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EX-10.2 - EXHIBIT 10.2 - VERINT SYSTEMS INCvrnt-ex102_20150731xform10.htm
EX-32.2 - EXHIBIT 32.2 - VERINT SYSTEMS INCvrnt-ex322_20150731xform10.htm
EX-10.1 - EXHIBIT 10.1 - VERINT SYSTEMS INCvrnt-ex101_20150731xform10.htm
EX-31.1 - EXHIBIT 31.1 - VERINT SYSTEMS INCvrnt-ex311_20150731xform10.htm
EX-31.2 - EXHIBIT 31.2 - VERINT SYSTEMS INCvrnt-ex312_20150731xform10.htm
EX-32.1 - EXHIBIT 32.1 - VERINT SYSTEMS INCvrnt-ex321_20150731xform10.htm
EX-10.3 - EXHIBIT 10.3 - VERINT SYSTEMS INCvrnt-ex103_20150731xform10.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                                to                                     .
 
Commission File No. 001-34807
Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter) 
Delaware
 
11-3200514
(State or Other Jurisdiction of Incorporation or
Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
330 South Service Road, Melville, New York
 
11747
(Address of Principal Executive Offices)
 
(Zip Code)
 
(631) 962-9600
 
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
There were 62,139,546 shares of the registrant’s common stock outstanding on August 14, 2015.
 




Verint Systems Inc. and Subsidiaries
Index to Form 10-Q
For the Period Ended July 31, 2015
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


Cautionary Note on Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
 
uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes, customer challenges, and evolving industry standards in our product offerings, adapt to changing market potential from area to area within our markets and successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer needs;
risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in our business;
risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have;
risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas of growth, management distraction, post-acquisition integration activities, and potential asset impairments;
risks relating to our ability to effectively and efficiently enhance our existing operations and execute on our growth strategy, including managing investments in our business and operations and enhancing and securing our internal and external operations;
risks associated with our ability to effectively and efficiently allocate limited financial and human resources to business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns;
risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information, security lapses, or with information technology system failures or disruptions;
risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, and fluctuations in foreign currency exchange rates;
risks associated with a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for certain projects;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate;
risks associated with our ability to retain and recruit qualified personnel in regions in which we operate, especially in new markets and growth areas we may enter;
challenges associated with selling sophisticated solutions, including with respect to educating our customers on the benefits of our solutions or assisting them in realizing such benefits;

ii


challenges associated with our strategy of pursuing larger sales opportunities that often involve longer sales cycles, including with respect to transaction reductions, deferrals, or cancellations during the sales cycle, ability to accurately forecast when a sales opportunity will convert to an order, and to forecast revenue and expenses, and increased volatility of our operating results from period to period;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;
risks that our products may contain defects or may be vulnerable to cyber-attacks, which could expose us to substantial liability;
risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers ("OEMs") for certain components, products, or services, including companies that may compete with us or work with our competitors;
risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. ("CTI"), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Comverse, Inc. ("Comverse"), being unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, and personnel and our ability to successfully implement and maintain adequate systems and internal controls for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays; and
risks associated with changes in our tax position.
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors" under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2015. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.


iii


Part I

Item 1.     Financial Statements






1


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
July 31,
 
January 31,
(in thousands, except share and per share data)

2015
 
2015
Assets

 


 

Current Assets:

 


 

Cash and cash equivalents

$
306,187


$
285,072

Restricted cash and bank time deposits

19,686


36,920

Short-term investments
 
59,721

 
35,751

Accounts receivable, net of allowance for doubtful accounts of $1.0 million and $1.1 million, respectively

244,749


262,092

Inventories

18,467


17,505

Deferred cost of revenue

3,127


6,722

Prepaid expenses and other current assets

75,594


66,130

  Total current assets

727,531


710,192

Property and equipment, net

63,841


62,490

Goodwill

1,231,840


1,200,817

Intangible assets, net

290,548


311,894

Capitalized software development costs, net

11,030


10,112

Long-term deferred cost of revenue

15,324


14,555

Other assets

39,389


40,936

  Total assets

$
2,379,503


$
2,350,996








Liabilities and Stockholders' Equity

 


 

Current Liabilities:

 


 

Accounts payable

$
69,980


$
72,885

Accrued expenses and other current liabilities

199,213


223,744

Deferred revenue

169,959


181,259

  Total current liabilities

439,152


477,888

Long-term debt

741,801


736,779

Long-term deferred revenue

22,480


20,544

Other liabilities

117,073


110,882

  Total liabilities

1,320,506


1,346,093

Commitments and Contingencies






Stockholders' Equity:

 


 

Preferred stock - $0.001 par value; authorized 2,207,000 shares at July 31, 2015 and January 31, 2015, respectively; none issued.
 

