0.8 million weighted average shares of performance-based restricted stock and restricted stock units from the computation of Diluted EPS, respectively, as the performance metric had yet to be achieved or their inclusion would be anti-dilutive.
Effect of the 2020 Convertible Notes and related transactions on Diluted EPS
In periods when the Company reports income from continuing operations, the potential dilutive effect of additional shares that may be issued on conversion of the 2020 Convertible Notes are included in the calculation of Diluted EPS under the treasury stock method when the price of the Company’s common stock exceeds the conversion price. The 2020 Convertible Notes will have no impact on Diluted EPS until the price of the Company's common stock exceeds the conversion price of $28.9044 per share because the principal of the 2020 Convertible Notes is required to be settled in cash. Based on the closing price of the Company's common stock of $10.49 per share on September 30, 2015, the if-converted value of the 2020 Convertible Notes was less than the outstanding principal.
Under the treasury stock method, the 2020 Convertible Notes would be dilutive if the Company’s common stock closes at or above $28.9044 per share. However, on conversion, no economic dilution is expected from the 2020 Convertible Notes as exercise of the call options is expected to eliminate any potential dilution from the 2020 Convertible Notes that would have otherwise occurred when the price of the Company’s common stock exceeds the conversion price. The call options are always excluded from the calculation of Diluted EPS as they would be anti-dilutive under the treasury stock method.
The warrants have an effect on Diluted EPS when the Company’s share price exceeds the warrant’s strike price of $40.1450 per share. As the price of the Company’s common stock increases above the warrant strike price, additional dilution would occur.
Share Repurchase Program
During the three months ended September 30, 2015, the Company repurchased 4.5 million shares of its common stock for $50.0 million. During the three months ended September 30, 2014, the Company did not repurchase any shares of its common stock. During the nine months ended September 30, 2015 and 2014, the Company repurchased 9.5 million shares and 5.0 million shares of its common stock for $150.2 million and $123.1 million, respectively.
On April 29, 2015, the Board of Directors authorized the repurchase of up to $125.0 million of the Company's common stock. The April 2015 authorization included amounts which were outstanding under previously authorized stock repurchase programs. As of September 30, 2015, the Company had $50.5 million of stock repurchase authorization remaining.
(11) Equity-based Compensation
Stock Option Plan
The Company grants equity-based compensation awards from its 2008 Equity Incentive Plan (the “2008 Plan”). As of September 30, 2015, the Company had 23.4 million shares reserved and 7.6 million shares available for issuance under the 2008 Plan. The 2008 Plan permits the grant of stock options, restricted stock, restricted stock units and similar types of equity awards to employees, officers, directors and consultants of the Company. Stock options generally have vesting periods of four years where one quarter of the grant vests at the end of the first year, and the remainder vests monthly thereafter. Stock options generally have a contractual term of seven years. Restricted stock is considered outstanding at the time of the grant as holders are entitled to voting rights. Awards of restricted stock are generally subject to a four year graded vesting period.
In March 2015, the Compensation Committee of the Board of Directors approved a grant of performance-based restricted stock units to certain senior officers of the Company for the 2015 to 2017 performance period. Vesting in the March 2015 award is subject to either performance conditions (i.e., achieving minimum defined levels of Company financial results) or a market condition (i.e., achieving a minimum relative Total Shareholder Return) as well as a three year service period ended March 1, 2018. The number of shares to be issued on vesting could be up to 200% of the target number of performance-based restricted stock units granted depending on the level of achievement.
For awards subject to performance conditions that were granted in March 2015, the fair value per award is fixed at the grant date; however, the amount of compensation expense will be adjusted throughout the performance period based on the probability of achievement of a target revenue compound annual growth rate and an Adjusted EBITDA (see Note 13) margin, with final compensation expense recognized based on the number of shares ultimately issued. For awards subject to a market condition, the fair value per award is fixed at the grant date and the amount of compensation expense is not adjusted during the performance period based on changes in the level of achievement of the relative Total Shareholder Return metric.
As of September 30, 2015, 2.0 million shares of restricted stock were outstanding and unvested, which includes 0.6 million performance-based restricted stock. As of September 30, 2015, 1.7 million restricted stock units were outstanding and unvested, which includes 0.3 million performance-based restricted stock units.
Employee Stock Purchase Plan
The Company’s 2008 Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares each purchase period at the lower of 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the purchase period.
As of September 30, 2015, the Company had 1.9 million shares of common stock reserved and available for issuance under the ESPP.
Valuation Techniques and Assumptions
The Company uses the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options and ESPP shares. The fair value of stock options and ESPP shares is estimated on the grant date using complex and subjective inputs, such as the expected volatility of the Company's common stock over the expected term of the award and projected employee exercise behavior. The Company estimates the fair value of restricted stock and restricted stock units subject to
service or performance conditions as the market value of the Company's common stock on the date of grant and uses a Monte Carlo simulation to estimate the fair value of restricted stock units subject to market conditions.
Assumptions used to estimate the fair value of equity-based compensation awards were as follows:
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock options: | | | | | | | |
Expected volatility | N/A |
| | 44 | % | | 45 | % | | 47 | % |
Expected term | N/A |
| | 4.0 years |
| | 4.0 years |
| | 4.0 years |
|
Risk-free interest rate | N/A |
| | 1.2 | % | | 1.3 | % | | 1.1 | % |
Expected dividend yield | N/A |
| | 0 | % | | 0 | % | | 0 | % |
ESPP shares: | | | | | | | |
Expected volatility | 56 | % | | 34 | % | | 53 | % | | 35 | % |
Expected term | 1.3 years |
| | 1.3 years |
| | 1.3 years |
| | 1.3 years |
|
Risk-free interest rate | 0.4 | % | | 0.3 | % | | 0.4 | % | | 0.3 | % |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Restricted stock units subject to market conditions: | | | | | | | |
Expected volatility | N/A |
| | N/A |
| | 41 | % | | N/A |
|
Expected term | N/A |
| | N/A |
| | 3.0 years |
| | N/A |
|
Risk-free interest rate | N/A |
| | N/A |
| | 1.0 | % | | N/A |
|
Expected dividend yield | N/A |
| | N/A |
| | 0 | % | | N/A |
|
Expected volatility is estimated using a combination of historical volatility and implied volatility derived from publicly-traded options on the Company's common stock. When historical data is available and relevant, the expected term of the award is estimated by calculating the average term from historical experience. When there is insufficient historical data to provide a reasonable basis on which to estimate the expected term, the Company uses an average of the vesting period and the contractual term of the award to estimate the expected term of the award. The risk-free interest rate is the yield on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the award at the grant date. The Company does not anticipate paying cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The number of awards expected to be forfeited during the requisite service period is estimated at the time of grant using historical data to estimate pre-vesting forfeitures and equity-based compensation is only recognized for awards for which the requisite service is expected to be rendered. Forfeiture estimates are revised during the requisite service period and the effect of changes in the number of awards expected to be forfeited is recorded as a cumulative adjustment in the period estimates are revised.
