NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Principles of Consolidation and Summary of Significant Accounting Policies
Business Description
We are a global leader in payments and commerce solutions. We provide expertise, solutions and services that add value at the retail point-of-sale and enable innovative forms of commerce. For over
35 years
, we have been designing, manufacturing, marketing and supplying a broad range of payment solutions, including customer payments acceptance, connectivity between merchants and financial institutions, as well as security and comprehensive payment and commerce services. We focus on delivering innovative point-of-sale payment capabilities, value-added services that increase merchant revenues and enhance the consumer experience, and solutions that enrich and improve the interaction between merchant and consumers. Today we are an industry leader in multi-application payment systems deployments. Key industries in which we operate include financial services, retail, petroleum, restaurant, hospitality, taxi, transportation, and healthcare.
VeriFone Systems, Inc. was incorporated in the state of Delaware on June 13, 2002 in order to acquire VeriFone, Inc. on July 1, 2002. VeriFone, Inc. was incorporated in 1981 and became our principal operating subsidiary on July 1, 2002. Effective May 18, 2010, we changed our corporate name from VeriFone Holdings, Inc. to VeriFone Systems, Inc. Shares of VeriFone Systems, Inc. are listed on the New York Stock Exchange under the trading symbol PAY.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of VeriFone Systems, Inc. and our wholly-owned and majority-owned subsidiaries, including a variable interest entity where we are deemed to be the primary beneficiary. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of our majority-owned subsidiaries are reported as noncontrolling interests
.
All intercompany accounts and transactions have been eliminated. The Consolidated Financial Statements also include the results of companies acquired by us from the date of each acquisition. Investments in businesses that we do not control, but in which we have the ability to exercise significant influence over operating and financial matters, are accounted for using the equity method.
We have
two
operating segments: Verifone Systems and Verifone Services. Verifone Systems delivers point of sale electronic payment devices that run our unique operating systems, security and encryption software and certified payment software for both payments and commerce. Verifone Services delivers device related services and maintenance, payment transaction routing and reporting, and commerce based services. Our reportable segments and reporting units are the same as our operating segments.
We determine our operating segments considering our overall management structure, how forecasts are approved, how executive compensation is determined, our organizational chart, as well as how our Chief Executive Officer, who is our chief operating decision maker, regularly reviews our operating results, assesses performance, allocates resources, and makes decisions regarding Verifone's operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions about future events that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We evaluate our estimates on an ongoing basis when updated information related to such estimates becomes available. We base our estimates on historical experience and information available to us at the time these estimates are made. Actual results could differ materially from these estimates
.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant Accounting Policies
Foreign Currency
We determine the functional currency for Verifone and our subsidiaries by reviewing the currencies in which their respective operating activities occur. For our subsidiaries whose functional currencies are not the U.S. Dollar, we generally translate assets and liabilities using exchange rates in effect as of the applicable balance sheet dates. Revenue and expenses for these subsidiaries are translated using average rates which approximate those in effect during the period. Foreign currency translation gains and losses are included in stockholders' equity as a component of Accumulated other comprehensive loss in our Consolidated Balance Sheets.
Monetary assets and liabilities denominated in currencies other than the functional currency of that subsidiary are remeasured to the functional currency using exchange rates in effect as of the applicable balance sheet dates. Gains and losses from these remeasurements are recorded as Other income (expense), net in our Consolidated Statements of Operations.
Revenue Recognition
System solutions net revenues include net revenues from the sale of products and associated perpetual software licenses and accessories. Services net revenues include net revenues from payment-related services, installation, customer support, repair services related to our System solutions, transaction processing, custom software development, and extended warranties, as well as from advertising in and on taxis, and leases of our products.
We recognize revenues net of sales taxes and value-added taxes when title and risk of loss have passed to the customer and all of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collection is reasonably assured and not contingent upon future performance.
Net revenues from sales to end-users, resellers, value-added resellers, and distributors are generally recognized upon shipment of the product. End-users, resellers, value-added resellers, and distributors generally have no rights of return, stock rotation rights, or price protection.
We recognize revenue from operating lease arrangements over the term of the applicable lease arrangements. Net revenues from operating lease arrangements represent less than
5%
of our total net revenues and are classified as Services net revenues.
Net revenues from services obligations to be provided over a period of time are initially deferred and then recognized on a straight-line basis over the period during which the services are provided. Net revenues from services billed on a per incident basis are recognized as the services are rendered. Net revenues from fees for payment services are recognized when the payment services are complete. Advertising revenues are recognized as the related services are performed.
We periodically enter into software development contracts with our customers that we recognize as net revenues on a completed contract basis
.
During the period of performance of such contracts, billings and costs are accumulated on the balance sheet, but no profit is recorded before completion or substantial completion of the project or milestone. We generally use customers' acceptance as the specific criteria to determine when such contracts are substantially completed. Provisions for losses on software development contracts are recorded in the period they become evident. Net revenues from software development contracts comprise less than
1%
of our total net revenues.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition for Multiple-Element Arrangements
When an arrangement includes multiple deliverables, we allocate the arrangement consideration to each deliverable qualifying as a separate unit of accounting based on its relative selling price at the inception of the arrangement. We determine the relative selling price based on the estimated selling price (ESP) using vendor specific objective evidence (VSOE), if it exists, and otherwise third-party evidence (TPE). If neither VSOE nor TPE exists for a unit of accounting, we use best estimated selling price (BESP).
VSOE is limited to the price charged when the same or similar product or service is sold separately. We define VSOE as substantial standalone transactions that are priced within a narrow range, as defined by us. In addition, we consider the geographies in which the products or services are sold, as well as the class of customers to which the products or services are sold. If a product or service is seldom sold separately, it is unlikely that we can determine VSOE for the product or service.
TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately to similarly situated customers. As our products and services contain a significant level of differentiation compared to our competitors' products, comparable prices are generally not available.
When we are unable to establish selling price using VSOE or TPE, we use BESP when allocating the arrangement consideration. BESP is the price at which management estimates that we would enter into a transaction with the customer if the product or service was to be sold by us regularly on a standalone basis. Our determination of BESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. The factors we consider include the geographies in which the products or services are sold, the anticipated gross margin on that deliverable, the cost to produce the deliverable, economic conditions and market trends, the selling price and gross margin for similar deliverables, and our ongoing pricing strategy and policies.
We analyze ESP at least annually or on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
In multiple element arrangements that include software, we first evaluate if a tangible product includes software. If a tangible product includes software and if both the tangible product and software components function together to deliver the tangible product's essential functionality, then we will treat the entire product as a non-software element. If the arrangement is deemed to have a software element, we first allocate the total arrangement consideration between the software group of elements as a whole and the non-software elements as a whole based on their relative selling prices, and then to the elements within those groups based on the applicable guidance.
Shipping and Handling Costs
Shipping and handling costs incurred for delivery to customers are expensed as incurred, and are included in Cost of net revenues in our Consolidated Statements of Operations. In those instances where we bill shipping and handling costs to customers, the amounts billed are classified as Net revenues in our Consolidated Statements of Operations.
Warranty Costs
We accrue for estimated warranty obligations when revenue is recognized based on an estimate of future warranty costs for delivered products. Such estimates are based on historical experience and expectations of future costs. At least annually or whenever circumstances warrant, we evaluate and adjust the accrued warranty costs to the extent actual warranty costs vary from the original estimates. Our warranty period typically extends from
one
to
three
years from the date of shipment. Actual warranty costs may differ materially from management's estimates.
Costs associated with maintenance contracts, including extended warranty contracts, are expensed when they are incurred.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
We measure stock-based compensation cost at the grant date, based on the estimated fair value of the award and the estimated number of shares we ultimately expect will vest. Stock-based compensation cost is recognized as expense on a straight-line basis over the requisite service period. Cash flows resulting from the tax benefits due to tax deductions in excess of the compensation cost recognized for those awards are classified as financing cash flows.
Advertising Costs
Advertising costs are expensed as incurred, and were immaterial for all periods presented in our Consolidated Statements of Operations.
Research and Software Development Costs
Research and development costs are generally expensed when incurred.
Software development costs incurred to develop software products for resale, including the costs of software components of our products, are subject to capitalization beginning when a product's technological feasibility has been established and ending when a software or product is available for general release to customers. In most instances, our products are released soon after technological feasibility has been established; therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. Capitalized costs of software for resale are amortized on a straight-line basis over the estimated life of the software or associated product, generally
three
to
five
years, commencing when the respective software or product is available to customers.
Software development costs for internal use software are subject to capitalization during the application development stage, beginning when a project, that will result in additional functionality, is approved and ending when the software is put into productive use. Capitalized internal use software costs are amortized on a straight-line basis over the estimated life of the software, generally
three
to
six
years, commencing when the respective software is put into productive use.
Amortization related to capitalized software development costs totaled
$7.1 million
,
$5.1 million
, and
$5.5 million
, for the fiscal years ended
October 31, 2017
,
2016
, and
2015
, respectively. Unamortized capitalized software development costs totaled
$50.7 million
and
$55.1 million
as of
October 31, 2017
and
2016
, respectively, and are recorded as a component of Other long-term assets in our Consolidated Balance Sheets.
Restructuring
The determination of when we accrue for employee involuntary termination benefits depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement. We record charges for one-time benefit arrangements in accordance with ASC 420
Exit or Disposal Cost Obligations
and charges for on-going benefit arrangements in accordance with ASC 712
Nonretirement Postemployment Benefits
.
We recognize a liability for costs associated with the closure of facilities when the liability is incurred. We measure these liabilities at fair value. Costs to terminate a contract before the end of its term are recognized when we terminate the contract in accordance with the contract terms. Costs that will continue to be incurred under a contract for its remaining term without economic benefit, net of estimated sublease income, are recognized at the facility cease-use date.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities, and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. In evaluating our ability to recover our deferred tax assets management considers all available positive and negative evidence including the past operating results, the existence of cumulative losses in past fiscal years, and the forecasted future taxable income in the jurisdictions in which we have operations.
We have established valuation allowances on U.S. deferred tax assets and certain non-U.S. deferred tax assets because realization of these tax benefits through future taxable income is not more likely than not as of
October 31, 2017
and
2016
. We intend to maintain the valuation allowances until sufficient positive evidence exists to support the reversal of the valuation allowances. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from the estimates, the amount of the valuation allowance could be materially impacted. An increase in the valuation allowance would result in additional tax expense in such period.
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties relating to these uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. Our estimate for the potential outcome of any uncertain tax issue is based on detailed facts and circumstances of each issue. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial condition.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than
50%
likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and time deposits with maturities of three months or less when purchased.
Allowance for doubtful accounts
An allowance for doubtful accounts is established with respect to those amounts that we determine to be doubtful of collection using specific identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Actual collection losses may differ materially from management's estimates. Uncollectible receivables are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted.
Accounts receivable payment terms are generally between net 30 to 60 days, unless special payment terms are arranged.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Inventories
Inventories are stated at the lower of standard cost and net realizable value. We compute inventory cost using standard costs, primarily on a FIFO method. Standard costs approximate actual costs, including materials, manufacturing costs, in-bound freight costs, and inbound-related supply chain costs. We regularly monitor inventory quantities on hand and committed orders with contract manufacturers, and record write-downs for excess and obsolete inventories based primarily on the shipment history and our estimated forecast of product demand. Such write-downs establish a new cost basis of accounting for the related inventory.
Consigned inventories from our contract manufacturers where title has not been transferred to us are excluded from our inventories. In certain circumstances, we are obligated to prepay deposits to our contract manufacturers based on a percentage of the value of the inventories consigned to us, and after a certain period of time has elapsed, we may be required to prepay the full amount if we have not taken title to the inventory. Prepayments for consigned inventory are included in Prepaid expenses and other current assets in our Consolidated Balance Sheets.
Generally, we take title to consigned inventories when we ship to our customers, and record the full cost of the inventories as Cost of net revenues at that time. We must purchase the consigned inventories from our contract manufacturers after a certain agreed-upon period of time, ranging from 30 days to one year. Consigned inventories are included in our calculation of minimum order commitments from our contract manufacturers.
Fair Value Measurements
We measure and record certain of our financial assets and liabilities at fair value on a recurring basis. We also apply the provisions of fair value measurement to various non-recurring measurements for our financial and non-financial assets and liabilities.
We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When estimating fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, credit risk, and risk of non-performance.
In measuring fair value, we follow a three-level hierarchy based on the inputs used:
Level 1 — Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace, such as similar instruments in an active
market, or computations using, among other inputs, forward pricing curves, credit default spreads, or the Black-Scholes-Merton valuation model.
Level 3 — Unobservable inputs that are supported by little or no market activity.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equity Investments
We evaluate our equity investments to determine whether an investee is a variable interest entity. If we conclude that an investee is a variable interest entity, we evaluate our power to direct the activities of the investee, our obligation to absorb the expected losses of the investee and our right to receive the expected residual returns of the investee to determine whether we are the primary beneficiary of the investee. If we are the primary beneficiary of a variable interest entity, we consolidate such entity and reflect the noncontrolling interest of other beneficiaries of that entity. If we conclude that an investee is not a variable interest entity, we do not consolidate the investee and account for the investment under either the equity method or cost method.
We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs, and vice versa, based on changes in facts and circumstances including changes in contractual arrangements and capital structure.
Equity investments are accounted for under the equity method if we are able to exert significant influence over the investee but do not have a controlling financial interest. If we do not have significant influence over the investee, we account for it under the cost method. The carrying value of equity investments are included in Other long-term assets in our Consolidated Balance Sheets.