 

Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 62,487,000 and 61,253,000 shares; outstanding 62,139,000 and 60,905,000 shares at July 31, 2015 and January 31, 2015, respectively.

62


61

Additional paid-in capital

1,364,330


1,321,455

Treasury stock, at cost - 348,000 shares at July 31, 2015 and January 31, 2015.

(10,251
)

(10,251
)
Accumulated deficit

(230,732
)

(219,074
)
Accumulated other comprehensive loss

(73,842
)

(94,335
)
Total Verint Systems Inc. stockholders' equity

1,049,567


997,856

Noncontrolling interest

9,430


7,047

  Total stockholders' equity

1,058,997


1,004,903

  Total liabilities and stockholders' equity

$
2,379,503


$
2,350,996


See notes to condensed consolidated financial statements.

2


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
(in thousands, except per share data)
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 

 
 

 
 
 
 
Product
 
$
121,767

 
$
113,175

 
$
224,566

 
$
221,311

Service and support
 
174,115

 
163,641

 
340,852

 
312,898

  Total revenue
 
295,882

 
276,816

 
565,418

 
534,209

Cost of revenue:
 
 

 
 

 
 
 
 
Product
 
41,984

 
32,122

 
76,881

 
71,599

Service and support
 
67,409

 
61,869

 
127,705

 
118,857

Amortization of acquired technology
 
9,856

 
8,564

 
17,836

 
14,922

  Total cost of revenue
 
119,249

 
102,555

 
222,422

 
205,378

Gross profit
 
176,633

 
174,261

 
342,996

 
328,831

Operating expenses:
 
 

 
 

 
 
 
 
Research and development, net
 
46,960

 
44,077

 
90,126

 
85,400

Selling, general and administrative
 
114,971

 
107,160

 
217,821

 
208,208

Amortization of other acquired intangible assets
 
10,733

 
11,554

 
21,470

 
22,757

  Total operating expenses
 
172,664

 
162,791

 
329,417

 
316,365

Operating income
 
3,969

 
11,470

 
13,579

 
12,466

Other income (expense), net:
 
 

 
 

 
 
 
 
Interest income
 
463

 
250

 
657

 
475

Interest expense
 
(8,561
)
 
(9,383
)
 
(16,898
)
 
(19,609
)
Losses on early retirements of debt
 

 
(5,454
)
 

 
(12,546
)
Other (expense) income, net
 
(3,751
)
 
(1,729
)
 
(3,540
)
 
1,099

  Total other expense, net
 
(11,849
)
 
(16,316
)
 
(19,781
)
 
(30,581
)
Loss before provision (benefit) for income taxes
 
(7,880
)
 
(4,846
)
 
(6,202
)
 
(18,115
)
Provision (benefit) for income taxes
 
2,037

 
5,534

 
2,984

 
(36,554
)
Net (loss) income
 
(9,917
)
 
(10,380
)
 
(9,186
)
 
18,439

Net income attributable to noncontrolling interest
 
1,325

 
1,898

 
2,472

 
2,761

Net (loss) income attributable to Verint Systems Inc.
 
$
(11,242
)
 
$
(12,278
)
 
$
(11,658
)
 
$
15,678

 
 
 
 
 
 
 
 
 
Net (loss) income per common share attributable to Verint Systems Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
(0.18
)
 
$
(0.21
)
 
$
(0.19
)
 
$
0.28

Diluted
 
$
(0.18
)
 
$
(0.21
)
 
$
(0.19
)
 
$
0.28

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
61,733

 
57,158

 
61,392

 
55,449

Diluted
 
61,733

 
57,158

 
61,392

 
56,559

 
See notes to condensed consolidated financial statements.