The weighted-average grant date fair value of equity-based awards (per award) and pre-tax equity-based compensation expense (in thousands) was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock options | N/A |
| | $ | 8.39 |
| | $ | 9.05 |
| | $ | 8.88 |
|
ESPP shares | $ | 5.12 |
| | $ | 6.53 |
| | $ | 5.33 |
| | $ | 6.54 |
|
Restricted stock and restricted stock units | $ | 13.13 |
| | $ | 24.42 |
| | $ | 22.27 |
| | $ | 24.54 |
|
| | | | | | | |
Pre-tax equity-based compensation | $ | 8,328 |
| | $ | 9,658 |
| | $ | 31,044 |
| | $ | 31,818 |
|
As of September 30, 2015, there was $61.8 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested equity-based awards which is expected to be recognized over a remaining weighted average period of 2.5 years.
The total intrinsic value of stock options exercised during the three months ended September 30, 2015 and 2014 was $0.0 million and $0.3 million, respectively. The total intrinsic value of stock options exercised during the nine months ended
September 30, 2015 and 2014 was $0.4 million and $1.9 million, respectively. Intrinsic value is calculated as the difference between the market value of the shares at the time of exercise and the exercise price of the stock option.
(12) Income Taxes
Due to the fact that the Company has a significant net operating loss carryforward and has recorded a valuation allowance against a significant portion of its deferred tax assets, foreign withholding taxes are the primary driver of income tax expense.
Components of Income tax expense were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Foreign withholding tax | $ | 4,080 |
| | $ | 2,637 |
| | $ | 10,737 |
| | $ | 12,371 |
|
Reserves for uncertain tax positions | (727 | ) | | (397 | ) | | (745 | ) | | 2,758 |
|
Change in net deferred tax liabilities | (65 | ) | | 179 |
| | 3,568 |
| | (2,764 | ) |
State income tax | (229 | ) | | 91 |
| | (2,411 | ) | | 319 |
|
Foreign income tax | 649 |
| | 948 |
| | 1,775 |
| | 974 |
|
Income tax expense | $ | 3,708 |
| | $ | 3,458 |
| | $ | 12,924 |
| | $ | 13,658 |
|
State income tax for the nine months ended September 30, 2015 includes a benefit of $4.0 million from an audit settlement with the California tax authorities related to the Company's 2008 state tax return.
Included in the change in net deferred tax liabilities for the nine months ended September 30, 2014 is a benefit of $1.9 million related to net operating losses and a benefit of $1.2 million due to the Veveo acquisition. The Veveo acquisition resulted in a net deferred tax liability related to finite-lived intangible assets. These net deferred tax liabilities are considered a source of future taxable income which allowed the Company to reduce its pre-acquisition deferred tax asset valuation allowance.
The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses potential outcomes of these audits in order to determine the appropriateness of its tax provision. Adjustments to uncertain tax positions are made to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular income tax audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously recognized, and therefore the resolution of one or more of these uncertainties in any particular period could have a material adverse impact on the Condensed Consolidated Financial Statements.
(13) Segment Information
Reportable segments are identified based on the Company's organizational structure and information reviewed by the Company’s chief operating decision maker ("CODM") to evaluate performance and allocate resources. The Company's operations are organized into two reportable segments for financial reporting purposes: the Intellectual Property Licensing segment and the Product segment. The Intellectual Property Licensing segment consists primarily of IPG patent licensing to third party guide developers such as multi-channel video service providers (e.g., cable, satellite and internet-protocol television), consumer electronics (“CE”) manufacturers, set-top box manufacturers and interactive television software and program guide providers in the online, over-the-top video and mobile phone businesses. The Product segment consists primarily of the licensing of Company-developed IPG products and services provided for multi-channel video service providers and CE manufacturers, in-guide advertising revenue, analytics revenue and revenue from licensing Metadata. The Product segment also includes sales of legacy Analog Content Protection, VCR Plus+, connected platform and media recognition products.
Segment results are derived from the Company's internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used by the consolidated company. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded from the measure of segment profitability reviewed by the CODM. In addition, certain costs are not allocated to the segments as they are considered Corporate costs. Corporate costs primarily include general and administrative costs such as corporate management, finance, legal and human resources. The CODM uses an Adjusted EBITDA (as defined below) measure to
evaluate the performance of, and allocate resources to, the segments. Segment balance sheets are not used by the CODM to allocate resources or assess performance.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Intellectual Property Licensing | | | | | | | |
Revenues | $ | 57,520 |
| | $ | 67,874 |
| | $ | 192,271 |
| | $ | 213,484 |
|
Adjusted Operating Expenses (1) | 15,515 |
| | 11,768 |
| | 47,535 |
| | 46,740 |
|
Adjusted EBITDA (2) | 42,005 |
| | 56,106 |
| | 144,736 |
| | 166,744 |
|
Product | | | | | | | |
Revenues | 57,362 |
| | 60,708 |
| | 184,456 |
| | 194,610 |
|
Adjusted Operating Expenses (1) | 45,811 |
| | 46,878 |
| | 146,959 |
| | 146,857 |
|
Adjusted EBITDA (2) | 11,551 |
| | 13,830 |
| | 37,497 |
| | 47,753 |
|
Corporate: | | | | | | | |
Adjusted Operating Expenses (1) | 11,907 |
| | 12,075 |
| | 38,472 |
| | 38,555 |
|
Adjusted EBITDA (2) | (11,907 | ) | | (12,075 | ) | | (38,472 | ) | | (38,555 | ) |
Consolidated: | | | | | | | |
Revenues | 114,882 |
| | 128,582 |
| | 376,727 |
| | 408,094 |
|
Adjusted Operating Expenses (1) | 73,233 |
| | 70,721 |
| | 232,966 |
| | 232,152 |
|
Adjusted EBITDA (2) | 41,649 |
| | 57,861 |
| | 143,761 |
| | 175,942 |
|
Depreciation | 4,280 |
| | 4,256 |
| | 13,098 |
| | 13,207 |
|
Amortization of intangible assets | 19,189 |
| | 20,158 |
| | 57,789 |
| | 58,178 |
|
Restructuring and asset impairment charges | 218 |
| | 2,722 |
| | 1,757 |
| | 8,404 |
|
Equity-based compensation | 8,328 |
| | 9,658 |
| | 31,044 |
| | 31,818 |
|
Reduction of contingent consideration liability | (860 | ) | | — |
| | (860 | ) | | — |
|
Contested proxy election costs | — |
| | — |
| | 4,346 |
| | — |
|
Transaction, transition and integration expenses | — |
| | 1,099 |
| | — |
| | 2,938 |
|
Operating income from continuing operations | 10,494 |
| | 19,968 |
| | 36,587 |
| | 61,397 |
|
Interest expense | (11,348 | ) | | (13,962 | ) | | (35,421 | ) | | (40,721 | ) |
Interest income and other, net | 586 |
| | — |
| | 1,089 |
| | 1,835 |
|
Loss on interest rate swaps | (11,787 | ) | | (229 | ) | | (17,106 | ) | | (7,565 | ) |
Loss on debt extinguishment | (2,695 | ) | | (5,159 | ) | | (2,815 | ) | | (5,159 | ) |
Loss on debt modification | — |
| | (3,775 | ) | | — |
| | (3,775 | ) |
(Loss) income from continuing operations before income taxes | $ | (14,750 | ) | | $ | (3,157 | ) | | $ | (17,666 | ) | | $ | 6,012 |
|
| |
(1) | Adjusted Operating Expenses is defined as operating expenses excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, equity-based compensation, contested proxy election costs, transaction, transition and integration expenses and changes in contingent consideration. |
| |
(2) | Adjusted EBITDA is defined as operating income excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, equity-based compensation, contested proxy election costs, transaction, transition and integration expenses and changes in contingent consideration. |
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Discussions of some of the matters contained in this Quarterly Report on Form 10-Q for Rovi Corporation (the “Company,” “we” or “us”) may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and as such, may involve risks and uncertainties, including the discussion contained in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have based these forward-looking statements on our current expectations and projections about future events or future financial performance, which include implementing our business strategy, developing and introducing new technologies, obtaining, maintaining and expanding market acceptance of the technologies we offer, and competition in our markets.