Equity method investments are initially recorded at fair value and are adjusted for our proportionate share of the earnings and losses of the equity method investee. Earnings and losses of equity method investments are based on the most recently available financial statements of the investee and are included in Other income (expense), net in our Consolidated Statements of Operations. Basis differences between the cost of an equity method investment and the underlying equity in the long-lived assets are amortized over the estimated economic useful life of the underlying long-lived asset and the amortization expense is included in Other income (expense), net in our Consolidated Statement of Operations.
We periodically review our cost and equity method investments for impairment and record a reduction in the carrying value, if and when necessary.
Derivative Financial Instruments
We use derivative financial instruments to manage certain exposures to foreign currency exchange rate and interest rate risks. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates.
We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments. Our derivative financial instruments do not include a right of offset, and we do not offset derivative financial assets against derivative financial liabilities.
Our derivative financial instruments consist primarily of foreign exchange forward contracts, which we use to hedge certain existing and anticipated foreign currency denominated transactions, and interest rate swaps, which we use to hedge a portion of the variability in cash flows related to our interest payments. We recognize the estimated fair value of our outstanding derivative financial instruments on our Consolidated Balance Sheets at the end of each reporting period as either assets or liabilities. Foreign exchange forward contracts generally mature within 90 days of inception. The interest rate swaps will mature on
June 30, 2019
.
Gains and losses arising from derivative financial instruments that are designated as cash flow hedges are recorded in Accumulated other comprehensive loss, and are subsequently reclassified into earnings in the period or periods during which the underlying transactions affect earnings. When we enter into hedges we formally assess hedge effectiveness and monitor the effectiveness qualitatively on an ongoing basis. When an anticipated transaction is no longer likely to occur, the corresponding derivative instrument is ineffective as a hedge, and changes in fair value of the instrument are recognized in Other income (expense), net.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivative financial instruments that are not designated as hedging instruments predominantly consist of foreign exchange forward contracts used to hedge foreign currency-denominated inter-company receivables and payables exposures arising from product sales and loans from one of our entities to another. Gains and losses arising from changes in the fair values of derivative financial instruments that are not designated as hedging instruments are recognized in Other income (expense), net.
Long-Lived Assets
Fixed assets are stated at cost, net of accumulated depreciation and amortization. Fixed assets are depreciated on a straight-line basis over the estimated useful lives of the assets, generally ranging from
three
to
ten years
, except buildings which are depreciated from
40
to
50 years
. Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful life of the asset.
Revenue generating assets are comprised of tangible assets that we have placed at third party locations for the purpose of generating revenues under rental or service based arrangements. Revenue generating assets are stated at cost, net of accumulated depreciation, and are generally depreciated on a straight-line basis over the estimated useful lives of the assets, generally
five
years. Payments to acquire revenue generating assets are included in Capital expenditures within cash flows from investing activities on our Consolidated Statements of Cash Flows.
Equipment under capital leases is recorded at the lesser of the present value of the minimum lease payments at the beginning of the lease term or the fair value of such equipment. Leased equipment is amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of such equipment.
Purchased intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated period of benefit, generally ranging from
one
to
20 years
.
If the estimated period of benefit for any of our long-lived assets is determined to have changed, we amortize the remaining net book values over the revised period of benefit.
We periodically evaluate whether changes have occurred that would render our long-lived assets not recoverable. If such circumstances arise, we use an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying amount of the assets over the fair value of such assets, with the fair value generally determined based on an estimate of discounted future cash flows. For assets held for sale, to the extent the carrying value is greater than the asset's fair value less costs to sell, an impairment loss is recognized for the difference.
Goodwill
Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired and liabilities assumed in a business acquisition. Goodwill is not amortized for accounting purposes.
We review the goodwill allocated to each of our reporting units for possible impairment annually on August 1 and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform a quantitative impairment test. If, we conclude otherwise, then no further action is taken. In a quantitative impairment test, we measure the recoverability of goodwill by comparing a reporting unit's carrying amount, including goodwill, to the estimated fair value of the reporting unit, and record an impairment charge for any excess.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In assessing the qualitative factors, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit's fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance, Verifone-specific events, and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only
one
reporting unit, we allocate, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where we have had an acquisition that benefited more than
one
reporting unit, we have assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.
The estimated fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows.
In order to assess the reasonableness of the calculated fair values of its reporting units, we compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). We evaluate the reasonableness of the premium over market capitalization by first quantifying certain controlling market participants' synergies included in the income approach. We then supplement this step by comparing the implied premiums for each reporting unit to the premiums implied by recent comparable transactions. If the implied control premium is not reasonable in light of these recent transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount rates or other assumptions.
In the event that we realign our reporting units, we allocate our goodwill to the new reporting units using the relative fair value approach. We perform an assessment of any potential goodwill impairment immediately prior to and after the reallocation of goodwill to the new reporting units.
Debt Issuance Costs and Original Issue Discounts
Costs incurred in connection with the issuance of new debt are generally capitalized and amounts paid in connection with the modification of existing debt are generally expensed as incurred. Capitalizable debt issuance costs paid to third parties and original issue discounts paid to creditors, net of amortization, are offset against the associated Short-term and Long-term debt on our Consolidated Balance Sheets.
Amortization expense on capitalized debt issuance costs and original issue discounts related to loans with fixed payment terms is calculated using the effective interest method over the term of the associated loans. Amortization expense on capitalized debt issuance costs and original issue discounts related to revolving loans are calculated using the straight-line method over the term of the revolving loan commitment. Amortization expense is recorded in Interest expense, net in our Consolidated Statements of Operations. When debt is extinguished prior to the maturity date, any remaining associated debt issuance costs or original issue discounts are expensed to Interest expense, net in our Consolidated Statements of Operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Business Combinations
In a business combination, we recognize separately from goodwill the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to adjustment. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill in the period in which the adjustment amounts are determined.
For a given acquisition, we generally identify certain pre-acquisition contingencies as of the acquisition date, and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the purchase price allocation and, if so, to determine the estimated amounts.
If we determine that a pre-acquisition non-income tax related contingency is probable in nature and estimable as of the acquisition date, we record our best estimate for such contingency as a part of the preliminary purchase price allocation. We often continue to gather related information and evaluate our pre-acquisition contingencies throughout the measurement period and if we make changes to the amounts recorded or if we identify additional pre-acquisition contingencies during the measurement period, such amounts are recorded in the period in which they are identified. Subsequent to our final determination of the contingency's estimated value within the measurement period, changes to these contingencies could have a material impact on our results of operations and financial position.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period, and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the tax allowance’s estimated value, changes to these uncertain tax positions and tax-related valuation allowances will affect our Income tax provision (benefit) in our Consolidated Statements of Operations and could have a material impact on our results of operations and financial position.
Acquisition-related costs are expensed as incurred.
Redeemable Noncontrolling Interest in Subsidiary
The redeemable noncontrolling interest in subsidiary is recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss, or its redemption value.
Concentrations of Credit Risk
Cash is placed on deposit in major financial institutions around the world. Some of these deposits may be in excess of insured limits. We believe that the financial institutions that hold our cash are financially sound and, accordingly, minimal credit risk exists with respect to these balances.
We invest cash not required for use in operations in high credit quality securities based on our investment policy. The investment policy has limits based on credit quality, investment concentration, investment type, and maturity that we believe reduce the risk of loss. Investments are of a short-term nature and include investments in money market funds and time deposits.
Our derivative financial instruments expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement when we have an unrealized gain on the instrument. We believe the counterparties for our outstanding contracts are large, financially sound institutions, and thus we do not anticipate nonperformance by these counterparties. However, given the high debt levels of many countries and institutions worldwide, the failure of the counterparties is possible. We have not experienced any investment losses due to institutional failure or bankruptcy.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our accounts receivable are derived from sales to a large number of direct customers, resellers, and distributors globally. We perform ongoing evaluations of our customers' financial condition and limit the amount of credit extended when deemed necessary, but generally require no collateral. As of
October 31, 2017
and
2016
no single customer accounted for more than 10% of our total Accounts receivable, net. For fiscal years
2017
,
2016
, and
2015
no single customer accounted for more than 10% of our total Net revenues.
We utilize a limited number of third parties to manufacture our products, and rely upon these contract manufacturers to produce and deliver products on a timely basis and at an acceptable cost. Furthermore, a majority of our manufacturing activities are concentrated in China and Brazil. As a result, disruptions to the business or operations of the contract manufacturers or to their ability to produce the required products in a timely manner, and particularly disruptions to the manufacturing facilities located in China and Brazil, could significantly impact our business and operations. In addition, a number of components that are necessary to manufacture and assemble our systems are specifically customized for use in our products and are obtained from sole source suppliers on a purchase order basis. Because of the customized nature of these components and the limited number of available suppliers, if we were to experience a supply disruption, it would be difficult and costly to find alternative sources in a timely manner.
Recently Adopted Accounting Pronouncements
During August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Because the presentation and classification under this new standard is consistent with our historical presentation and classification, we elected to early adopt ASU 2016-15 retrospectively, effective November 1, 2016. Adoption had no impact on our consolidated statements of cash flows in any period presented.
During November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows - Restricted Cash,
which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have elected to early adopt ASU 2016-18 retrospectively, effective November 1, 2016. Accordingly, restricted cash is included as a component of Cash, cash equivalents and restricted cash on our Consolidated Statements of Cash Flows for all periods presented.
During January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The standard is effective for annual or any interim impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Because this new standard simplifies the goodwill impairment test, we elected to early adopt ASU 2017-04 prospectively, effective February 1, 2017, when we performed an interim impairment test on our former Taxi Solutions reporting unit. The adoption of this standard did not have any impact on our consolidated financial position and results of operations.
During May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation - Scope of Modification Accounting
, which provides guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The amendments in this standard should be applied prospectively to awards modified on or after the adoption date. Because this new standard simplifies the assessment of any share-based payment award modifications, we have elected to early adopt ASU 2017-09 prospectively, effective August 1, 2017. The impact of the adoption of this standard will depend upon the nature of future modifications to share-based payment awards.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities,
which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted in any interim period after issuance, provided that the effect of adoption should be reflected as of the beginning of the fiscal year of adoption. Because this new standard simplifies our hedge accounting, we have elected to early adopt ASU 2017-12 using a modified retrospective approach effective as of November 1, 2016. Adoption of this standard did not have any impact on our consolidated financial position and results of operations.
Recent Accounting Pronouncements Not Yet Adopted
During May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
as amended by ASU 2015-14, 2016-08, 2016-10, 2016-12, 2017-05, and 2017-13 which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. It defines a five step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of reporting periods beginning after December 15, 2016. Two methods of adoption are permitted: (a) full retrospective adoption, meaning this standard is applied to all periods presented or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance as of the date of adoption is recognized as an adjustment to the opening retained earnings balance. We expect to adopt ASU 2014-09 effective in the first interim period of our fiscal year ending October 31, 2019 and currently expect to select the modified retrospective adoption method.
As this new revenue standard will supersede substantially all existing revenue guidance under US GAAP, once adopted it could impact revenue and cost recognition on sales across all our businesses, in addition to our business processes, compensation, information technology systems and other financial reporting and operational elements. We expect that this standard may impact, in some cases, the timing and amount of revenue recognized, such as term based software licenses, which are not material, but that are currently recognized over the license term and will be recognized at the time the license is delivered to the customer under the new guidance. Additionally, the direct costs to obtain and fulfill customer contracts, in some cases, may be deferred and amortized under the new standard. We are continuing to assess the potentially impacted revenue streams and costs, quantifying the materiality of these impacts and considering additional disclosure requirements.
During February 2016, the FASB issued ASU 2016-02,
Leases
, which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In connection with this new guidance, the FASB created Topic 842, Leases, which supersedes Topic 840, Leases. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are continuing to evaluate our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations. We expect that this new standard will have a material impact on our balance sheets and are in the process of evaluating whether adoption may impact the timing of revenue recognition on certain leases of equipment to customers.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
, to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period, however, any adjustments should be reflected as of the beginning of the fiscal year of adoption and all of the guidance must be adopted in the same period. The new standard must be adopted either prospectively, retrospectively, or using a modified retrospective transition method, depending on the area covered in this ASU. We intend to adopt this standard, as required, effective November 1, 2017 and do not expect adoption to have a material impact on our consolidated financial position, and results of operations.
During June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
, which introduces new guidance for the accounting for credit losses on financial instruments and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The new standard must generally be adopted using a modified retrospective transition method, through a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. We are currently in the process of evaluating the impact of this new pronouncement on our consolidated financial position and results of operations and our adoption timing.
During January 2017, the FASB issued ASU 2017-01,
Business Combinations - Clarifying the Definition of a Business
, which provides new guidance to assist entities with evaluating when a set of transferred assets and activities is a business. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. This update should be applied prospectively on or after the effective date. Early application is permitted in certain circumstances. We are currently assessing when to adopt this new standard. The impact of adopting this standard will depend upon the nature of our future acquisitions, if any.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 2. Business Combinations
Fiscal year 2017 Divestiture
On June 30, 2017, we divested our controlling interest in Verifone Systems (China), Inc., the entity which operated our China business, to the former general manager of this business. In connection with this divestiture, we retained a
30%
equity interest in Verifone Systems (China), Inc., in the form of non-voting preferred equity that has a
$29 million
liquidation preference and is non-convertible for an initial
two
year period. We have determined that Verifone Systems (China), Inc. is a variable interest entity and that we are not the primary beneficiary. Additionally, we do not have significant influence over the entity, so we account for this investment as a cost method investment. The initial fair value of our
30%
equity interest was determined using the income approach and was deemed nominal. The income approach, which we believe most appropriately measures the fair value of this income producing asset, calculates fair value by discounting estimated after-tax cash flows to a present value, using a risk-adjusted discount rate. Our investment is classified as Level 3 because we use significant unobservable inputs to determine the expected cash flows and an appropriate discount rate to calculate the fair value. The significant unobservable inputs we use to value this investment include our estimate of the future expected revenues, margins and other cash outlays, as well as expected terminal value growth rates of the China business. See Note 9,
Equity Investments
, and Note 12,
Restructuring and Related Charges
, for additional information.