3


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Net (loss) income
 
$
(9,917
)
 
$
(10,380
)
 
$
(9,186
)
 
$
18,439

Other comprehensive income (loss), net of reclassification adjustments:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
6,253

 
(1,744
)
 
11,422

 
14,992

Net unrealized (losses) gains on available-for-sale securities
 
(13
)
 
16

 
44

 
13

Net unrealized gains on derivative financial instruments designated as hedges
 
5,002

 
274

 
10,029

 
585

Provision for income taxes on net unrealized gains on derivative financial instruments designated as hedges
 
(509
)
 
(56
)
 
(1,091
)
 
(158
)
Other comprehensive income (loss)
 
10,733

 
(1,510
)
 
20,404

 
15,432

Comprehensive income (loss)
 
816

 
(11,890
)
 
11,218

 
33,871

Comprehensive income attributable to noncontrolling interest
 
1,446

 
1,975

 
2,383

 
2,864

Comprehensive (loss) income attributable to Verint Systems Inc.
 
$
(630
)
 
$
(13,865
)
 
$
8,835

 
$
31,007

 
See notes to condensed consolidated financial statements.

4


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
 
Verint Systems Inc. Stockholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Verint Systems Inc. Stockholders' Equity
 
 
 
Total Stockholders' Equity
(in thousands) 
 
Shares
 
Par
Value
 
 
Treasury
Stock
 
Accumulated
Deficit
 
 
 
Non-controlling
Interest
 
Balances at January 31, 2014
 
53,605

 
$
54

 
$
924,663

 
$
(8,013
)
 
$
(250,005
)
 
$
(39,725
)
 
$
626,974

 
$
6,144

 
$
633,118

Net income
 

 

 

 

 
15,678

 

 
15,678

 
2,761

 
18,439

Other comprehensive income
 

 

 

 

 

 
15,329

 
15,329

 
103

 
15,432

Common stock issued in public offering, net of issuance costs
 
5,750

 
6

 
264,970

 

 

 

 
264,976

 

 
264,976

Equity component of convertible notes, net of issuance costs
 

 

 
78,223

 

 

 

 
78,223

 

 
78,223

Purchase of convertible note hedges
 

 

 
(60,800
)
 

 

 

 
(60,800
)
 

 
(60,800
)
Issuance of warrants
 

 

 
45,188

 

 

 

 
45,188

 

 
45,188

Stock-based compensation - equity portion
 

 

 
23,760

 

 

 

 
23,760

 

 
23,760

Exercises of stock options
 
246

 

 
8,499

 

 

 

 
8,499

 

 
8,499

Common stock issued for stock awards and stock bonuses
 
1,013

 
1

 
4,531

 

 

 

 
4,532

 

 
4,532

Purchases of treasury stock
 
(46
)
 

 

 
(2,238
)
 

 

 
(2,238
)
 

 
(2,238
)
Tax effects from stock award plans
 

 

 
323

 

 

 

 
323

 

 
323

Balances at July 31, 2014
 
60,568

 
$
61

 
$
1,289,357

 
$
(10,251
)
 
$
(234,327
)
 
$
(24,396
)
 
$
1,020,444


$
9,008

 
1,029,452

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 31, 2015
 
60,905

 
$
61

 
$
1,321,455

 
$
(10,251
)
 
$
(219,074
)
 
$
(94,335
)
 
$
997,856

 
$
7,047

 
$
1,004,903

Net (loss) income
 

 

 

 

 
(11,658
)
 

 
(11,658
)
 
2,472

 
(9,186
)
Other comprehensive income (loss)
 

 

 

 

 

 
20,493

 
20,493

 
(89
)
 
20,404

Stock-based compensation - equity portion
 

 

 
34,325

 

 

 

 
34,325

 

 
34,325

Exercises of stock options
 
6

 

 
229

 

 

 

 
229

 

 
229

Common stock issued for stock awards and stock bonuses
 
1,228

 
1

 
7,744

 

 

 

 
7,745

 

 
7,745

Tax effects from stock award plans
 

 

 
577

 

 

 

 
577

 

 
577

Balances at July 31, 2015
 
62,139

 
$
62

 
$
1,364,330

 
$
(10,251
)
 
$
(230,732
)
 
$
(73,842
)
 
$
1,049,567

 
$
9,430

 
$
1,058,997

 
See notes to condensed consolidated financial statements.