In some cases, these forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “predict,” “potential,” “intend,” or “continue,” and similar expressions. These statements are based on the beliefs and assumptions of our management and on information currently available to our management. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see Item 1A. – Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2014. Except as required by law, we specifically disclaim any obligation to update such forward-looking statements.
The following commentary should be read in conjunction with the financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2014 and the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Overview
We are focused on powering content discovery and personalization through our technology and intellectual property, using data and analytics to monetize interactions across multiple entertainment platforms. We provide a broad set of integrated solutions that are embedded in our customers' products and services to connect consumers with entertainment through content discovery solutions, including interactive program guides (“IPGs”), search and recommendation services, cloud data services and our extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). We also offer advertising and analytics services. We have patented many aspects of content discovery, digital video recorder and video-on-demand functionality and multi-screen functionality, as well as interactive applications and advertising. We have historically licensed this portfolio for use with linear television broadcast. However, there is an emerging industry transition to internet platform technologies which are enabling new video services for television in homes as well as on multiple screens such as tablets and smartphones. We believe this transition presents new opportunities to license our intellectual property portfolio for different use cases and to different customers, as well as to develop, market and sell products and services which enable such functionality. Building on this foundation, we are establishing broad industry relationships with the companies leading the next generation of digital entertainment. Our strategy includes developing products and services that complement our intellectual property and address the opportunity presented by this industry transformation. Our solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets. For financial reporting purposes, our business is organized in two segments: Intellectual Property Licensing and Product.
Revenue for the three months ended September 30, 2015 decreased by 11% compared to the prior year period as a result of a decline in revenue in our Intellectual Property Licensing segment and to a lesser degree, a decline in revenue in our Product segment. For the three months ended September 30, 2015, 27% of revenue was from our contracts with Comcast Corporation ("Comcast"), AT&T Inc. / DIRECTV and Time Warner Cable Inc. ("Time Warner"). In September 2015, the Company's contract with Time Warner was extended from September 2015 to March 2016. Our contracts with DIRECTV and Comcast expire in December 2015 and March 2016, respectively.
For the three months ended September 30, 2015, our loss from continuing operations was $18.5 million, or $0.22 of diluted loss per share, compared to a loss from continuing operations of $6.6 million, or $0.07 of diluted loss per share, in the prior year period, respectively. The increased loss from continuing operations primarily resulted from lower revenue and an
increase in the loss on our interest rate swap portfolio, partially offset by lower costs to restructure and service our debt portfolio and our operations, as well as the realization of savings from past restructuring actions.
During the three months ended September 30, 2015, we:
| |
• | generated $35.3 million in operating cash flow from continuing operations, |
| |
• | extinguished our Term Loan Facility A due in 2019 by making a $75.0 million voluntary principal prepayment, |
| |
• | terminated our $175.0 million revolving credit facility due in 2019, and |
| |
• | repurchased 4.5 million shares of our common stock for $50.0 million. |
Comparison of Three and Nine Months Ended September 30, 2015 and 2014
The consolidated results of operations for the three and nine months ended September 30, 2015 compared to the prior year were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2015 | | 2014 | | Change $ | | Change % |
Revenues | | $ | 114,882 |
| | $ | 128,582 |
| | $ | (13,700 | ) | | (11 | )% |
Costs and expenses: | | | | | | | | |
Cost of revenues, excluding amortization of intangible assets | | 24,608 |
| | 23,437 |
| | 1,171 |
| | 5 | % |
Research and development | | 23,945 |
| | 25,369 |
| | (1,424 | ) | | (6 | )% |
Selling, general and administrative | | 32,148 |
| | 33,172 |
| | (1,024 | ) | | (3 | )% |
Depreciation | | 4,280 |
| | 4,256 |
| | 24 |
| | 1 | % |
Amortization of intangible assets | | 19,189 |
| | 20,158 |
| | (969 | ) | | (5 | )% |
Restructuring and asset impairment charges | | 218 |
| | 2,722 |
| | (2,504 | ) | | (92 | )% |
Gain on sale patents | | — |
| | (500 | ) | | 500 |
| | (100 | )% |
Total costs and expenses | | 104,388 |
| | 108,614 |
| | (4,226 | ) | | (4 | )% |
Operating income from continuing operations | | 10,494 |
| | 19,968 |
| | (9,474 | ) | | (47 | )% |
Interest expense | | (11,348 | ) | | (13,962 | ) | | 2,614 |
| | (19 | )% |
Interest income and other, net | | 586 |
| | — |
| | 586 |
| | N/A |
|
Loss on interest rate swaps | | (11,787 | ) | | (229 | ) | | (11,558 | ) | | 5,047 | % |
Loss on debt extinguishment | | (2,695 | ) | | (5,159 | ) | | 2,464 |
| | (48 | )% |
Loss on debt modification | | — |
| | (3,775 | ) | | 3,775 |
| | (100 | )% |
Loss from continuing operations before income taxes | | (14,750 | ) | | (3,157 | ) | | (11,593 | ) | | 367 | % |
Income tax expense | | 3,708 |
| | 3,458 |
| | 250 |
| | 7 | % |
Loss from continuing operations, net of tax | | (18,458 | ) | | (6,615 | ) | | (11,843 | ) | | 179 | % |
Loss from discontinued operations, net of tax | | — |
| | (417 | ) | | 417 |
| | (100 | )% |
Net loss | | $ | (18,458 | ) | | $ | (7,032 | ) | | $ | (11,426 | ) | | 162 | % |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2015 | | 2014 | | Change $ | | Change % |
Revenues | | $ | 376,727 |
| | $ | 408,094 |
| | $ | (31,367 | ) | | (8 | )% |
Costs and expenses: | | | | | | | | |
Cost of revenues, excluding amortization of intangible assets | | 78,407 |
| | 81,973 |
| | (3,566 | ) | | (4 | )% |
Research and development | | 79,087 |
| | 79,859 |
| | (772 | ) | | (1 | )% |
Selling, general and administrative | | 110,002 |
| | 105,576 |
| | 4,426 |
| | 4 | % |
Depreciation | | 13,098 |
| | 13,207 |
| | (109 | ) | | (1 | )% |
Amortization of intangible assets | | 57,789 |
| | 58,178 |
| | (389 | ) | | (1 | )% |