Fiscal year 2017 Exchange Transaction
On April 7, 2017, we entered into an exchange transaction with DMI Parent, DMI Holdings and Gas Media under which we contributed certain assets, consisting of customer contracts associated with our business of marketing, promoting, selling and distributing media and advertising solutions for display or use in petroleum forecourts in the United States, in exchange for a
50%
equity interest in Gas Media, and DMI Parent contributed
100%
of its equity interest in DMI Holdings in exchange for a
50%
equity interest in Gas Media. Gas Media will be operated by DMI Parent and Verifone, but is not jointly controlled by both parties. In connection with the exchange transaction, we have agreed to guarantee, in certain circumstances, up to
$12.5 million
out of a total of
$83.8 million
of debt issued to Gas Media.
Our investment in Gas Media was initially valued at
$19.2 million
. We have determined that Gas Media is not a variable interest entity and we account for this investment as an equity method investment as we have significant influence over the entity. The debt guarantee was deemed to have a nominal value. We have used the income approach to determine the fair value of our investment in Gas Media. The income approach, which we believe most appropriately measures the fair value of this income producing asset, calculates fair value by discounting estimated after-tax cash flows to a present value, using a risk-adjusted discount rate. Our investment is classified as Level 3 because we use significant unobservable inputs to determine the expected cash flows and an appropriate discount rate to calculate the fair value. The significant unobservable inputs we use to value the Gas Media investment include our estimate of the future expected revenues, margins and other cash outlays, as well as the terminal value growth rates of the Gas Media business. The discount rate used to determine the fair value of this investment is
18.7%
. See Note 9,
Equity Investments
, for additional information.
In connection with this exchange transaction, we recorded a
$10.1 million
gain that is included in Other income (expense), net in the Consolidated Statements of Operations. The gain was determined as the excess of the fair value of Verifone’s
50%
equity interest in Gas Media over the carrying value of the contributed assets, including allocated goodwill.
Fiscal Year 2016 Acquisitions
During fiscal year 2016, we completed
three
business combinations with net assets as described in the table below for an aggregate consideration totaling
$193.1 million
, including
$186.8 million
of cash paid on acquisition date, contingent consideration with a fair value of
$5.0 million
at the acquisition date and
$1.3 million
in future consideration based on the exchange rate at the acquisition date. No Verifone equity was issued, and in each transaction all the outstanding equity of the applicable business was acquired, except for Panaroma Bilisim Teknolojileri Sanayi Ve Ticaret Anonim Sirketi (Panaroma), in which we acquired
51%
of the voting equity interest. See Note 9,
Equity Investments
, for additional information about our investment in Panaroma. We acquired these
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
businesses to expand our operations in Germany, North America, and Turkey. Each acquisition was accounted for using the acquisition method of accounting.
The following table summarizes the fair values of the assets acquired and liabilities assumed (in thousands) at the acquisition date of each transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InterCard
|
|
AJB
|
|
Panaroma
|
|
Total
|
Acquisition date
|
December 23, 2015
|
|
February 2, 2016
|
|
May 20, 2016
|
|
|
Tangible assets acquired (liabilities assumed), net
(1)
|
$
|
3,874
|
|
|
$
|
16,811
|
|
|
$
|
(2,479
|
)
|
|
$
|
18,206
|
|
Purchased intangible assets
(2)
|
52,681
|
|
|
41,100
|
|
|
14,220
|
|
|
108,001
|
|
Redeemable noncontrolling interest
(3)
|
—
|
|
|
—
|
|
|
(7,430
|
)
|
|
(7,430
|
)
|
Goodwill
(4)
|
37,292
|
|
|
30,989
|
|
|
6,090
|
|
|
74,371
|
|
Total purchase price
|
$
|
93,847
|
|
|
$
|
88,900
|
|
|
$
|
10,401
|
|
|
$
|
193,148
|
|
|
|
(1)
|
The net assets acquired include trade receivables valued at
$23.5 million
. The gross contractual value of the trade receivables as of the acquisition date was
$31.5 million
, of which
$8.0 million
was not expected to be collected.
|
|
|
(2)
|
Purchased intangible assets include customer relationships valued at
$76.9 million
, which are amortized over their estimated useful lives of
one
to
thirteen years
, acquired technology valued at
$21.0 million
, which are amortized over their estimated useful lives of
four
to
six years
, and other intangibles valued at
$10.1 million
, which are amortized over their estimated useful lives of
one
to
seven years
.
|
|
|
(3)
|
The minority shareholder holding the remaining
49%
of Panaroma has a put option that is exercisable for
three years
after January 1, 2020 and if exercised requires us to purchase the remaining
49%
equity of Panaroma at a multiple of earnings before taxes, depreciation and amortization for the year ended December 31, 2019. Since the noncontrolling interest is redeemable at the option of the minority shareholder and is outside our control, it is reported in the mezzanine section in the Consolidated Balance Sheets and recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss, or its redemption value.
|
|
|
(4)
|
Goodwill represents the expected benefits of combining the acquisitions' operations with our operations. Goodwill from the InterCard and AJB acquisitions was assigned to our Verifone Services reportable segment. The goodwill of the Panaroma acquisition was assigned to our Verifone Systems reportable segment. The goodwill associated with the AJB acquisition that is deductible for income tax purposes is
$19.3 million
and goodwill recognized on the other fiscal year 2016 acquisitions is not deductible for income tax purposes.
|
Fiscal Year 2015 Acquisitions
In fiscal year 2015, we completed
five
business combinations for consideration totaling
$29.6 million
, including
$22.1 million
of cash paid on acquisition date,
$5.7 million
in future consideration and contingent consideration with a fair value of
$1.8 million
at the acquisition dates. Each acquisition was accounted for using the acquisition method of accounting. These acquisitions were completed to augment our existing service offerings. Purchased intangible assets totaled
$9.0 million
related to developed and core technology,
$2.8 million
related to customer relationships, and
$0.5 million
related to other intangible assets. Goodwill from these acquisitions totaled
$16.6 million
, of which
$5.1 million
was deductible for income tax purposes. The goodwill was substantially assigned to our North America reportable segment in fiscal year 2015. In fiscal year 2016, in conjunction with the realignment of the company's organizational structure, we reallocated our goodwill to our
two
new operating segments: Verifone Systems and Verifone Services that are also our reporting units.
See Note 10,
Goodwill and Purchased Intangible Assets
for additional information.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3. Net Income (Loss) per Share of Common Stock
Basic net income (loss) per share of common stock is computed by dividing net income (loss) attributable to VeriFone Systems, Inc. stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share of common stock is computed using the weighted average number of shares of common stock outstanding plus the effect of common stock equivalents, unless the common stock equivalents are anti-dilutive. The potential dilutive shares of our common stock resulting from assumed exercises of equity related instruments are determined using the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock will result in a greater number of dilutive securities.
The following table presents the computation of net income (loss) per share of common stock (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Basic and diluted net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
|
$
|
(173,829
|
)
|
|
(9,281
|
)
|
|
$
|
79,097
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - basic
|
111,817
|
|
|
110,829
|
|
|
114,044
|
|
Weighted average effect of dilutive stock options, RSUs and RSAs
|
—
|
|
|
—
|
|
|
1,890
|
|
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - diluted
|
111,817
|
|
|
110,829
|
|
|
115,934
|
|
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
|
|
|
|
|
|
Basic
|
$
|
(1.55
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.69
|
|
Diluted
|
$
|
(1.55
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.68
|
|
For the
fiscal years
ended
October 31, 2017
and
2016
, equity incentive awards representing
6.4 million
and
6.2 million
shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net loss per share as they were anti-dilutive because we incurred net losses for those periods. For the fiscal year ended
October 31, 2015
, equity incentive awards representing
1.5 million
shares of common stock were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive. Anti-dilutive awards, which include stock options, RSUs and RSAs, could impact future calculations of diluted net income per share if the fair market value of our common stock increases.
Note 4. Employee Benefit Plans
Retirement and Post-employment Plans
We maintain defined contribution retirement plans in certain countries, including a 401(k) plan for our U.S. employees. During fiscal years
2017
,
2016
, and
2015
, we contributed
$13.9 million
,
$16.4 million
, and
$13.9 million
, respectively, to these plans.
We have defined benefit pension plans, as required by local laws, for our employees in certain countries, primarily Germany and Taiwan, and non-retirement post-employment benefit plans for our employees in certain countries, primarily Germany and Israel. These plans are not considered material to our financial position or results of operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equity Incentive Plans
We have granted stock awards, including stock options and restricted stock units (RSUs) pursuant to stockholder-approved equity incentive plans. Our stock awards include vesting provisions that are based on either time, performance or market conditions. Shares issued to employees upon the exercise or vesting of equity incentive awards are issued from authorized but unissued common stock.
2006 Equity Incentive Plan
In March 2006, our stockholders approved the 2006 Equity Incentive Plan for our officers, directors, employees, and consultants. Under this equity incentive plan, we have granted stock options, RSUs, and RSAs. Stock option awards are granted with an exercise price equal to the market price of our common stock at the date of grant, and have a maximum term of
seven
years. Awards under this plan are generally time-based awards with vesting over a period of
1
to
4
years from the date of grant, or performance-based awards with vesting based on achievement of specified criteria over a period of
1
to
3
years from the date of grant. The vesting conditions of all awards were set by the compensation committee of the Board of Directors at the time of the grant.
As of
October 31, 2017
,
13.0 million
shares remained available for future grants under this plan. For purposes of the number of shares issuable under this plan, any awards granted as stock options are counted as one share for every award granted; RSUs granted on or after June 29, 2011 are counted as
2.0
shares for every RSU granted; and RSUs granted prior to June 29, 2011 are counted as
1.75
shares for every RSU granted.
Other Equity Incentive Plans
Stock options remain outstanding under several other equity incentive plans, including plans assumed in connection with our acquisitions of Hypercom and Lipman. We no longer grant stock options under any of these plans.
Equity Incentive Plan Activity
The following table provides a summary of stock option activity for the fiscal year ended
October 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
(in thousands)
|
|
Weighted
Average
Exercise
Price
(per share)
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding at beginning of period
|
2,859
|
|
|
$
|
30.16
|
|
|
|
|
|
Exercised
|
(72
|
)
|
|
$
|
15.98
|
|
|
|
|
|
Canceled
|
(1
|
)
|
|
$
|
20.57
|
|
|
|
|
|
Expired
|
(735
|
)
|
|
$
|
28.05
|
|
|
|
|
|
Outstanding at end of period
|
2,051
|
|
|
$
|
31.41
|
|
|
1.77
|
|
$
|
527
|
|
Vested or expected to vest at October 31, 2017
|
2,050
|
|
|
$
|
31.42
|
|
|
1.77
|
|
$
|
527
|
|
Exercisable at October 31, 2017
|
2,025
|
|
|
$
|
31.49
|
|
|
1.76
|
|
$
|
527
|
|
The weighted-average grant-date fair value per share for stock options granted during the fiscal year ended
October 31, 2015
was
$13.44
. The total intrinsic value of options exercised during the fiscal years ended
October 31, 2017
,
2016
, and
2015
was
$0.1 million
,
$5.8 million
, and
$14.5 million
, respectively. We did not grant stock options in the fiscal years ended
October 31, 2017
and
October 31, 2016
.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides a summary of RSU activity for the fiscal year ended
October 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Aggregate
Intrinsic
Value
|
Outstanding at beginning of period
|
3,378
|
|
|
|
Granted
|
2,983
|
|
|
|
Vested
|
(1,127
|
)
|
|
|
Canceled
|
(866
|
)
|
|
|
Outstanding at end of period
|
4,368
|
|
|
$
|
83,340
|
|
Vested or expected to vest at October 31, 2017
|
3,763
|
|
|
$
|
71,794
|
|
Vested and deferred at October 31, 2017
|
91
|
|
|
$
|
1,729
|
|
During the fiscal year ended
October 31, 2017
we granted
2.5 million
RSUs with time-based vesting conditions and
0.5 million
RSUs with performance-based vesting conditions contingent upon meeting certain financial and operational targets.
The weighted-average grant-date fair value per share for RSUs granted during the years ended
October 31, 2017
,
2016
, and
2015
was
$18.13
,
$24.06
, and
$36.14
, respectively.
The total fair value of RSUs that vested during the fiscal years ended
October 31, 2017
,
2016
, and
2015
was
$20.8 million
,
$23.3 million
, and
$39.6 million
, respectively.
Equity Incentive Award Valuation
The grant date fair value of RSUs that have time or performance based vesting conditions contingent upon meeting financial and operational targets are equal to the closing market price of our common stock on the grant date.