5


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended
July 31,
(in thousands) 
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net (loss) income
 
$
(9,186
)
 
$
18,439

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
52,388

 
49,192

Stock-based compensation - equity portion
 
34,325

 
23,106

Amortization of discount on convertible notes
 
4,995

 
1,148

Reduction of valuation allowance resulting from acquisition of KANA
 

 
(45,171
)
Non-cash gains on derivative financial instruments, net
 
(274
)
 
(103
)
Losses on early retirements of debt
 

 
12,546

Other non-cash items, net
 
11,075

 
7,213

Changes in operating assets and liabilities, net of effects of business combinations:
 
 

 
 

Accounts receivable
 
16,614

 
(23,189
)
Inventories
 
(2,460
)
 
(8,958
)
Deferred cost of revenue
 
2,834

 
(545
)
Prepaid expenses and other assets
 
(8,984
)
 
6,716

Accounts payable and accrued expenses
 
(22,262
)
 
22,288

Deferred revenue
 
(9,982
)
 
7,675

Other, net
 
(2,920
)
 
16

Net cash provided by operating activities
 
66,163

 
70,373

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Cash paid for business combinations, including adjustments, net of cash acquired
 
(21,215
)
 
(602,943
)
Purchases of property and equipment
 
(10,191
)
 
(9,358
)
Purchases of investments
 
(39,842
)
 
(17,187
)
Maturities and sales of investments
 
15,479

 
9,790

Cash paid for capitalized software development costs
 
(2,136
)
 
(2,892
)
Change in restricted cash and bank time deposits, including long-term portion, and other investing activities, net
 
15,141

 
(36,618
)
Net cash used in investing activities
 
(42,764
)
 
(659,208
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from borrowings, net of original issuance discount
 

 
1,526,750

Repayments of borrowings and other financing obligations
 
(212
)
 
(1,361,708
)
Proceeds from public issuance of common stock
 

 
274,563

Proceeds from issuance of warrants
 

 
45,188

Payments for convertible note hedges
 

 
(60,800
)
Payments of equity issuance, debt issuance and other debt-related costs
 
(239
)
 
(27,713
)
Proceeds from exercises of stock options
 
229

 
8,585

Purchases of treasury stock
 

 
(2,238
)
Payments of contingent consideration for business combinations (financing portion)
 
(2,856
)
 
(6,026
)
Net cash (used in) provided by financing activities
 
(3,078
)
 
396,601

Effect of foreign currency exchange rate changes on cash and cash equivalents
 
794

 
285

Net increase (decrease) in cash and cash equivalents
 
21,115

 
(191,949
)
Cash and cash equivalents, beginning of period
 
285,072

 
378,618

Cash and cash equivalents, end of period
 
$
306,187

 
$
186,669


See notes to condensed consolidated financial statements.

6


VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business
 
Unless the context otherwise requires, the terms "Verint", "we", "us", and "our" in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
 
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence®.

Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.

Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") for the year ended January 31, 2015. The condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the periods ended July 31, 2015 and 2014, and the condensed consolidated balance sheet as of July 31, 2015, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2015 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2015. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2015. The results for interim periods are not necessarily indicative of a full year’s results.

Principles of Consolidation
 
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries, and a joint venture in which we hold a 50% equity interest.  This joint venture functions as a systems integrator for Asian markets and is a variable interest entity in which we are the primary beneficiary. The noncontrolling interest in this joint venture is reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our equity. Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost.  We include the results of operations of acquired companies from the date of acquisition.  All significant intercompany transactions and balances are eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

7



Significant Accounting Policies

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2015. There were no material changes to our significant accounting policies during the six months ended July 31, 2015.

Change in Functional Currency

The functional currency for most of our foreign subsidiaries is the applicable local currency, although we have several subsidiaries with functional currencies that differ from their local currency, of which the most notable exceptions are our subsidiaries in Israel, whose functional currencies are the U.S. dollar. During the three months ended July 31, 2015, we changed the functional currency for one of our subsidiaries from the euro to the U.S. dollar in anticipation of an increase in U.S. dollar denominated revenue resulting from changes in the subsidiary's business model. This change in functional currency is applied on a prospective basis. Previously, this subsidiary was judged to operate in two economic environments which had differing foreign currency exchange risks, and therefore used a different functional currency (euro and U.S dollar) in each environment.
 