Restructuring and asset impairment charges | | 1,757 |
| | 8,404 |
| | (6,647 | ) | | (79 | )% |
Gain on sale of patents | | — |
| | (500 | ) | | 500 |
| | (100 | )% |
Total costs and expenses | | 340,140 |
| | 346,697 |
| | (6,557 | ) | | (2 | )% |
Operating income from continuing operations | | 36,587 |
| | 61,397 |
| | (24,810 | ) | | (40 | )% |
Interest expense | | (35,421 | ) | | (40,721 | ) | | 5,300 |
| | (13 | )% |
Interest income and other, net | | 1,089 |
| | 1,835 |
| | (746 | ) | | (41 | )% |
Loss on interest rate swaps | | (17,106 | ) | | (7,565 | ) | | (9,541 | ) | | 126 | % |
Loss on debt extinguishment | | (2,815 | ) | | (5,159 | ) | | 2,344 |
| | (45 | )% |
Loss on debt modification | | — |
| | (3,775 | ) | | 3,775 |
| | (100 | )% |
(Loss) income from continuing operations before income taxes | | (17,666 | ) | | 6,012 |
| | (23,678 | ) | | (394 | )% |
Income tax expense | | 12,924 |
| | 13,658 |
| | (734 | ) | | (5 | )% |
Loss from continuing operations, net of tax | | (30,590 | ) | | (7,646 | ) | | (22,944 | ) | | 300 | % |
Loss from discontinued operations, net of tax | | — |
| | (56,291 | ) | | 56,291 |
| | (100 | )% |
Net loss | | $ | (30,590 | ) | | $ | (63,937 | ) | | $ | 33,347 |
| | (52 | )% |
Revenues
For the three months ended September 30, 2015, revenue decreased 11% compared to the prior year as a result of a $10.4 million decrease in revenue in our Intellectual Property Licensing segment and a $3.3 million decrease in revenue in our Product segment. For the nine months ended September 30, 2015, revenue decreased 8% compared to the prior year as a result of a $21.2 million decrease in revenue in our Intellectual Property Licensing segment and a $10.2 million decrease in revenue in our Product segment. For additional details on the changes in revenue, see the discussion of our segment results.
Cost of revenues, excluding amortization of intangible assets
Cost of revenues consist primarily of service costs, employee-related costs, patent prosecution, maintenance and litigation costs, and an allocation of overhead and facilities costs. For the three months ended September 30, 2015, cost of revenues increased from the prior year primarily due to a $2.3 million increase in patent litigation costs which were partially offset by a $1.1 million decrease in employee-related costs. For the nine months ended September 30, 2015, cost of revenues decreased from the prior year primarily due to a $3.6 million decrease in patent litigation costs, a $0.9 million decrease in employee-related costs and benefits from past restructuring actions which were partially offset by increased investments in our analytics operations.
Research and development
Research and development expenses are comprised primarily of employee-related costs, consulting costs and an allocation of overhead and facilities costs. For the three months ended September 30, 2015, research and development expenses decreased from the prior year primarily due to a decrease in the costs of our Metadata operations resulting from cost saving initiatives. For the nine months ended September 30, 2015, research and development expenses decreased compared to the prior year as decreases in spending on our Metadata operations and legacy products were substantially offset by increased investments to support our cloud-based platforms and analytics services.
Selling, general and administrative
Selling and marketing expenses are comprised primarily of employee-related costs, travel costs, advertising costs and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee-related costs, travel costs, corporate accounting, tax and legal fees, and an allocation of overhead and facilities costs.
The decrease in selling, general and administrative expenses during the three months ended September 30, 2015 was primarily due to a decrease in employee costs and a $0.9 million reduction in the Veveo contingent consideration liability, which were partially offset by an $0.8 million reimbursement related to a previously settled case which reduced legal fees in the prior year period and higher bad debt expense.
The increase in selling, general and administrative expenses during the nine months ended September 30, 2015 was primarily due to $4.3 million of costs incurred related to the contested proxy election, higher bad debt expense and the prior year including the reimbursement of $0.8 million in legal fees related to a previously settled case, partially offset by a $0.9 million reduction in the Veveo contingent consideration liability. Reductions in employee costs due to our cost saving initiatives and lower bonus expense more than offset the increase in consulting expenses and employee costs related to the upcoming major service provider license renewals and the expansion of our patent strategy group.
Amortization of intangible assets
For the three and nine months ended September 30, 2015, amortization of intangible assets decreased from the prior year primarily due to certain intangible assets related to past acquisitions becoming fully amortized during the period which was partially offset by additional amortization related to the Veveo acquisition in February 2014 and the acquisition of a patent portfolio in July 2014.
Restructuring and asset impairment charges
In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and our narrowed business focus on discovery, in 2014 we conducted a review of our remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, we took cost reduction actions that resulted in restructuring and asset impairment charges of $2.7 million and $8.4 million during the three and nine months ended September 30, 2014, respectively. Amounts recorded during the three and nine months ended September 30, 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.
Gain on sale of patents
During the three and nine months ended September 30, 2014, we recorded a gain of $0.5 million from a patent sale. We anticipate selling additional patents in the future as we continue to look for additional ways to monetize patents we hold that are outside our core discovery portfolio.
Interest expense
For the three and nine months ended September 30, 2015, interest expense decreased compared to the prior year primarily due to a lower effective interest rate on the 2020 Convertible Notes compared to the 2040 Convertible Notes.
Interest income and other, net
Interest income and other, net for the three months ended September 30, 2015 increased primarily due to a $0.4 million decrease in foreign currency losses. For the nine months ended September 30, 2015, the decrease in Interest income and other, net was primarily due to the release of a $1.2 million contingent liability in 2014 that was acquired in a prior acquisition and a decline in equity income from our joint venture in Japan, partially offset by a $0.9 million decrease in foreign currency losses.