We estimate the grant date fair value of RSUs that have market based vesting conditions using the Monte Carlo simulation method, using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Expected term (in years)
|
3.0
|
|
|
3.0
|
|
|
3.0
|
|
Risk-free interest rate
|
1.5
|
%
|
|
1.3
|
%
|
|
1.1
|
%
|
Expected dividend rate
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected stock price volatility
|
36.9
|
%
|
|
46.8
|
%
|
|
52.7
|
%
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation Expense
The following table presents the stock-based compensation expense recognized in our Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Cost of net revenues
|
$
|
4,627
|
|
|
$
|
3,324
|
|
|
$
|
2,548
|
|
Research and development
|
6,482
|
|
|
7,207
|
|
|
6,669
|
|
Sales and marketing
|
11,538
|
|
|
13,503
|
|
|
16,219
|
|
General and administrative
|
17,256
|
|
|
18,244
|
|
|
16,817
|
|
Total stock-based compensation expense
|
$
|
39,903
|
|
|
$
|
42,278
|
|
|
$
|
42,253
|
|
Our computation of stock-based compensation expense includes an estimate of award forfeitures based on historical experience. We record compensation expense only for those awards that are expected to vest.
As of
October 31, 2017
, total unrecognized stock-based compensation expense related to unvested RSUs was
$60.2 million
and is expected to be recognized over the remaining weighted-average vesting period of
2.5
years. As of
October 31, 2017
, total unrecognized stock-based compensation expense related to unvested options was nominal and is expected to be recognized in the next
eight
months.
Note 5. Stock Repurchase Program
In September 2015, our Board of Directors authorized a program to repurchase shares of our common stock with an aggregate value of up to
$200.0 million
, with no expiration from the date of authorization. As of
October 31, 2017
, there was
$50.0 million
remaining available for stock repurchases under this program. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing and actual amount of the share repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities, including mergers and acquisitions, market conditions and other factors. We are not obligated to repurchase any specific number of shares under the program and the repurchase program may be modified, suspended or discontinued at any time.
During the fiscal years ended
October 31, 2016
and
2015
, we repurchased approximately
2.6 million
and
2.7 million
shares of our common stock, respectively, on the open market at an average repurchase price of
$28.02
and
$28.66
per share, respectively, pursuant to this program.
No
shares were repurchased during the fiscal year ended
October 31, 2017
.
In December 2017, our Board of Directors authorized to expand the stock repurchase program to allow repurchase of additional shares of our common stock with an aggregate value of up to
$100.0 million
, with no expiration from the date of authorization. As of December 18, 2017, there was
$150.0 million
remaining available for stock repurchases under this program.
Note 6. Income Taxes
Income (loss) before income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
(173,550
|
)
|
|
$
|
(2,894
|
)
|
|
$
|
69,458
|
|
Foreign
|
30,731
|
|
|
4,721
|
|
|
3,490
|
|
Income (loss) before income taxes
|
(142,819
|
)
|
|
1,827
|
|
|
72,948
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provision for (benefit from) income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
915
|
|
|
$
|
(917
|
)
|
|
$
|
1,965
|
|
State
|
(130
|
)
|
|
961
|
|
|
206
|
|
Foreign
|
35,490
|
|
|
26,093
|
|
|
21,664
|
|
Total current provision for income taxes
|
36,275
|
|
|
26,137
|
|
|
23,835
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(1,100
|
)
|
|
3,377
|
|
|
(306
|
)
|
State
|
(70
|
)
|
|
336
|
|
|
(44
|
)
|
Foreign
|
(2,605
|
)
|
|
(18,323
|
)
|
|
(30,894
|
)
|
Total deferred benefit from income taxes
|
(3,775
|
)
|
|
(14,610
|
)
|
|
(31,244
|
)
|
Income tax provision (benefit)
|
$
|
32,500
|
|
|
$
|
11,527
|
|
|
$
|
(7,409
|
)
|
A reconciliation of taxes computed at the federal statutory income tax rate to the provision for (benefit from) income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Provision for (benefit from) income taxes computed at the federal statutory rate
|
$
|
(49,986
|
)
|
|
$
|
638
|
|
|
$
|
25,532
|
|
State income tax, net of federal tax benefit
|
(154
|
)
|
|
961
|
|
|
469
|
|
Foreign income taxes at other than U.S. rates
|
17,508
|
|
|
17,155
|
|
|
(2,544
|
)
|
Valuation allowance, net
|
58,988
|
|
|
(1,919
|
)
|
|
(31,065
|
)
|
Impact of tax rate changes
|
(474
|
)
|
|
(1,523
|
)
|
|
485
|
|
Unrealized inter-company profits
|
114
|
|
|
(130
|
)
|
|
409
|
|
Foreign exchange
|
3,156
|
|
|
1,067
|
|
|
(2,692
|
)
|
Stock compensation
|
288
|
|
|
918
|
|
|
1,516
|
|
Research Credit
|
(2,002
|
)
|
|
(2,926
|
)
|
|
(1,662
|
)
|
Other
|
5,062
|
|
|
(2,714
|
)
|
|
2,143
|
|
Income tax provision (benefit)
|
$
|
32,500
|
|
|
$
|
11,527
|
|
|
$
|
(7,409
|
)
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Loss carry forwards
|
$
|
154,890
|
|
|
$
|
111,955
|
|
Basis differences in deductible goodwill and purchased intangibles
|
54,722
|
|
|
49,807
|
|
Foreign tax credit carry forwards
|
19,048
|
|
|
14,544
|
|
Foreign taxes on basis differences
|
58,924
|
|
|
54,170
|
|
Accrued expenses and reserves
|
20,515
|
|
|
29,609
|
|
Deferred revenue
|
40,073
|
|
|
55,657
|
|
Stock based compensation
|
20,927
|
|
|
19,965
|
|
Unrealized foreign currency losses
|
15,344
|
|
|
17,144
|
|
R&D credit carry forwards
|
13,108
|
|
|
10,712
|
|
Interest carry forward
|
12,423
|
|
|
11,221
|
|
Inventories
|
10,692
|
|
|
7,637
|
|
Other deferred tax assets
|
9,452
|
|
|
6,895
|
|
Total deferred tax assets
|
430,118
|
|
|
389,316
|
|
Valuation allowance
|
(372,616
|
)
|
|
(326,935
|
)
|
Deferred tax liabilities:
|
|
|
|
Basis differences on purchased intangibles
|
(39,031
|
)
|
|
(52,827
|
)
|
Basis differences in investments in foreign subsidiaries
|
(70,393
|
)
|
|
(57,657
|
)
|
Other deferred tax liabilities
|
(12,513
|
)
|
|
(14,278
|
)
|
Total deferred tax liabilities
|
(121,937
|
)
|
|
(124,762
|
)
|
Net deferred tax liabilities
|
$
|
(64,435
|
)
|
|
$
|
(62,381
|
)
|
Other deferred tax assets and liabilities are comprised primarily of the tax effects of depreciation and amortized debt issuance costs.
The realization of deferred tax assets is dependent primarily on generating sufficient U.S. and foreign taxable income in future fiscal years. We regularly assess the need for a valuation allowance against deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we consider the cumulative loss in the U.S. as a significant piece of negative evidence. Therefore, in fiscal 2013, we established a
$245.0 million
valuation allowance against a significant portion of our deferred tax assets, including U.S. federal and state deferred tax assets, as well as certain other foreign deferred tax assets. We will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward and adjust the valuation allowance accordingly. We intend to maintain the valuation allowances until sufficient positive evidence exists to support the reversal of the valuation allowance.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The tax loss carry forwards as of October 31, 2017 were related primarily to tax losses of
$466.2 million
in the U.S.,
$113.1 million
in Ireland,
$31.1 million
in Brazil,
$25.3 million
in France,
$16.3 million
in Spain,
$12.5 million
in the United Kingdom, and
$48.7 million
in various other non-U.S. countries. Approximately
$232.8 million
of foreign tax losses may be carried forward indefinitely. The remaining approximately
$480.3 million
of tax losses is subject to limited carry forward terms of
3
to
20
years, and will expire at various dates beginning in 2018, if not utilized.
The excess tax benefits associated with stock option exercises are recorded directly to stockholders' equity only when realized. The excess tax benefits that have not yet been realized at October 31, 2017, but which are included in net operating loss carryforwards on a tax return basis at October 31, 2017, total
$133.1 million
.
The U.S. net operating loss carryforward includes acquired net operating losses of
$125.8 million
. Utilization of some of our acquired NOL and tax credit carryforwards in the United States may be subject to annual limitation due to the ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of certain NOLs and tax credits before future utilization.
As of October 31, 2017, we have recorded U.S. foreign tax credit carry forwards of
$77.0 million
which will expire at various dates beginning in 2020, if not utilized. In addition we have recorded U.S. research and development tax credit carry forwards of
$21.4 million
which will expire at various dates beginning in 2019, if not utilized.
We recognize deferred tax liabilities associated with outside basis differences on investments in foreign subsidiaries unless the difference is considered essentially permanent in duration. As of October 31, 2017, we have recorded a deferred tax liability of
$64.7 million
associated with
$169.4 million
of taxable outside basis differences which are not considered permanently reinvested. We have not recorded deferred taxes on approximately
$872.9 million
of undistributed earnings as they are considered permanently reinvested. As of October 31, 2017, the determination of the unrecorded deferred tax liability related to these earnings is not practicable. If circumstances change and it becomes apparent that some or all of the undistributed earnings will not be invested indefinitely, or will be remitted in the foreseeable future, an additional deferred tax liability will be recorded for some or all of the outside basis difference.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Israel Tax Audit Assessment
We are currently under audit by the Israeli Tax Authorities for fiscal years 2011 through 2015. The Israeli Tax Authorities issued a tax assessment in October 2014 for fiscal year 2009 or alternatively for fiscal year 2008 claiming there was a business restructuring that resulted in a transfer of some functions, assets and risks from VeriFone Israel Ltd. to the U.S. parent company that the Israeli Tax Authorities claim was a sale valued at
1.36 billion
New Israeli Shekels
(approximately
$386.1 million
at the foreign exchange rate as of
October 31, 2017
). We filed our objection to the tax assessment in January 2015 and received the Israeli Tax Authorities decision through an Order (a second stage assessment) in January 2016. The Order increased the value of the sale to
2.20 billion
New Israeli Shekels in fiscal year 2009 (approximately
$624.1 million
at the foreign exchange rate as of
October 31, 2017
) or alternatively
2.23 billion
New Israeli Shekels in fiscal year 2008 (approximately
$631.4 million
at the foreign exchange rate as of
October 31, 2017
) and contended secondary adjustments relating to a deemed dividend and/or interest.
Based on the Order, these and other claims result in a tax liability and deficiency penalty assessment in the amount of
1.34 billion
New Israeli Shekels (approximately
$378.2 million
at the foreign exchange rate as of
October 31, 2017
), if the claim was assessed for fiscal year 2009, to
1.58 billion
New Israeli Shekels (approximately
$446.4 million
at the foreign exchange rate as of
October 31, 2017
) if the claim was assessed for fiscal year 2008, including interest, the required Israeli price index adjustments (referred to as the linkage differentials) and deficiency fines (as applicable) through
October 31, 2017
. The Israeli Tax Authorities' contention regarding secondary adjustments relating to deemed dividend was not quantified by them.
We continue to believe the Israeli Tax Authorities' assessment position is without merit and appealed the assessment to the district court. We have agreed with the Israeli Tax Authorities to repay our
$69.0 million
intercompany loan from VeriFone Israel Ltd. to the extent of the amount of a final agreed tax assessment concerning fiscal year 2008 and fiscal year 2009 or a judgment of a district court in an appeal on the decision of the Israeli Tax Authorities in the objection, if any.
The Israeli Tax Authorities issued a tax assessment in October 2017 for fiscal years 2011 and 2012 that includes secondary adjustments relating to a deemed dividend and/or interest with respect to the contention concerning business restructuring in 2008 or 2009. The Israeli Tax Authorities' contention regarding secondary adjustments relating to deemed dividend was not quantified by them. We intend to file our objection to the assessment.
Other Audits
We have certain other foreign subsidiaries under audit by foreign tax authorities, including Brazil for 2002, Germany for 2013 to 2015, India for fiscal years 2008 to 2015 and New Zealand for fiscal years 2014 and 2015. Although we believe we have appropriately provided for income taxes for the years subject to audit, the Brazil, Germany, India, Israel and New Zealand taxing authorities may adopt different interpretations. We have not yet received any final determinations with respect to these audits. We have accrued tax liabilities associated with these audits. With few exceptions, we are no longer subject to tax examination for periods prior to 2008.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
106,103
|
|
|
$
|
110,564
|
|
|
$
|
111,002
|
|
Lapse of statute of limitations
|
(6,179
|
)
|
|
(1,185
|
)
|
|
(501
|
)
|
Increases in balances related to tax positions taken during prior periods
|
1,946
|
|
|
488
|
|
|
2,988
|
|
Decreases in balances related to tax positions taken during prior periods
|
(1,392
|
)
|
|
(3,834
|
)
|
|
(3,615
|
)
|
Increases in balances related to tax positions taken during current period
|
7,490
|
|
|
5,100
|
|
|
1,246
|
|
Settlements
|
—
|
|
|
(5,030
|
)
|
|
(556
|
)
|
Balance at end of period
|
$
|
107,968
|
|
|
$
|
106,103
|
|
|
$
|
110,564
|
|
The total gross unrecognized tax benefits, if recognized, will affect our effective tax rate. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the tax authorities. We believe that it is reasonably possible that there could be an immaterial reduction in unrecognized tax benefits due to statute of limitation expirations in multiple tax jurisdictions during the next 12 months. Interest and penalties accrued on these uncertain tax positions will also be released upon the expiration of statutes of limitations. Interest and penalties recognized in each statement of operations were not material. As of
October 31, 2017
we have accrued
$6.3 million
for the payment of interest and penalties related to unrecognized tax benefits.