Loss on interest rate swaps
We have not designated any of our interest rate swaps as hedges for accounting purposes and therefore changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Condensed Consolidated Statements of Operations (see Note 8 to the Condensed Consolidated Financial Statements, which is incorporated
herein by reference). We generally utilize interest rate swaps to convert the interest rate on a portion of our floating interest rate loans to a fixed interest rate. Under the terms of our interest rate swaps, we generally receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future London Interbank Offering Rate ("LIBOR"), we generally will have a gain when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally will have a loss when adjusting our interest rate swaps to fair value.
Loss on debt extinguishment and Loss on debt modification
During the nine months ended September 30, 2015, we made voluntary principal prepayments that extinguished Term Loan Facility A, elected to terminate our Revolving Facility, and redeemed $291.0 million in principal of our 2040 Convertible Notes for cash. These actions combined to result in a Loss on debt extinguishment of $2.7 million and $2.8 million, respectively, for the three and nine months ended September 30, 2015.
The July 2014 issuance of the Senior Secured Credit Facility and the subsequent repayment of a previous credit facility were accounted for partially as a debt extinguishment and partially as a debt modification. Creditors in the previous credit facility that elected not to participate in the Senior Secured Credit Facility were extinguished and the three and nine months ended September 30, 2014 include a $5.2 million Loss on debt extinguishment related to unamortized debt issuance costs and unamortized debt discount. Additionally, debt issuance costs of $3.8 million related to the issuance of the Senior Secured Credit Facility to creditors from the previous credit facility were recognized as a Loss on debt modification in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014.
Income tax expense
Due to the fact that we have a significant net operating loss carryforward and we have recorded a valuation allowance against a significant portion of our deferred tax assets, foreign withholding taxes are the primary driver of our income tax expense.
We recorded Income tax expense for the three months ended September 30, 2015 of $3.7 million, which primarily consists of $4.1 million of foreign withholding taxes and $0.6 million of foreign income taxes that were partially offset by a $0.7 million reduction in reserves for uncertain tax positions. We recorded Income tax expense for the three months ended September 30, 2014 of $3.5 million, which primarily consists of $2.6 million of foreign withholding taxes and $0.9 million of foreign income taxes, partially offset by a $0.4 million reduction in reserves for uncertain tax positions.
We recorded Income tax expense for the nine months ended September 30, 2015 of $12.9 million, which primarily consists of $10.7 million of foreign withholding taxes, a $3.6 million change in net deferred tax liabilities and $1.8 million of foreign income taxes, which were partially offset by a $2.4 million benefit from state income taxes, which reflects the settlement of the Company's 2008 California tax return, and a $0.7 million reduction in reserves for uncertain tax positions. We recorded income tax expense for the nine months ended September 30, 2014 of $13.7 million, which primarily consists of $12.4 million of foreign withholding taxes, $2.8 million from the recognition of reserves for uncertain tax positions and $1.0 million of foreign income taxes, partially offset by a $2.8 million change in net deferred tax liabilities. Included in the change in net deferred tax liabilities was a benefit of $1.9 million related to net operating losses and a benefit of $1.2 million due to the Veveo acquisition. The Veveo acquisition resulted in a net deferred tax liability related to finite-lived intangible assets. These net deferred tax liabilities are considered a source of future taxable income which allowed us to reduce our pre-acquisition deferred tax asset valuation allowance.
Loss from discontinued operations, net of tax
The loss from discontinued operations for the nine months ended September 30, 2014 is primarily due to the loss on the sale of the DivX, MainConcept and Nowtilus businesses.
Segment Results
We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA use the definitions provided in Note 13 of the Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Intellectual Property Licensing Segment
The Intellectual Property Licensing segment's results of operations for the three and nine months ended September 30, 2015 compared to the prior year were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Service Provider | $ | 45,890 |
| | $ | 48,671 |
| | $ | (2,781 | ) | | (6 | )% |
Consumer Electronics | 11,630 |
| | 19,203 |
| | (7,573 | ) | | (39 | )% |
Intellectual Property Licensing Revenues | 57,520 |
| | 67,874 |
| | (10,354 | ) | | (15 | )% |
Adjusted Operating Expenses | 15,515 |
| | 11,768 |
| | 3,747 |
| | 32 | % |
Adjusted EBITDA | $ | 42,005 |
| | $ | 56,106 |
| | $ | (14,101 | ) | | (25 | )% |
Adjusted EBITDA Margin | 73.0 | % | | 82.7 | % | | | | |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Service Provider | $ | 144,344 |
| | $ | 148,513 |
| | $ | (4,169 | ) | | (3 | )% |
Consumer Electronics | 47,927 |
| | 64,971 |
| | (17,044 | ) | | (26 | )% |
Intellectual Property Licensing Revenues | 192,271 |
| | 213,484 |
| | (21,213 | ) | | (10 | )% |
Adjusted Operating Expenses | 47,535 |
| | 46,740 |
| | 795 |
| | 2 | % |
Adjusted EBITDA | $ | 144,736 |
| | $ | 166,744 |
| | $ | (22,008 | ) | | (13 | )% |
Adjusted EBITDA Margin | 75.3 | % | | 78.1 | % | | | | |
For the three months ended September 30, 2015, Intellectual Property Licensing revenue decreased 15% compared to the prior year as revenue from Service Providers decreased 6% while revenue from Consumer Electronics ("CE") manufacturers decreased 39%. The decrease in revenue from Service Providers was primarily due to a decline in sales of set-top boxes by a customer, partially offset by an increase in the number or subscribers for which we receive a monthly patent license fee. The decrease in revenue from CE manufacturers was primarily due to a major CE manufacturer going out of license in the third quarter of 2015. We are currently engaged in productive licensing discussions with this major CE manufacturer.
For the nine months ended September 30, 2015, Intellectual Property Licensing revenue decreased 10% compared to the prior year due to a 3% decrease in revenue from Service Providers and a 26% decrease in revenue from CE manufacturers. The decrease in revenue from Service Providers was primarily due to a decline in sales of set-top boxes by a customer, partially offset by an increase in the number of subscribers for which we receive a monthly patent license fee and executing a bulk purchase of IPG licenses with a third party IPG provider of set-top boxes in the second quarter of 2015. The decrease in revenue from CE manufacturers was primarily due to two major CE manufacturers being out of license in 2015 and a decrease in revenue from catch-up payments included in patent license agreements intended to make us whole for the pre-license period of use as compared to the prior year.
Intellectual Property Licensing segment Adjusted Operating Expenses increased 32% for the three months ended September 30, 2015, compared to the prior year primarily due to a $2.3 million increase in patent litigation costs, a $1.2 million increase in consulting and employee-related costs and a $0.5 million Gain on sale of patents that reduced Adjusted Operating Expenses in the prior year. Adjusted Operating Expenses increased 2% during the nine months ended September 30, 2015 primarily due to a $4.3 million increase in consulting and employee-related costs and a $0.5 million Gain on sale of patents that reduced Adjusted Operating Expenses in the prior year, partially offset by a $3.6 million decrease in patent litigation costs. The increase in consulting and employee-related costs for the three and nine months ended September 30, 2015 were primarily due to consulting and employee costs related to the upcoming license renewals with Time Warner, DIRECTV, Comcast and EchoStar and the expansion of the patent strategy group.
Product Segment
The Product segment's results of operations for the three and nine months ended September 30, 2015 compared to the prior year were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Service Provider | $ | 48,117 |
| | $ | 49,226 |
| | $ | (1,109 | ) | | (2 | )% |
Consumer Electronics | 5,825 |
| | 5,755 |
| | 70 |
| | 1 | % |
Other | 3,420 |
| | 5,727 |
| | (2,307 | ) | | (40 | )% |
Product Revenues | 57,362 |
|
| 60,708 |
| | (3,346 | ) | | (6 | )% |
Adjusted Operating Expenses | 45,811 |
| | 46,878 |
| | (1,067 | ) | | (2 | )% |
Adjusted EBITDA | $ | 11,551 |
| | $ | 13,830 |
| | $ | (2,279 | ) | | (16 | )% |
Adjusted EBITDA Margin | 20.1 | % | | 22.8 | % | | | | |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Service Provider | $ | 149,440 |
| | $ | 152,038 |
| | $ | (2,598 | ) | | (2 | )% |
Consumer Electronics | 16,586 |
| | 17,442 |
| | (856 | ) | | (5 | )% |
Other | 18,430 |
| | 25,130 |
| | (6,700 | ) | | (27 | )% |
Product Revenues | 184,456 |
| | 194,610 |
| | (10,154 | ) | | (5 | )% |
Adjusted Operating Expenses | 146,959 |
| | 146,857 |
| | 102 |
| | — | % |
Adjusted EBITDA | $ | 37,497 |
| | $ | 47,753 |
| | $ | (10,256 | ) | | (21 | )% |
Adjusted EBITDA Margin | 20.3 | % | | 24.5 | % | | | | |
For the three months ended September 30, 2015, Product segment revenues decreased 6% compared to the prior year due to a 2% decrease in revenue from Service Providers, a 1% increase in CE revenue and a 40% decrease in Other revenue. The decrease in Service Provider revenue for the three months ended September 30, 2015 was primarily the result of a decrease in IPG product revenue, partially offset by an increase in advertising revenue. The decrease in Other revenue was the result of the prior year benefiting from an agreement that allows one of our licensees to incorporate our Analog Content Protection ("ACP") technology in specified devices in perpetuity.
For the nine months ended September 30, 2015, Product segment revenues decreased 5% compared to the prior year due to a 2% decrease in revenue from Service Providers, a 5% decrease in CE revenue and a 27% decrease in Other revenue. The decrease in Service Provider revenue was primarily the result of acceptance of our Passport guide product for deployment in multiple countries with a major Latin American service provider which benefited revenue in 2014, offset in part by an increase in advertising revenues, including a $1.5 million benefit from a major Pay TV provider agreeing to report advertising sales to us at the end of each month instead of on a one month lag. Due to this change, we now recognize IPG advertising revenue related to this Pay TV provider with no lag. The decrease in CE revenue was primarily due to a decrease in the number of units shipped that incorporated our products. The decrease in Other revenue was the result of a decline in ACP revenue, including the effect of a license agreement executed in the prior year that allowed a licensee to incorporate our ACP technology in specified devices in perpetuity; however, both periods included significant perpetual license fees that are not expected to recur for the remainder of 2015 and did not recur in the rest of 2014.
For the three months ended September 30, 2015, Adjusted Operating Expenses decreased 2% compared to the prior year primarily due to a decrease in Metadata research and development costs due to cost savings initiatives. Adjusted Operating Expenses increased slightly during the nine months ended September 30, 2015 compared to the prior year as increased investments to support our cloud-based platforms and analytics services were offset by a decrease in spending on Metadata and legacy product research and development due to cost saving initiatives.
Corporate
Corporate costs for the three and nine months ended September 30, 2015 compared to the prior year were as follows (dollars in thousands):
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Adjusted Operating Expenses | $ | 11,907 |
| | $ | 12,075 |
| | (168 | ) | | (1 | )% |
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Adjusted Operating Expenses | $ | 38,472 |
| | $ | 38,555 |
| | (83 | ) | | — | % |
For the three and nine months ended September 30, 2015, Corporate Adjusted Operating Expenses decreased primarily due to a decrease in employee-related costs, partially offset by an $0.8 million reimbursement of legal fees in 2014 related to a previously settled case.
Liquidity and Capital Resources
We finance our operations primarily from cash generated by our operations. We believe that internally generated cash flows are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, interest payments and income tax payments, in addition to investments in future growth opportunities and share repurchases. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however, our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to sufficient capital resources under such conditions.
Our cash, cash equivalents and marketable securities are held in numerous locations around the world. Our cash position remains strong, and we believe that our cash, cash equivalents and marketable securities and anticipated cash flow generated from operations, as supplemented with access to capital markets, as necessary, will be sufficient to meet our working capital, capital expenditure, debt and operating requirements for at least the next twelve months.
As of September 30, 2015, we had $65.2 million in cash and cash equivalents, $82.6 million in short-term marketable securities and $141.7 million in long-term marketable securities. Of these amounts, $204.7 million was held by our foreign subsidiaries. Due to our net operating loss carryforwards, we could repatriate amounts held outside the U.S. to the U.S. with a minimal tax impact.
Sources and Uses of Cash
Cash flows compared to the prior year were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2015 | | 2014 | | Change $ | | Change % |
Continuing Operations: | | | | | | | |
Net cash provided by operating activities | $ | 101,038 |
| | $ | 150,622 |
| | $ | (49,584 | ) | | (33 | )% |
Net cash provided by investing activities | 74,962 |
| | 73,847 |
| | 1,115 |
| | 2 | % |
Net cash used in financing activities | (264,875 | ) | | (210,110 | ) | | (54,765 | ) | | 26 | % |
Net cash used in discontinued operations | (199 | ) | | (5,300 | ) | | 5,101 |
| | (96 | )% |
Effect of exchange rate changes on cash and cash equivalents | (317 | ) | | 53 |
| | (370 | ) | | (698 | )% |
Net (decrease) increase in cash and cash equivalents | $ | (89,391 | ) | | $ | 9,112 |
| | $ | (98,503 | ) | | (1,081 | )% |
Net cash provided by operating activities for the nine months ended September 30, 2015 decreased $49.6 million primarily due to the receipt of a significant upfront payment in the first quarter of 2014 related to a multi-year licensing deal
signed in the fourth quarter of 2013, a decrease in income from continuing operations, lower revenue resulting in lower collections on accounts receivable in 2015 and the collection of certain large receivable balances in 2014 related to deals signed at the end of 2013, partially offset by lower payments for Accounts payable and accrued expenses and other long-term liabilities as a result of lower bonus and interest payments and the settlement of an interest rate swap in 2014. The availability of cash generated by our operations in the future could be affected by other business risks including, but not limited to, those Risk Factors in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.