Note 7. Balance Sheet Components
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash and cash equivalents
|
$
|
131,029
|
|
|
$
|
148,352
|
|
|
$
|
208,870
|
|
Restricted cash included in Prepaid expenses and other current assets
|
11,413
|
|
|
9,008
|
|
|
4,844
|
|
Restricted cash included in Other long-term assets
|
1,287
|
|
|
1,821
|
|
|
2,155
|
|
Total cash, cash equivalents and restricted cash
|
$
|
143,729
|
|
|
$
|
159,181
|
|
|
$
|
215,869
|
|
Restricted cash as of
October 31, 2017
and
2016
was mainly comprised of cash held on behalf of customers as part of our transaction processing services.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowances for doubtful accounts
Activity related to the allowances for doubtful accounts consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
9,240
|
|
|
$
|
7,904
|
|
|
$
|
8,510
|
|
Charges to bad debt expense
|
1,037
|
|
|
4,251
|
|
|
2,329
|
|
Write-offs, recoveries, and adjustments
|
(2,377
|
)
|
|
(2,915
|
)
|
|
(2,935
|
)
|
Balance at end of period
|
$
|
7,900
|
|
|
$
|
9,240
|
|
|
$
|
7,904
|
|
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Raw materials
|
$
|
32,118
|
|
|
$
|
35,453
|
|
Work-in-process
|
978
|
|
|
3,884
|
|
Finished goods
|
93,467
|
|
|
135,894
|
|
Total inventories
|
$
|
126,563
|
|
|
175,231
|
|
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Assets held for sale
|
$
|
46,368
|
|
|
$
|
5,131
|
|
Prepaid expenses
|
41,824
|
|
|
46,240
|
|
Other current assets
|
50,204
|
|
|
59,026
|
|
Total prepaid expenses and other current assets
|
$
|
138,396
|
|
|
$
|
110,397
|
|
Assets held for sale relate to our Taxi Solutions business. See Note 12,
Restructuring and Related Charges,
for additional information. Other current assets were comprised primarily of prepaid taxes and restricted cash.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
Estimated Useful Life (Years)
|
|
2017
|
|
2016
|
Revenue generating assets
|
5
|
|
$
|
138,770
|
|
|
$
|
209,725
|
|
Computer hardware and software
|
3-5
|
|
97,413
|
|
|
112,984
|
|
Machinery and equipment
|
3-10
|
|
47,728
|
|
|
57,020
|
|
Leasehold improvements
|
Lesser of the term of the lease or the estimated useful life
|
|
31,445
|
|
|
31,328
|
|
Office equipment, furniture, and fixtures
|
3-5
|
|
20,947
|
|
|
18,573
|
|
Buildings
|
40-50
|
|
6,028
|
|
|
6,011
|
|
Total depreciable property and equipment, at cost
|
|
|
342,331
|
|
|
435,641
|
|
Accumulated depreciation
|
|
|
(221,574
|
)
|
|
(243,127
|
)
|
Depreciable property and equipment, net
|
|
|
120,757
|
|
|
192,514
|
|
Construction in progress
|
|
|
5,941
|
|
|
8,600
|
|
Land
|
|
|
1,174
|
|
|
1,163
|
|
Total property and equipment, net
|
|
|
$
|
127,872
|
|
|
$
|
202,277
|
|
During the fiscal year 2017, we divested or reclassified as held for sale revenue generating assets and other fixed assets with a net carrying value of
$74.9 million
.
Total depreciation expense for the fiscal years ended
October 31, 2017
,
2016
, and
2015
was
$66.1 million
,
$62.5 million
, and
$58.7 million
, respectively.
Other long-term assets
Other long-term assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Capitalized software development costs
|
$
|
50,691
|
|
|
$
|
55,097
|
|
Equity investments
|
19,589
|
|
|
552
|
|
Other
|
31,526
|
|
|
25,674
|
|
Total other long-term assets
|
$
|
101,806
|
|
|
$
|
81,323
|
|
See Note 9,
Equity Investments
, for additional information on our equity investments.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accruals and Other Current Liabilities
Accruals and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Accrued expenses
|
$
|
57,114
|
|
|
$
|
76,187
|
|
Accrued compensation
|
65,663
|
|
|
52,555
|
|
Other current liabilities
|
104,518
|
|
|
84,669
|
|
Total accruals and other current liabilities
|
$
|
227,295
|
|
|
$
|
213,411
|
|
Other current liabilities were comprised primarily of trade payables and accruals that are held for sale in connection with the disposal of our Taxi Solutions business, accrued restructuring and related accruals, sales and value-added taxes payable, income taxes payable, and accrued warranty.
Accrued Warranty
Activity related to accrued warranty consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
16,656
|
|
|
$
|
16,320
|
|
Warranty charged to Cost of net revenues
|
10,466
|
|
|
13,111
|
|
Utilization of warranty accrual
|
(14,104
|
)
|
|
(12,957
|
)
|
Other
|
469
|
|
|
182
|
|
Balance at end of period
|
13,487
|
|
|
16,656
|
|
Less: current portion
|
(11,669
|
)
|
|
(13,640
|
)
|
Long-term portion
|
$
|
1,818
|
|
|
$
|
3,016
|
|
Deferred Revenue, Net
Deferred revenue, net of related costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Deferred revenue
|
$
|
181,271
|
|
|
$
|
185,788
|
|
Deferred cost of revenue
|
$
|
(18,056
|
)
|
|
(14,475
|
)
|
Deferred revenue, net
|
163,215
|
|
|
171,313
|
|
Less: current portion
|
$
|
(101,427
|
)
|
|
(104,797
|
)
|
Long-term portion
|
$
|
61,788
|
|
|
66,516
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Unrecognized tax benefits liability, net
|
$
|
37,412
|
|
|
$
|
33,745
|
|
Contingent consideration payable
|
—
|
|
|
5,254
|
|
Other long-term liabilities
|
38,677
|
|
|
37,841
|
|
Total other long-term liabilities
|
$
|
76,089
|
|
|
$
|
76,840
|
|
Accumulated Other Comprehensive Loss
Activity related to Accumulated other comprehensive loss consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
(1)
|
|
Unrealized gain (loss) on derivatives designated as cash flow hedges
(2)
|
|
Other
(3)
|
|
Total
|
Balance at October 31, 2015
|
|
$
|
(286,662
|
)
|
|
$
|
(4,409
|
)
|
|
$
|
(1,250
|
)
|
|
$
|
(292,321
|
)
|
Losses before reclassifications, net of tax
|
|
(46,618
|
)
|
|
(1,971
|
)
|
|
—
|
|
|
(48,589
|
)
|
Amounts reclassified from Accumulated other comprehensive loss, net of tax
|
|
—
|
|
|
3,961
|
|
|
(4,045
|
)
|
|
(84
|
)
|
Other comprehensive income (loss)
|
|
(46,618
|
)
|
|
1,990
|
|
|
(4,045
|
)
|
|
(48,673
|
)
|
Balance at October 31, 2016
|
|
(333,280
|
)
|
|
(2,419
|
)
|
|
(5,295
|
)
|
|
(340,994
|
)
|
Gains before reclassifications, net of tax
|
|
60,512
|
|
|
3,062
|
|
|
—
|
|
|
63,574
|
|
Amounts reclassified from Accumulated other comprehensive loss, net of tax
|
|
7,711
|
|
|
1,171
|
|
|
1,966
|
|
|
10,848
|
|
Other comprehensive income
|
|
68,223
|
|
|
4,233
|
|
|
1,966
|
|
|
74,422
|
|
Balance at October 31, 2017
|
|
$
|
(265,057
|
)
|
|
$
|
1,814
|
|
|
$
|
(3,329
|
)
|
|
$
|
(266,572
|
)
|
(1) Amounts reclassified from Accumulated other comprehensive loss, net of tax, were recorded in Redeemable noncontrolling interest in subsidiary and Noncontrolling interests in subsidiaries in the Consolidated Balance Sheets.
(2) Amounts reclassified from Accumulated other comprehensive loss, net of tax, were recorded in Interest expense, net in the Consolidated Statements of Operations. The related tax impacts were insignificant.
(3) Amounts reclassified from Accumulated other comprehensive loss, net of tax, were recorded in General and administrative expenses in the Consolidated Statements of Operations. The related tax impacts were insignificant.
Note 8. Financial Instruments
Fair Value Measurements
Our financial assets and liabilities consist principally of cash, accounts receivable, accounts payable, debt, foreign exchange forward contracts, and interest rate swaps, and are reported at fair value. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value. The estimated fair value of our debt approximates the carrying value because the interest rate on such debt adjusts to market rates on a periodic basis. Foreign exchange forward contracts, interest rate swaps, and contingent consideration payable are recorded at estimated fair value on a recurring basis.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following tables present our significant assets and liabilities that are measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands). There were no transfers between levels of fair value hierarchy in the
fiscal years
ended
October 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
October 31, 2016
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts not designated as hedging instruments
|
$
|
238
|
|
|
$
|
—
|
|
|
$
|
238
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
—
|
|
Interest rate swap agreements designated as cash flow hedges
|
3,745
|
|
|
—
|
|
|
3,745
|
|
|
—
|
|
|
301
|
|
|
—
|
|
|
301
|
|
|
—
|
|
Total assets measured and recorded at fair value
|
$
|
3,983
|
|
|
$
|
—
|
|
|
$
|
3,983
|
|
|
$
|
—
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,997
|
|
Foreign exchange forward contracts not designated as hedging instruments
|
115
|
|
|
—
|
|
|
115
|
|
|
—
|
|
|
153
|
|
|
—
|
|
|
153
|
|
|
—
|
|
Interest rate swap agreements designated as cash flow hedges
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,676
|
|
|
—
|
|
|
2,676
|
|
|
—
|
|
Total liabilities measured and recorded at fair value
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
8,826
|
|
|
$
|
—
|
|
|
$
|
2,829
|
|
|
$
|
5,997
|
|
Fair Value of Contingent Consideration Payable
Contingent consideration payable at
October 31, 2016
is comprised of amounts payable related to acquisitions and is classified as Level 3 because we use significant unobservable inputs to determine the expected payments and an appropriate discount rate to calculate the fair value. There is no contingent consideration payable at
October 31, 2017
because our obligation for the majority of the
October 31, 2016
contingent consideration was canceled in connection with the Gas Media exchange transaction, see Note 2,
Business Combinations.
No other remaining contingent consideration is expected to be paid. The maximum liability of the remaining contingent consideration payable is indeterminate because it is based on contributions from the acquired business.
Derivative Financial Instruments
Interest Rate Swap Agreements Designated as Cash Flow Hedges
We use interest rate swap agreements to hedge the variability in cash flows related to interest payments. As of
October 31, 2017
, we have outstanding interest rate swap agreements to effectively convert
$400.0 million
of the term A loan from a floating rate plus applicable margin to a fixed rate of
1.20%
plus applicable margin through March 30, 2018. In addition, we have an outstanding interest rate swap agreement to effectively convert
$350.0 million
of the term A loan to a fixed rate of
0.975%
plus applicable margin from March 30, 2018 through
June 30, 2019
.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The notional amounts of interest rate swap agreements outstanding as of
October 31, 2017
and
October 31, 2016
were
$400.0 million
and
$500.0 million
, respectively.
As of
October 31, 2017
, the estimated net derivative gain related to our cash flow hedges included in Accumulated other comprehensive loss that will be reclassified into earnings in the next 12 months is
$1.5 million
.
Foreign Exchange Forward Contracts Not Designated as Hedging Instruments
We arrange and maintain foreign currency exchange forward contracts so as to yield gains or losses to offset changes in foreign currency denominated assets or liabilities due to changes in foreign exchange rates, with the objective to mitigate the volatility associated with foreign currency transaction gains or losses. Our foreign currency exposures are predominantly inter-company receivables and payables arising from product sales and loans from one of our entities to another. Our foreign exchange forward contracts generally mature within
90
days. The notional amounts of such contracts outstanding as of
October 31, 2017
and
October 31, 2016
were
$255.2 million
and
$175.0 million
, respectively.
We recognized the following gains (losses) on foreign exchange forward contracts not designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Gains (losses) recognized in Other income (expense), net in our Consolidated Statements of Operations
|
$
|
4,310
|
|
|
$
|
(1,988
|
)
|
|
$
|
17,113
|
|
Note 9. Equity Investments
Consolidated variable interest entity
We have a
51%
equity interest in Panaroma and have determined it is a variable interest entity and that we are the primary beneficiary. Consequently, we consolidate the entity and reflect the non-controlling interest of the entity in our financial statements.
The minority shareholder holding the remaining
49%
of Panaroma has a put option that is exercisable for
three
years after January 1, 2020 and if exercised requires us to purchase the remaining
49%
equity of Panaroma at a multiple of earnings before taxes, depreciation and amortization for the year ended December 31, 2019. Since the noncontrolling interest is redeemable at the option of the minority shareholder and is outside our control, it is reported in the mezzanine section in the Consolidated Balance Sheets and recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss, or its redemption value.
In addition to our equity investment in Panaroma, we have also entered into other arrangements such as reseller and service agreements. We have no obligation to provide ongoing funding other than the put option described above. However in the first quarter of the fiscal year ended January 31, 2018, we provided a nominal financial support to Panaroma and revised certain payment terms relating to purchases of inventory to assist them with their working capital needs.
Equity method investment
We have a
50%
equity interest in Gas Media and have determined that Gas Media is not a variable interest entity. The carrying value of our investment in Gas Media is
$16.8 million
as of
October 31, 2017
.
We have made the election to use a one-month lag to record our share of Gas Media's results. Our share of the losses of Gas Media was
$2.4 million
for the
fiscal year
ended
October 31, 2017
. Our basis difference between the investment in Gas Media and the amount of underlying equity in net assets is
$9.8 million
as of
October 31, 2017
.
In addition, we have agreed to guarantee, in certain circumstances, up to
$12.5 million
out of a total of
$83.8 million
of debt issued to Gas Media. Our maximum exposure is based on the carrying value of investment to date and the extent of our guarantee. As of
October 31, 2017
, we have not made any payments and no amounts are accrued related to this guarantee.
Cost method investments
We have investments accounted for under the cost method that have a nominal carrying value as of the fiscal year ended
October 31, 2017
and
2016
.
Two
of these investments are in variable interest entities where we are not the primary beneficiary. Our known maximum exposure to loss on the variable interest entities is
$13.8 million
as of the fiscal year ended
October 31, 2017
, and relates primarily to future borrowings on a committed line of credit available to one of our investees. These investments do not have a readily determinable fair values and we did not record any other-than-temporary impairments for the
fiscal years
ended
October 31, 2017
and
2016
.
We periodically evaluate the carrying value of our equity investments, when events and circumstances indicate the investment may not be recoverable. As part of this evaluation, we estimate the fair value of the equity investments using Level 3 inputs. These investments include our holdings in privately-held companies that are not exchange traded and therefore not supported with observable market prices, hence we may determine the fair value by reviewing equity valuation reports, current financial results, long-term plans of the private company, the amount of cash that the privately-held company has on-hand, the ability to obtain additional financing and overall market conditions in which the private company operates.
Note 10. Goodwill and Purchased Intangible Assets
Goodwill
Activity related to goodwill by reportable segment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
EMEA
|
|
Latin America
|
|
Asia-Pacific
|
|
Verifone Systems
|
|
Verifone Services
|
|
Total
|
Balance at October 31, 2015
|
$
|
106,641
|
|
|
$
|
810,062
|
|
|
$
|
85,797
|
|
|
$
|
81,531
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,084,031
|
|
Segment reallocation
|
(106,641
|
)
|
|
(810,062
|
)
|
|
(85,797
|
)
|
|
(81,531
|
)
|
|
512,182
|
|
|
571,849
|
|
|
—
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,090
|
|
|
68,281
|
|
|
74,371
|
|
Other adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,431
|
)
|
|
(3,431
|
)
|
Currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,146
|
)
|
|
(23,332
|
)
|
|
(44,478
|
)
|
Balance at October 31, 2016
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
497,126
|
|
|
613,367
|
|
|
1,110,493
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,647
|
|
|
5,647
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,384
|
)
|
|
(17,384
|
)
|
Reclassification to assets held for sale
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,327
|
)
|
|
(28,327
|
)
|
Disposals
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,096
|
)
|
|
(10,096
|
)
|
Currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,778
|
|
|
26,259
|
|
|
44,037
|
|
Balance at October 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
514,904
|
|
|
$
|
589,466
|
|
|
$
|
1,104,370
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During December 2015, our Chief Executive Officer realigned the company's organizational structure to focus on
two
operating segments: Verifone Systems and Verifone Services. In connection with the operating segment realignment, during the three months ended January 31, 2016, we updated our goodwill impairment assessment based on a quantitative analysis. We first evaluated the goodwill of our reporting units immediately prior the realignment and concluded that there was
no
impairment. We then allocated our goodwill to the new reporting units using a relative fair value approach, and re-confirmed that there is no impairment.
During the fourth quarters of fiscal year 2017 and 2016, we completed our annual impairment assessments and concluded that goodwill was not impaired in either year. We used the qualitative method in our 2017 and 2016 annual assessments related to both of our reporting units. We used the quantitative approach in our 2016 assessment related to our former Taxi Solutions reporting unit.
During the second quarter of fiscal year 2017, management concluded that the carrying amount of the goodwill related to our former Taxi Solutions reporting unit may not be recoverable, and based on a quantitative assessment, considering potential sales transactions, management determined the fair value of the reporting unit and concluded that the goodwill was impaired by
$17.4 million
. Also, during the second quarter of fiscal year 2017, our management committed to a plan to sell our former Taxi Solutions reporting unit, and the remaining
$28.3 million
of goodwill in our former Taxi Solutions reporting unit was reclassified to assets held for sale. See Note 12,
Restructuring and Related Charges,
for additional information.
Purchased Intangible Assets, Net
Purchased Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
October 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
$
|
498,951
|
|
|
$
|
(282,176
|
)
|
|
$
|
216,775
|
|
|
$
|
521,964
|
|
|
$
|
(249,513
|
)
|
|
$
|
272,451
|
|
Other
|
40,715
|
|
|
(21,112
|
)
|
|
19,603
|
|
|
73,175
|
|
|
(39,328
|
)
|
|
33,847
|
|
Total
|
$
|
539,666
|
|
|
$
|
(303,288
|
)
|
|
$
|
236,378
|
|
|
$
|
595,139
|
|
|
$
|
(288,841
|
)
|
|
$
|
306,298
|
|
Other intangible assets, net, were comprised primarily of developed and core technology.
When purchased intangible assets reach the end of their useful lives, gross carrying amount and accumulated amortization are offset. During the
fiscal year
ended
October 31, 2017
, we offset
$44.6 million
of Gross carrying amount and Accumulated amortization of intangible assets related to customer relationships and
$29.9 million
related to other intangible assets, because they reached the end of their useful lives.
Activity related to purchased intangible assets during the fiscal year ended October 31, 2017 includes a
$29.3 million
currency translation adjustment to Gross carrying amount and a
$17.0 million
currency translation adjustment to Accumulated amortization.
Amortization of purchased intangible assets was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Included in Cost of net revenues
|
$
|
6,727
|
|
|
$
|
15,130
|
|
|
$
|
18,307
|
|
Included in Operating expenses
|
69,622
|
|
|
90,534
|
|
|
82,492
|
|
Total amortization of purchased intangible assets
|
$
|
76,349
|
|
|
$
|
105,664
|
|
|
$
|
100,799
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of
October 31, 2017
, is estimated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Net Revenues
|
|
Operating
Expenses
|
|
Total
|
Fiscal Years Ending October 31:
|
|
|
|
|
|
2018
|
$
|
5,357
|
|
|
$
|
57,455
|
|
|
$
|
62,812
|
|
2019
|
5,235
|
|
|
51,871
|
|
|
57,106
|
|
2020
|
3,528
|
|
|
43,910
|
|
|
47,438
|
|
2021
|
2,353
|
|
|
31,973
|
|
|
34,326
|
|
2022
|
203
|
|
|
16,709
|
|
|
16,912
|
|
Thereafter
|
—
|
|
|
17,784
|
|
|
17,784
|
|
Total future amortization expense
|
$
|
16,676
|
|
|
$
|
219,702
|
|
|
$
|
236,378
|
|
Note 11. Financings
Amounts outstanding under our financing arrangements consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
Credit Agreement
|
|
|
|
Term A loan
|
$
|
465,000
|
|
|
$
|
525,000
|
|
Term B loan
|
193,500
|
|
|
195,500
|
|
Revolving loan
|
168,447
|
|
|
204,684
|
|
Capital leases and other debt
|
10,734
|
|
|
11,573
|
|
Total principal payments due
|
837,681
|
|
|
936,757
|
|
Less: original issue discount and debt issuance costs
|
(6,867
|
)
|
|
(10,844
|
)
|
Total amounts outstanding
|
830,814
|
|
|
925,913
|
|
Less: current portion
|
(68,770
|
)
|
|
(66,017
|
)
|
Long-term portion
|
$
|
762,044
|
|
|
$
|
859,896
|
|
Credit Agreement
On December 28, 2011, we entered into a credit agreement which was amended on July 8, 2014. The amended and restated agreement provides for an aggregate amount of up to
$1.3 billion
of debt consisting of a
$600.0 million
term A loan,
$200.0 million
term B loan and
$500.0 million
revolving loan commitment.
Borrowings under the credit agreement bear interest at a “Base Rate” or “Eurodollar Rate”, at our option, plus an applicable margin based on certain financial ratios, determined and payable quarterly. In addition, we pay an undrawn commitment fee on the unused portion of the revolving loan ranging from
0.25%
to
0.50%
per annum, depending on our leverage ratio.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The outstanding principal balance of the term A loan is required to be repaid in quarterly installments of the following percentages of the original balance outstanding under the term A loan:
1.25%
for each quarter from the quarter ending September 30, 2014 through the quarter ending June 30, 2016;
2.50%
for each quarter from the quarter ending September 30, 2016 through the quarter ending June 30, 2019, with the balance being due at maturity on July 8, 2019. The outstanding principal balance of the term B loan is required to be repaid in equal quarterly installments of
0.25%
of the original balance outstanding under the term B loan, with the balance being due at maturity on July 8, 2021. The revolving loan terminates on July 8, 2019. Outstanding amounts may also be subject to mandatory repayment with the proceeds of certain asset sales, and debt issuances, and, in the case of the term B loan only, from a portion of annual excess cash flows depending on our total leverage ratio, as defined under the agreement.
Additional terms of the credit agreement require compliance with financial covenants that require us to maintain financial ratios related to interest coverage and financial leverage. We were in compliance with these financial covenants as of
October 31, 2017
. The credit agreement also contains representations and warranties, affirmative covenants, negative covenants, financial covenants and conditions that are customarily required for similar financings including the following, among others:
|
|
•
|
A restriction on incurring additional indebtedness, subject to specified permitted debt;
|
|
|
•
|
A restriction on creating certain liens, subject to specified exceptions;
|
|
|
•
|
A restriction on mergers and consolidations, subject to specified exceptions;
|
|
|
•
|
A restriction on asset dispositions, subject to specified exceptions for ordinary course and other transactions;
|
|
|
•
|
A restriction on certain investments, subject to certain exceptions and a suspension if we achieve certain credit ratings;
|
|
|
•
|
A restriction on the payment of dividends, subject to specified exceptions; and
|
|
|
•
|
A restriction on entering into certain transactions with affiliates, subject to specified exceptions.
|
Borrowings under the credit agreement are guaranteed by certain of our wholly owned domestic subsidiaries and secured by a first priority lien and security interest in certain of our assets, subject to customary exceptions.
As of
October 31, 2017
, we have elected the Eurodollar option for all of our borrowings. Eurodollar loans bear interest at a monthly market interest rate plus a margin according to the credit agreement. As of
October 31, 2017
, the monthly market interest rate was
1.25%
for our term A and revolver loans, and
1.25%
for our term B loan, and the margins were
2.00%
for our term A and revolver loans and
2.75%
for our term B loan. Accordingly, as of
October 31, 2017
, the interest rate was
3.25%
for the term A and revolving loans and
4.00%
for the term B loan.
We have a number of interest rate swap agreements under which we currently pay banks a fixed rate of
1.20%
and receive a monthly floating rate, which effectively converts
$400.0 million
of the term A loan from a floating interest rate to a fixed interest rate as of
October 31, 2017
. See Note 8,
Financial Instruments,
for additional information.
As of
October 31, 2017
, the commitment fee for the unused portion of the revolving loan was
0.25%
per annum, payable quarterly in arrears, and the amount available to draw under the revolving loan was
$331.6 million
.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Principal Payments
Future principal payments due under our financing arrangements are as follows (in thousands):
|
|
|
|
|
|
Amounts
|
Years Ending October 31:
|
|
2018
|
$
|
69,101
|
|
2019
|
577,737
|
|
2020
|
3,036
|
|
2021
|
187,568
|
|
2022
|
23
|
|
Thereafter
|
216
|
|
Total
|
$
|
837,681
|
|
Note 12. Restructuring and Related Charges
As part of cost optimization and corporate transformation initiatives, our management has approved, committed to and initiated various restructuring plans to reduce headcount, exit under-performing businesses, and consolidate facilities and data centers.
Activity related to our restructuring and related accruals for the
fiscal years
ended
October 31, 2017
and
2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Plans
|
|
|
|
|
|
Prior year Plans
|
|
June 2016 Plan
|
|
June 2017 Plan
|
|
|
|
|
|
Employee
Involuntary Termination Benefits
|
|
Facilities
Related
Costs
|
|
Employee Involuntary Termination Benefits
|
|
Facilities Related Costs
|
|
Employee Involuntary Termination Benefits
|
|
Other Business Exit Costs
|
|
Total
|
Balance at October 31, 2015
|
$
|
6,117
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,122
|
|
Charges, net of adjustments
|
(172
|
)
|
|
—
|
|
|
11,907
|
|
|
3,430
|
|
|
—
|
|
|
—
|
|
|
15,165
|
|
Cash payments
|
(4,245
|
)
|
|
(5
|
)
|
|
(6,682
|
)
|
|
(623
|
)
|
|
—
|
|
|
—
|
|
|
(11,555
|
)
|
Balance at October 31, 2016
|
$
|
1,700
|
|
|
$
|
—
|
|
|
$
|
5,225
|
|
|
$
|
2,807
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,732
|
|
Charges, net of adjustments
|
(817
|
)
|
|
—
|
|
|
6,092
|
|
|
(767
|
)
|
|
11,819
|
|
|
28,686
|
|
|
45,013
|
|
Cash payments
|
(883
|
)
|
|
—
|
|
|
(8,220
|
)
|
|
(1,043
|
)
|
|
(6,388
|
)
|
|
(10,319
|
)
|
|
(26,853
|
)
|
Balance at October 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,097
|
|
|
$
|
997
|
|
|
$
|
5,431
|
|
|
$
|
18,367
|
|
|
$
|
27,892
|
|
Cumulative costs to date
|
$
|
18,655
|
|
|
$
|
853
|
|
|
$
|
18,005
|
|
|
$
|
2,725
|
|
|
$
|
11,819
|
|
|
$
|
28,686
|
|
|
|
|
Activities under these Restructuring Plans are expected to be substantially complete by the end of fiscal year 2018.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restructuring and related charges were allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Included in Cost of net revenues
|
$
|
25,726
|
|
|
$
|
5,125
|
|
|
$
|
348
|
|
Included in Operating expenses
|
143,152
|
|
|
41,254
|
|
|
8,429
|
|
Total restructuring and related charges
|
$
|
168,878
|
|
|
$
|
46,379
|
|
|
$
|
8,777
|
|
Petro Media restructuring
During fiscal year 2017, our management committed to and completed a plan to exit our petroleum media business, which was part of our Verifone Services segment. In connection with this decision, we contributed certain assets to Gas Media, terminated certain customer agreements and classified the remaining assets of this business as held for sale, resulting in a
$49.1 million
write-down to reflect the assets held for sale at fair value, of which
$10.6 million
is included in Cost of net revenues and
$38.5 million
is included in Restructuring and related charges in the Consolidated Statements of Operations. We also recorded a
$28.1 million
expense during the fiscal year ended October 31, 2017, for estimated future obligations associated with the terminated customer agreements of which
$18.4 million
was unpaid as of October 31, 2017.