Net cash provided by investing activities for the nine months ended September 30, 2015 increased $1.1 million due to a decrease in the net use of cash associated with acquisitions and divestitures compared to the prior period, which was partially offset by a decrease in net proceeds from net sales and maturities of marketable securities of $38.5 million. The nine months ended September 30, 2015 includes the payment of $5.1 million in continent consideration related to previous acquisitions compared to payments in 2014 of $60.7 million for the Veveo acquisition and $28.0 million for the purchase of a patent portfolio, offset by the receipt of $50.3 million from the 2014 sale of DivX and MainConcept. We anticipate that capital expenditures to support the growth of our business and strengthen our operations infrastructure will be between $19 million and $22 million for the full year 2015.
Net cash used in financing activities for the nine months ended September 30, 2015 included $291.0 million of principal payments on our 2040 Convertible Notes and the issuance of $345.0 million of principal of 2020 Convertible Notes. Using the proceeds from the 2020 Convertible Notes issuance, we repaid $100.0 million which had been borrowed against our Revolving Facility in February 2015, in part, to extinguish a portion of the 2040 Convertible Notes. In connection with issuing the 2020 Convertible Notes, we purchased a call option to manage the potential dilution to earnings per share from conversion of the 2020 Convertible Notes and sold a warrant for a net cash payment of $33.5 million. During the nine months ended September 30, 2015, we made aggregate voluntary principal prepayments of $125.0 million to extinguish our Term Loan Facility A. In addition, we used $154.5 million to repurchase shares of our common stock and received $8.8 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan. During the nine months ended September 30, 2014, we made $915.8 million in debt principal payments, which was partially offset by $812.0 million of additional borrowings under the Senior Secured Credit Facility and used $123.1 million to repurchase shares of our common stock. The nine months ended September 30, 2014 also included the receipt of $16.8 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan.
On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock. The April 2015 authorization includes any amounts which were outstanding under previously authorized stock repurchase programs. As of September 30, 2015, our remaining stock repurchase authorization was $50.5 million.
Capital Resources
The outstanding principal and carrying amount of debt we issued were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Outstanding Principal | | Carrying Amount | | Outstanding Principal | | Carrying Amount |
2020 Convertible Notes | $ | 345,000 |
| | $ | 287,854 |
| | $ | — |
| | $ | — |
|
Term Loan Facility A | — |
| | — |
| | 125,000 |
| | 124,580 |
|
Term Loan Facility B | 691,250 |
| | 688,326 |
| | 696,500 |
| | 693,227 |
|
2040 Convertible Notes | — |
| | — |
| | 290,990 |
| | 289,125 |
|
Total | $ | 1,036,250 |
| | $ | 976,180 |
| | $ | 1,112,490 |
| | $ | 1,106,932 |
|
In September 2015, we elected to terminate our Revolving Facility which had made $175.0 million available to obtain short-term or long-term financing.
During the next twelve months, $7.0 million of our debt is scheduled to mature. For more information on our borrowings, see Note 8 to the Condensed Consolidated Financial Statements in Part I, Item 1, which is incorporated herein by reference.
2020 Convertible Notes
We issued $345.0 million in aggregate principal of 0.500% Convertible Notes due in 2020 at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes (which represents an initial conversion price of approximately $28.9044 per share). Holders may convert the 2020 Convertible Notes prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
| |
• | during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; |
| |
• | during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or |
| |
• | on the occurrence of specified corporate events. |
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.
On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of our common stock over a specified observation period. On conversion, we will pay cash up to the aggregate principal amount of the 2020 Convertible Notes converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.
The initial conversion rate will be subject to adjustment in certain events, including certain events that constitute a make-whole fundamental change (as defined in the 2015 Indenture). In addition, if we undergo a fundamental change (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require us to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The initial conversion rate is also subject to customary anti-dilution adjustments.
The 2020 Convertible Notes are not redeemable prior to maturity by us and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by us. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.
Senior Secured Credit Facility
On July 2, 2014, we, as parent guarantor, and two of our wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of our other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (the “Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (the “Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”).
As a result of voluntary principal prepayments in June 2015 and September 2015, Term Loan Facility A was extinguished. As of September 30, 2015, no amounts related to Term Loan Facility A remain outstanding.
Term Loan Facility B amortizes in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount thereof, with any remaining balance payable on the final maturity date of Term Loan Facility B. Loans under Term Loan Facility B bear interest, at our option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions. Term Loan Facility A and the Revolving Facility contained financial covenants that required that we maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. Term Loan Facility B does not contain a minimum consolidated interest coverage ratio or a maximum total leverage ratio covenant. We may be required to make an additional payment on the Term Loan Facility each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No payment was required in February 2015.
2040 Convertible Notes
We issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015, holders of $287.4 million of outstanding principal exercised their right to require us to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, we redeemed the remaining $3.6 million of outstanding principal. As of September 30, 2015, no amounts related to the 2040 Convertible Notes remain outstanding.
Contractual Obligations
For information about our contractual obligations, see "Contractual and Other Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference. The following table summarizes our contractual obligations at September 30, 2015 (in thousands), except for purchase obligations, which have not materially changed since December 31, 2014.
|
| | | | | | | | | | | | | | | | | | | |
| Payments due by period |
Contractual Obligations | Total | | Remainder of 2015 | | 2016 - 2017 | | 2018 - 2019 | | Thereafter |
Long-term debt (1) | $ | 1,036,250 |
| | $ | 1,750 |
| | $ | 14,000 |
| | $ | 359,000 |
| | $ | 661,500 |
|
Interest on long-term debt (1) | 154,831 |
| | 6,624 |
| | 55,486 |
| | 54,349 |
| | 38,372 |
|
Operating lease commitments | 101,470 |
| | 5,493 |
| | 31,128 |
| | 21,886 |
| | 42,963 |
|
| $ | 1,292,551 |
| | $ | 13,867 |
| | $ | 100,614 |
| | $ | 435,235 |
| | $ | 742,835 |
|
| |
(1) | The 2020 Convertible Notes are presented based on the date they can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances. For additional information, see Note 8 to our Condensed Consolidated Financial Statements, which is incorporated herein by reference. |
Off Balance Sheet Arrangements
Since December 31, 2014, we have not engaged in any material off-balance sheet arrangements, including the use of structured finance vehicles, special purpose entities or variable interest entities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and reported results of operations for the period then ended. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
With the exception of goodwill which is discussed below, we believe there have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.
Goodwill
Goodwill represents the excess of cost over fair value of the net assets of an acquired business. Goodwill is evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Goodwill is evaluated for potential impairment at the reporting unit level, which is either the operating segment or one level below.