Taxi Solutions restructuring
During the second quarter of fiscal year 2017, our management committed to a plan to sell our former Taxi Solutions reporting unit and we classified the net assets and liabilities of this business as held for sale. The net assets held for sale are presented at fair value and classified as Level 3 because we use significant unobservable inputs to determine the fair value. The fair value was initially determined during the second quarter of fiscal year 2017 in connection with the quantitative assessment of goodwill impairment discussed in Note 10,
Goodwill and Purchased Intangible Assets.
Additionally, based upon continued negotiations of potential sales transactions, management updated the fair value of the assets held for sale during fiscal year 2017, resulting in charges totaling
$50.2
million, which are included in Restructuring and related charges in the Consolidated Statements of Operations.
The following table reflects the October 31, 2017 carrying value of the Taxi Solutions assets and liabilities that are classified as held for sale (in thousands):
|
|
|
|
|
|
October 31, 2017
|
Accounts Receivable
|
$
|
11,908
|
|
Prepaid expenses and other current assets
|
14,102
|
|
Revenue generating assets and other fixed assets
|
35,245
|
|
Purchased intangibles assets, net
|
5,786
|
|
Goodwill
|
46,978
|
|
Accounts payable, accruals and other current liabilities
|
(15,721
|
)
|
Other
|
(2,859
|
)
|
Carrying Value
|
95,439
|
|
Goodwill impairment
|
(17,384
|
)
|
Fair value adjustments
|
(50,215
|
)
|
Fair value of assets held for sale
|
$
|
27,840
|
|
The gross assets held for sale are presented in Prepaid expenses and other current assets in the Consolidated Balance Sheet and the gross liabilities held for sale are presented in Accruals and other current liabilities in the Consolidated Balance Sheet.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Losses before income taxes on our Taxi Solutions business incurred during fiscal year 2017 was
$74.7 million
,
$16.8 million
and
$5.5 million
for the
fiscal years
ended
October 31, 2017
,
2016
, and
2015
respectively.
On December 11, 2017, we divested our Taxi Solutions business for
$22.5 million
in cash paid at closing plus
$7.5 million
due in March 2018. In connection with the transaction, we received a
10%
common stock equity interest in a limited liability company that is an indirect parent of the buyer and is partially owned by the former general manager of this business. The purchase price is subject to upward adjustment based on working capital in certain circumstances. The buyer assumed responsibility for the
$50.3 million
of operating lease commitments associated with the Taxi Solution business, as discussed in Note 13,
Commitments and Contingencies,
and we have retained certain guarantees of these leases, for which we are indemnified.
China business restructuring
During June 2017, we divested our controlling interest in the entity that operated our China business, including primarily Accounts receivable, Inventories, Prepaid expenses and other current assets, as well as Accounts payable, and Accruals and other current liabilities, resulting in a
$24.4 million
charge, of which
$11.1 million
is included in Cost of net revenues and
$13.3 million
is included in Restructuring and related charges in the Consolidated Statements of Operations. See Note 2,
Business Combinations,
for additional information on the divestiture.
Losses before income taxes on our China business was
$33.2 million
,
$15.6 million
and
$7.6 million
for the
fiscal years
ended
October 31, 2017
,
2016
, and
2015
respectively.
Other fiscal year 2016 business restructurings
During
fiscal year
2016
, our management committed to a plan to exit certain under-performing businesses. We classified the assets of these businesses as held for sale and recorded a
$22.0 million
write-down to reflect the assets held for sale at fair value during
fiscal year
2016
. This write-down is included in Restructuring and related charges in the Consolidated Statements of Operations. Additionally, during
fiscal year
2016
we recorded a
$9.2 million
charge for costs to terminate a contract related to a service we will no longer offer, of which
$2.9 million
is included in cost of net revenues and
$6.3 million
is included in Restructuring and related charges in the Consolidated Statement of Operations.
Note 13. Commitments and Contingencies
Commitments
Leases
We lease certain facilities under non-cancelable operating leases that contain free rent periods, leasehold improvement rebates or rent escalation clauses. Rent expense under these leases is recorded on a straight-line basis over the lease term. We are committed to pay a portion of the related actual operating expenses under some of these lease agreements, and those operating expenses are not included in the table below. The difference between amounts paid and rent expense is recorded as deferred rent. The short-term and long-term portions are included in Accruals and other current liabilities and Other long-term liabilities, respectively, in our Consolidated Balance Sheets.
In connection with our Taxi Solutions business, we have entered into operating lease arrangements for the right to place advertising in or on taxicabs. In general, these lease arrangements, which will be assigned in connection with the divestiture of the Taxi Solutions business, are non-cancelable for terms ranging from
three
to
eight
years, require us to pay minimum lease amounts based on the types and locations of the advertising displays in or on the taxicabs, and are subject to fee escalation clauses. Based upon the number of operational taxicabs with our advertising displays at
October 31, 2017
, these lease commitments total
$50.3 million
and are included in the future minimum lease payments in the table below.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future minimum lease payments under these leases as of
October 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Lease Payments
|
|
Sublease
Rental Income
|
|
Net Minimum
Lease Payments
|
Years Ending October 31:
|
|
|
|
|
|
|
2018
|
$
|
40,363
|
|
|
$
|
(646
|
)
|
|
$
|
39,717
|
|
2019
|
29,187
|
|
|
(659
|
)
|
|
28,528
|
|
2020
|
23,923
|
|
|
(673
|
)
|
|
23,250
|
|
2021
|
17,020
|
|
|
(687
|
)
|
|
16,333
|
|
2022
|
10,221
|
|
|
(701
|
)
|
|
9,520
|
|
Thereafter
|
8,930
|
|
|
(1,449
|
)
|
|
7,481
|
|
Total
|
$
|
129,644
|
|
|
$
|
(4,815
|
)
|
|
$
|
124,829
|
|
Rent expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Rent expense for non-cancelable taxi operating leases
|
$
|
27,932
|
|
|
$
|
32,543
|
|
|
$
|
35,297
|
|
Facility and other rent expense
|
26,634
|
|
|
27,706
|
|
|
26,885
|
|
Total rent expense
|
$
|
54,566
|
|
|
$
|
60,249
|
|
|
$
|
62,182
|
|
Manufacturing Related Agreements
We work on a purchase order basis with our contract manufacturers, which are located in China, Singapore, Malaysia, Brazil, and Germany, and component suppliers located throughout the world, to supply nearly all of our finished goods inventories, spare parts, and accessories. We provide each such supplier with a purchase order to cover the manufacturing requirements, which generally constitutes a binding commitment by us to purchase materials and finished goods produced by the manufacturer as specified in the purchase order. Most of these purchase orders are considered to be non-cancelable and are expected to be paid within one year of the issuance date. As of
October 31, 2017
, the amount of purchase commitments issued to contract manufacturers and component suppliers totaled approximately
$113.5 million
. Of this amount,
$8.3 million
has been recorded in Accruals and other current liabilities in our Consolidated Balance Sheets because these commitments are not expected to have future value to us.
On April 3, 2017, to lock in pricing on certain components, we committed to purchase
$144.0 million
of such components over a four year period,
$36.0 million
per year, from one of our existing suppliers. As of October 31, 2017 our remaining non-cancelable commitment under this agreement totaled
$103.9 million
.
Bank Guarantees
We have issued bank guarantees with maturities ranging from
two months
to
eight
years to certain of our customers and vendors as required in some countries to support certain performance obligations under our service or other agreements with those parties. As of
October 31, 2017
, the maximum amount that may become payable under these guarantees was
$15.9 million
, of which
$2.1 million
was collateralized by restricted cash deposits.
In addition, in connection with our investment in Gas Station TV we have agreed to guarantee, in certain circumstances, up to
$12.5 million
of debt issued to Gas Media. As of October 31, 2017, we have not made any payments and no amounts are accrued related to this guarantee.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Contingencies
We evaluate the circumstances regarding outstanding and potential litigation and other contingencies on a quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure, and if so, whether an estimate of the possible loss or range of loss can be made, or whether such an estimate cannot be made. When a loss is probable and reasonably estimable, we accrue for such amount based on our estimate of the probable loss considering information available at the time. When a loss is reasonably possible, we disclose the estimated possible loss or range of loss in excess of amounts accrued, if material. Except as otherwise disclosed below, we do not believe that material losses were probable or that there was a reasonable possibility that a material loss may have been incurred with respect to the matters disclosed.
Brazilian Tax Assessments
State Value-Added Tax
The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the São Paulo State Revenue Department for collection of state sales taxes related to purported sales of software for the 1998 and 1999 tax years. In 2004, an appeal against this unfavorable administrative decision was filed in a judicial proceeding. The first level decision in the judicial proceeding was issued in our favor. The São Paulo State Revenue Department filed an appeal of this decision. The second level administrative decision ordered that the case be returned to the lower court in order to allow the production of further evidence. That evidence production has now concluded, and we are awaiting judgment. Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding. The tax assessment including estimated interest through
October 31, 2017
for this matter totals approximately
9.4 million
Brazilian reais (approximately
$2.9 million
at the foreign exchange rate as of
October 31, 2017
). As of
October 31, 2017
, we have not accrued for this matter, but we have posted a bank bond as a guaranty.
Municipality Services Tax Assessments
In December 2009, one of the Brazilian subsidiaries that was acquired as part of the Lipman acquisition was notified of a tax assessment regarding alleged nonpayment of tax on services rendered for the period from September 2004 to December 2004. This assessment was issued by the municipality of São Paulo (the "municipality") and asserts a services tax deficiency and related penalties totaling
$0.9 million
Brazilian reais (approximately
$0.3 million
at the foreign exchange rate as of
October 31, 2017
), excluding interest. The municipality claims that the Brazilian subsidiary rendered certain services within the municipality of São Paulo but simulated that those services were rendered in another city. At the end of December 2010 the municipality issued further tax assessments alleging the same claims for 2005 through June 2007. These additional subsequent claims assert services tax deficiencies and related penalties totaling
5.9 million
Brazilian reais (approximately
$1.8 million
at the foreign exchange rate as of
October 31, 2017
), excluding interest. We received unfavorable decisions from the administrative courts, which ruled to maintain the tax assessments for each of these matters. No further grounds of appeal are available to us for these assessments within the administrative courts. In October 2012, as a result of the decision at the administrative level, the tax authorities filed an enforcement action in the civil courts to collect on the services tax assessments amounts awarded by the administrative court and seeking other related costs and fees. On March 6, 2013, we filed our defensive claims in the civil courts in response to the tax authorities' enforcement action. In February 2013 the tax authorities filed an additional enforcement action in the civil courts to collect on the penalties related to the services tax assessments amounts awarded by the administrative courts. Based on our understanding of the underlying facts of this matter and our evaluation of the potential outcome at the judicial level, we believe it is reasonably possible that our Brazilian subsidiary will be required to pay some amount of the alleged tax assessments and penalties related to these matters, as well as amounts of interest and certain costs and fees imposed by the court related thereto. As of
October 31, 2017
, the amount of the alleged tax assessments and penalties related to these matters was approximately
26.8 million
Brazilian reais (approximately
$8.2 million
at the foreign exchange rate as of
October 31, 2017
), including interest, costs and fees related thereto.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the municipality of Curitiba for collection of alleged services tax deficiency. An appeal against this unfavorable administrative decision was filed in a judicial proceeding and currently the case is pending the municipality of Curitiba's compliance with the writ of summons. As of
October 31, 2017
, the underlying assessment, including estimated interest, was approximately
6.0 million
Brazilian reais (approximately
$1.8 million
at the foreign exchange rate as of
October 31, 2017
). Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding.
Israel Securities Class Actions
On January 27, 2008, a class action complaint was filed against us in the Central District Court in Tel Aviv, Israel on behalf of purchasers of our stock on the Tel Aviv Stock Exchange. The complaint sought compensation for damages allegedly incurred by the class of plaintiffs due to the publication of erroneous financial reports. On April 2, 2015, the Israeli Supreme Court ruled that the applicable law is U.S. law and dismissed this action as estopped by settlement of the similar consolidated federal securities class action in the U.S. (
In re VeriFone Holdings, Inc., previously reported
).
The plaintiff and putative class members in this Israeli action are included in the stipulated settlement of the U.S. class action unless an individual plaintiff opts out. On June 29, 2015, the plaintiff filed a motion for award of compensation and attorneys' fees based on the amount of settlement compensation received by Israelis in the U.S. class action. On January 14, 2016, the Israeli District Court denied this motion. Plaintiff has not timely appealed, that ruling is now final, and this 2008 action is now concluded.