Qualitative factors are first assessed to determine whether events or changes in circumstances indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors which could trigger an interim impairment review, include, but are not limited to:
| |
• | significant deterioration in general economic, industry or market conditions; |
| |
• | significant adverse developments in cost factors; |
| |
• | significant deterioration in actual or expected financial performance or operating results; |
| |
• | significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and a |
| |
• | significant sustained decrease in share price. |
During the three months ended September 30, 2015, the extent and duration of the decline in our stock price, among other factors, indicated that it was more-likely-than-not that the fair value of our reporting units was less than their carrying amount and, as a result, a quantitative interim goodwill impairment test was performed.
If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a quantitative two-step impairment test is performed. In first step of the quantitative impairment test, the fair value of each reporting unit is compared to its carrying amount. The fair value of the Intellectual Property Licensing reporting unit is estimated using an income approach and the fair value of the Product reporting unit is estimated using a weighting of fair values derived from an income approach and a market approach. Under the income approach, the fair value of a reporting unit is estimated based on the present value of estimated future cash flow and considers estimated revenue growth rates, future operating margins and risk-adjusted discount rates. Under the market approach, fair value is estimated based on market multiples of revenue or earnings derived from comparable publicly-traded companies. The carrying amount of a reporting unit is determined by assigning the assets and liabilities, including goodwill and intangible assets, to the reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired and no further testing is performed.
If the fair value of a reporting unit is less than its carrying amount, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In the second step, the reporting unit's assets, including any unrecognized intangible assets, liabilities and non-controlling interests are measured at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same manner as if the reporting unit was being acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.
The process of evaluating goodwill for potential impairment is subjective and requires significant estimates, assumptions and judgments particularly related to the identification of reporting units, the assignment of assets and liabilities to reporting units, and estimating the fair value of each reporting unit. Estimating the fair value of a reporting unit considers future revenue growth rates, operating margins, income tax rates and economic and market conditions, as well as risk-adjusted discount rates and the identification of appropriate market comparable data.
The results of the quantitative interim goodwill impairment test indicated that the estimated fair value exceeded the carrying amount by 10% and 37% for the Intellectual Property Licensing and Product reporting units, respectively. While the quantitative interim goodwill impairment test indicated that the fair value of each reporting unit exceeded its respective carrying amount, if we fail to renew licenses, or renew licenses with materially different terms than those assumed, with Time Warner, DIRECTV, Comcast or EchoStar, if there is significant decline in our stock price, or if market multiples for comparable publicly-traded companies decrease, an impairment of goodwill could result, the effect of which could be material.
Recent Accounting Pronouncements
For a summary of applicable recent accounting pronouncements, see Note 1 to the Condensed Consolidated Financial Statements in Part I, Item 1, which is incorporated herein by reference.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including those related to changes in interest rates, foreign currency exchange rates and security prices. Changes in these factors may cause fluctuations in our financial position, results of operations or cash flows. For quantitative and qualitative disclosures about market risk, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference. Other than market risks associated with the issuance of the 2020 Convertible Notes, which are described below, we believe our exposure to market risk has not changed materially since December 31, 2014.
2020 Convertible Notes
In March 2015, we issued $345.0 million principal 2020 Convertible Notes that have a fixed annual interest rate of 0.500%. As the 2020 Convertible Notes have a fixed interest rate, there is no economic interest rate exposure. However, the fair value of the 2020 Convertible Notes is exposed to fluctuations in interest rates and securities prices. Generally, the fair value of the 2020 Convertible Notes will increase as interest rates fall and the fair value of the 2020 Convertible Notes will increase as the price of our common stock increases.
In connection with the offering of the 2020 Convertible Notes, we purchased call options and sold warrants with respect to our common stock . The options are expected to offset the potential dilution with respect to shares of our common stock resulting from any conversion of the 2020 Convertible Notes. The warrants will have a dilutive effect with respect to our common stock to the extent that the market price of our common stock exceeds the strike price of the warrants. However, we have the right to settle the warrants in cash or shares. The strike price of the warrants is $40.1450 per share. The number of shares of our common stock underlying the warrants is 11.9 million shares, subject to anti-dilution adjustments.
For further discussion regarding the 2020 Convertible Notes and the related call options and warrants, see Note 8 to our Condensed Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
We believe there have been no changes to our internal controls over financial reporting during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. Other Information
ITEM 1. Legal Proceedings
The information contained in Note 9 to the Condensed Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
ITEM 1A. Risk Factors
We believe that there have been no significant changes to the risk factors associated with our business as compared to those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about our purchases of our common stock during the three months ended September 30, 2015 (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
July 1, 2015 to July 31, 2015 | — |
| | $ | — |
| | — | | | $ | 100,472.6 | |
August 1, 2015 to August 31, 2015 | 4,492 |
| | $ | 11.13 |
| | 4,492 | | | $ | 50,472.6 | |
September 1, 2015 to September 30, 2015 | — |
| | $ | — |
| | — | | | $ | 50,472.6 | |
Total | 4,492 |
| | | | 4,492 | | | |
| |
(1) | On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock. The April 2015 authorization included amounts which were outstanding under our previously authorized stock repurchase programs. |
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
|
| | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | |
Exhibit Description | |
Form | |
Date | |
Number | | Filed Herewith |
31.01 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
31.02 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
32.01 | | Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
32.02 | | Certification of Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
101.INS | | XBRL Instance Document | | | | | | | | X |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
ROVI CORPORATION | |
Authorized Officer: | | |
Date: | October 28, 2015 | | |
| | By: | /s/ Thomas Carson |
| | | Thomas Carson |
| | | President and Chief Executive Officer |
| | | |
Principal Financial Officer: |
Date: | October 28, 2015 | | |
| | By: | /s/ Peter C. Halt |
| | | Peter C. Halt |
| | | Chief Financial Officer |
| | | |
Principal Accounting Officer: |
Date: | October 28, 2015 | | |
| | By: | /s/ Wesley Gutierrez |
| | | Wesley Gutierrez |
| | | Chief Accounting Officer and Treasurer |
Exhibit 31.01
CERTIFICATION
I, Thomas Carson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Rovi Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
| | |
Date: | October 28, 2015 | |
| | |
| | /s/ Thomas Carson |
| | Thomas Carson |
| | President and Chief Executive Officer |
Exhibit 31.02
CERTIFICATION
I, Peter C. Halt, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Rovi Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
| | |
Date: | October 28, 2015 | |
| | |
| | /s/ Peter C. Halt |
| | Peter C. Halt |
| | Chief Financial Officer |
Exhibit 32.01
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of Rovi Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Thomas Carson certifies in his capacity as Chief Executive Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), that to the best of his knowledge:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)), and
(b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has hereunto signed this Certification as of October 28, 2015.
|
| |
| /s/ Thomas Carson |
| Thomas Carson |
| President and Chief Executive Officer |
Exhibit 32.02
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of Rovi Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Peter C. Halt certifies in his capacity as Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350, as adopted), that to the best of his knowledge:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)), and
(b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has hereunto signed this Certification as of October 28, 2015.
|
| |
| /s/ Peter C. Halt |
| Peter C. Halt |
| Chief Financial Officer |
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