On May 12, 2015, a new class action complaint was filed against us in Israel alleging similar claims as the dismissed Israeli class action and alleging that Israeli shareholders were deprived of due process in the U.S. class action settlement proceedings. We are opposing the new class action and plaintiff's class certification motion on substantially the same grounds on which the previous case was dismissed. The court held a pretrial hearing on that motion on May 19, 2016, at which it requested additional information including expert reports, a position paper from the Israel Securities Authority (ISA) and further briefing. In July 2016, the ISA submitted a position paper supporting our position regarding applicable law. Other requested information has also now been submitted, but the court has not yet ruled.
Dolled v. Bergeron et al.
On April 19, 2013, a derivative action,
Dolled v. Bergeron et al.
, Case No. 113-CV-245056, was filed in the Superior Court of California, County of Santa Clara in connection with our February 20, 2013 announcement of preliminary financial results for the fiscal quarter ended January 31, 2013. The action, brought derivatively on behalf of Verifone, named Verifone as a nominal defendant and brought claims for insider selling, breach of fiduciary duty and unjust enrichment variously against certain of our current and former officers and directors. The complaint sought unspecified monetary damages, restitution and disgorgement of profits and compensation paid to defendants, injunctive relief directing us to reform its corporate governance, and payment of the plaintiff's costs and attorneys' fees. On May 30, 2013, the court entered the parties' stipulation and proposed order, which appointed plaintiff and plaintiff's counsel as lead plaintiff and lead counsel, respectively, in the consolidated action, captioned
In re VeriFone Systems, Inc. Derivative Litigation
.
In light of the below-mentioned
Zoumboulakis
judgment, the plaintiff voluntarily dismissed this action with prejudice on October 23, 2017. This matter is now concluded.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Zoumboulakis v. McGinn et al.
On May 24, 2013, a federal derivative action,
Zoumboulakis v. McGinn et al.
, Case No. 13-CV-02379, was filed in the U.S. District Court for the Northern District of California against certain current and former directors and officers derivatively on our behalf. The complaint, which named us as a nominal defendant, alleged breach of fiduciary duty and abuse of control and asserted claims under Section 14(a) of the Securities Exchange Act of 1934 for false or misleading financial statements and proxy statement disclosures. The original complaint sought unspecified monetary damages, including exemplary damages, restitution from defendants, injunctive relief directing us to make certain corporate governance reforms, and payment of the plaintiff's costs and attorneys' fees. On August 12, 2013, the court granted defendants' motion to relate this action to the pending shareholder class action,
Sanders v. VeriFone Systems, Inc. et al
. On January 21, 2014, plaintiff filed a first amended complaint, which removed one of our former officers from the action and added an additional former director as a defendant. The first amended complaint asserted claims against the defendants for breach of fiduciary duty, abuse of control, violations of Securities Exchange Act Section 14(a) and unjust enrichment. The first amended complaint also included claims for insider trading against three of the named former and current directors. On August 7, 2014, the court granted our motion to dismiss the first amended complaint with leave to amend. On October 17, 2014, plaintiff filed a second amended complaint, to which we responded by filing another motion to dismiss. On December 3, 2015, the court granted our motion to dismiss, again with leave to amend. On January 20, 2016, plaintiff filed a third amended complaint alleging demand futility with respect to the current Board. On March 1, 2016, we filed another motion to dismiss, which the court granted with prejudice on September 22, 2017, entering judgment in favor of defendants. Because no appeal was filed timely, this matter is now concluded.
Indian Antitrust Proceedings
The Competition Commission of India (CCI) investigated certain complaints made against us alleging unfair practices based on certain provisions in our software development license arrangements in India. We cooperated with requests by the CCI in its investigation. In March 2014, the Director General of the CCI investigating the allegations issued a report rejecting certain of the allegations, but also finding that certain provisions of our licenses may constitute unfair business practices. VeriFone India Sales Pvt. Ltd. filed objections to that report.
In April 2015, the CCI issued rulings directing Verifone India to cease and desist from engaging in the alleged anti-competitive conduct and imposing a penalty, the amount of which is not material to our results of operations. We have deposited 10% of this penalty amount and accrued the balance while we appeal these rulings.
On June 15, 2015, we filed appeals and interim applications with the Competition Appellate Tribunal (COMPAT) to stay the CCI orders. The appellate court granted our interim applications to stay all proceedings at least until the final appellate hearing. That appellate hearing commenced on January 19, 2016, and was next scheduled to continue on May 31, 2017, but was taken off that tribunal's calendar due to the May 26, 2017 merger of the COMPAT with the National Company Law Appellate Tribunal (NCLAT). These appeals are now being reheard before the NCLAT Bench. That rehearing began on November 7, 2017, and is scheduled to continue on January 5, 2018.
The CCI's rulings reserved the right to pursue additional proceedings against individuals that it deems responsible for the alleged conduct. We are unable to make any estimate of potential loss for any further proceedings the CCI may pursue but do not expect it to be material to our results of operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Litigation
Certain of the foregoing cases are still in the preliminary stages, and we are not able to quantify the extent of our potential liability, if any, other than as described above. Further, the outcome of litigation is inherently unpredictable and subject to significant uncertainties. If any of these matters are resolved adversely to us, this could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, defending these legal proceedings is likely to be costly, which may have a material adverse effect on our financial condition, results of operations and cash flows, and may divert management's attention from the day-to-day operations of our business. We are subject to various other legal proceedings related to commercial, customer and employment matters that have arisen during the ordinary course of business. The outcome of such legal proceedings is inherently unpredictable and subject to significant uncertainties. Although there can be no assurance as to the ultimate disposition of these matters, our management has determined, based upon the information available at the date of these financial statements, including anticipated expected availability of insurance coverage, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Income Tax Uncertainties
As of
October 31, 2017
, the amount payable for unrecognized tax benefits was
$37.4 million
, including accrued interest and penalties, none of which is expected to be paid within one year. This amount is included in Other long-term liabilities in our Consolidated Balance Sheet as of
October 31, 2017
. We are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur.
Note 14. Segment and Geographic Information
Net revenues and operating income (loss) of each segment reflect net revenues and expenses that are directly attributable to that segment. Net revenues and expenses not allocated to segment net revenues and segment operating income include amortization of purchased intangible assets, amortization of step-down in deferred services net revenues and associated costs of net revenues at acquisition, restructuring and related charges, goodwill impairment, stock-based compensation, as well as general and administrative and corporate research and development expense. We do not allocate other income and expenses to our operating segments. Also, we do not separately evaluate assets by segment and therefore assets by segment are not presented below.
The following table sets forth net revenues for our reportable segments and reconciles segment net revenues to total net revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Segment net revenues:
|
|
|
|
|
|
Verifone Systems
|
$
|
1,085,478
|
|
|
$
|
1,236,361
|
|
|
$
|
1,309,629
|
|
Verifone Services
|
788,491
|
|
|
769,715
|
|
|
691,822
|
|
Total segment net revenues
|
1,873,969
|
|
|
2,006,076
|
|
|
2,001,451
|
|
Amortization of step down in deferred services net revenues at acquisition
|
(2,993
|
)
|
|
(13,927
|
)
|
|
(994
|
)
|
Total net revenues
|
$
|
1,870,976
|
|
|
$
|
1,992,149
|
|
|
$
|
2,000,457
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth operating income for our reportable segments and reconciles segment operating income to consolidated operating income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating income by segment:
|
|
|
|
|
|
Verifone Systems
|
$
|
176,722
|
|
|
$
|
252,326
|
|
|
$
|
294,857
|
|
Verifone Services
|
206,840
|
|
|
198,426
|
|
|
178,754
|
|
Total segment operating income
|
383,562
|
|
|
450,752
|
|
|
473,611
|
|
Items not attributable to segment operating income:
|
|
|
|
|
|
Amortization of step down in deferred services gross margin at acquisition
|
(2,385
|
)
|
|
(9,839
|
)
|
|
(994
|
)
|
Restructuring and related charges
|
(168,878
|
)
|
|
(46,814
|
)
|
|
(8,777
|
)
|
Amortization of purchase intangible assets
|
(76,349
|
)
|
|
(105,664
|
)
|
|
(100,799
|
)
|
Stock-based compensation expense
|
(39,903
|
)
|
|
(42,278
|
)
|
|
(42,253
|
)
|
Litigation settlement and loss contingency expense
|
—
|
|
|
(650
|
)
|
|
(1,213
|
)
|
Goodwill impairment
|
(17,384
|
)
|
|
—
|
|
|
—
|
|
Unallocated general and administrative expenses
|
(172,380
|
)
|
|
(186,308
|
)
|
|
(187,161
|
)
|
Unallocated research and development expenses
|
(2,986
|
)
|
|
(14,593
|
)
|
|
(18,112
|
)
|
Other unallocated costs
|
(15,675
|
)
|
|
(11,827
|
)
|
|
(7,311
|
)
|
Total operating income (loss)
|
$
|
(112,378
|
)
|
|
$
|
32,779
|
|
|
$
|
106,991
|
|
Depreciation and amortization of property and equipment was allocated to segments as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
Verifone Systems
|
$
|
6,755
|
|
|
$
|
6,177
|
|
|
$
|
5,648
|
|
Verifone Services
|
32,699
|
|
|
43,184
|
|
|
41,484
|
|
Unallocated
|
26,651
|
|
|
13,097
|
|
|
11,537
|
|
Total depreciation and amortization expense
|
$
|
66,105
|
|
|
$
|
62,458
|
|
|
$
|
58,669
|
|
Geographic Information
Our net revenues, by country with net revenues over 10% of total net revenues, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
627,718
|
|
|
$
|
807,229
|
|
|
$
|
789,386
|
|
Other countries
|
1,243,258
|
|
|
1,184,920
|
|
|
1,211,071
|
|
Total net revenues
|
$
|
1,870,976
|
|
|
$
|
1,992,149
|
|
|
$
|
2,000,457
|
|
Net revenues are allocated to countries based on the shipping destination or service delivery location of customer orders.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property and equipment, net, by country with fixed assets over 10% of total fixed assets, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
United States
|
$
|
29,146
|
|
|
$
|
99,807
|
|
Other countries
|
98,726
|
|
|
102,470
|
|
Property and equipment, net
|
127,872
|
|
|
202,277
|
|
During the fiscal year 2017, we divested or reclassified as held for sale revenue generating assets and other fixed assets with a net carrying value of
$74.9 million
.
VERIFONE SYSTEMS, INC.
Selected Quarterly Results of Operations (Unaudited)
The following selected quarterly data should be read in conjunction with our Consolidated Financial Statements and accompanying notes appearing in this Item 8,
Financial Statements and Supplementary Data,
and Item 7
, Management’s Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on Form 10-K. This information has been derived from our unaudited Consolidated Financial Statements that, in our opinion, reflect all recurring adjustments necessary to fairly present our financial information when read in conjunction with our Consolidated Financial Statements and Notes. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
The tables below sets forth selected unaudited financial data for each quarter for the last two fiscal years (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2017
|
|
First
Quarter
|
|
Second
Quarter
(1)
|
|
Third
Quarter
(1)
|
|
Fourth
Quarter
(1)
|
Net revenues
|
453,871
|
|
|
473,685
|
|
|
466,866
|
|
|
$
|
476,554
|
|
Gross margin
|
171,431
|
|
|
172,761
|
|
|
174,450
|
|
|
194,370
|
|
Operating income (loss)
|
(4,435
|
)
|
|
(81,394
|
)
|
|
(50,214
|
)
|
|
23,665
|
|
Consolidated net income (loss)
|
(17,724
|
)
|
|
(89,665
|
)
|
|
(70,788
|
)
|
|
2,858
|
|
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
|
$
|
(16,623
|
)
|
|
$
|
(89,267
|
)
|
|
(70,955
|
)
|
|
$
|
3,016
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
$
|
(0.15
|
)
|
|
$
|
(0.80
|
)
|
|
(0.63
|
)
|
|
$
|
0.03
|
|
Diluted net income (loss) per share
|
$
|
(0.15
|
)
|
|
$
|
(0.80
|
)
|
|
(0.63
|
)
|
|
$
|
0.03
|
|
|
|
(1)
|
The second, third, and fourth fiscal quarters of 2017 include $80.4 million, $78.6 million, and $7.9 million, respectively, of restructuring and related charges as part of cost optimization and corporate transformation initiatives including losses from certain disposals. For further information, see Note 12,
Restructuring and related charges,
in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2016
|
|
First
Quarter
|
|
Second
Quarter
(1)
|
|
Third
Quarter
(1)
|
|
Fourth
Quarter
(1)
|
Net revenues
|
$
|
513,539
|
|
|
$
|
526,278
|
|
|
$
|
488,132
|
|
|
$
|
464,200
|
|
Gross margin
|
215,285
|
|
|
210,379
|
|
|
191,147
|
|
|
177,500
|
|
Operating income (loss)
|
36,216
|
|
|
19,779
|
|
|
(22,345
|
)
|
|
(871
|
)
|
Consolidated net income (loss)
|
23,733
|
|
|
3,340
|
|
|
(31,498
|
)
|
|
(5,275
|
)
|
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
|
$
|
23,501
|
|
|
$
|
2,899
|
|
|
$
|
(31,138
|
)
|
|
$
|
(4,543
|
)
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
$
|
0.21
|
|
|
$
|
0.03
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
Diluted net income (loss) per share
|
$
|
0.21
|
|
|
$
|
0.03
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
|
|
(1)
|
The third fiscal quarter of
2016
includes $38.8 million of restructuring and related charges as part of cost optimization and corporate transformation initiatives. For further information, see Note 12,
Restructuring and related charges,
in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
|