Recent Accounting Pronouncements
 
New Accounting Pronouncements Recently Adopted

In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-01,
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity is no longer required to separately present an extraordinary item on its statement of operations, net of tax, after income from continuing operations or to disclose income taxes and net income per share data applicable to an extraordinary item. However, ASU No. 2015-01 still retains the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU No. 2015-01 was effective for us on February 1, 2015. The adoption of this standard did not impact our condensed consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective for us on February 1, 2015. The adoption of this standard did not impact our condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Effective

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU No. 2015-11 requires measurement of most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which inventory is measured at the lower of cost or market, with market defined as replacement cost, net realizable value, or net realizable value less a normal profit margin. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. The provisions of ASU No. 2015-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The provisions of ASU No. 2015-03 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. When adopted, this guidance must be applied on a retrospective basis. We plan

8


to adopt the provisions of ASU No. 2015-03 effective on February 1, 2016. As of July 31, 2015, we have $13.6 million of net deferred debt issuance costs which are reported within Other assets on our condensed consolidated balance sheet, $3.8 million of which relate to our Revolving Credit Facility and will continue to be reported within Other assets.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The provisions of ASU No. 2014-15 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, although early adoption is permitted. The adoption of ASU No. 2014-15 is not expected to have a material effect on our future condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. ASU No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU No. 2014-10 removes the financial reporting distinction between development stage entities and other reporting entities from GAAP and it eliminates an exception provided in the consolidation guidance for development stage enterprises. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As originally issued, this guidance was effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In July 2015, the FASB deferred the effective date by one year, to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. Entities may choose from two adoption methods, with certain practical expedients. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements and evaluating the available adoption methods.


2.
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
 
The following table summarizes the calculation of basic and diluted net (loss) income per common share attributable to Verint Systems Inc. for the three and six months ended July 31, 2015 and 2014

9


 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
(in thousands, except per share amounts) 
 
2015
 
2014
 
2015
 
2014
Net (loss) income
 
$
(9,917
)
 
$
(10,380
)
 
$
(9,186
)
 
$
18,439

Net income attributable to noncontrolling interest
 
1,325

 
1,898

 
2,472

 
2,761

Net (loss) income attributable to Verint Systems Inc.
 
$
(11,242
)
 
$
(12,278
)
 
$
(11,658
)
 
$
15,678

Weighted-average shares outstanding:
 
 

 
 

 
 

 
 
Basic
 
61,733

 
57,158

 
61,392

 
55,449

Dilutive effect of employee equity award plans
 

 

 

 
1,110

Dilutive effect of 1.50% convertible senior notes
 

 

 

 

Dilutive effect of warrants
 

 

 

 

Diluted
 
61,733

 
57,158

 
61,392

 
56,559

Net (loss) income per common share attributable to Verint Systems Inc.:
 
 

 
 

 
 

 
 
Basic
 
$
(0.18
)
 
$
(0.21
)
 
$
(0.19
)
 
$
0.28

Diluted
 
$
(0.18
)
 
$
(0.21
)
 
$
(0.19
)
 
$
0.28


We excluded the following weighted-average potential common shares from the calculations of diluted net (loss) income per common share during the applicable periods because their inclusion would have been anti-dilutive:
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
(in thousands) 
 
2015
 
2014
 
2015
 
2014
Common shares excluded from calculation:
 
 

 
 

 
 
 
 
Stock options and restricted stock-based awards
 
1,482

 
1,509

 
1,925

 
390

1.50% convertible senior notes
 
6,205

 
2,968

 
6,205

 
1,508

Warrants
 
6,205

 
2,968

 
6,205

 
1,508


In periods for which we report a net loss attributable to Verint Systems Inc., basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.

The 1.50% convertible senior notes ("Notes") will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the Warrants unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share.

Our Note Hedges (as defined in Note 6, "Long-Term Debt") do not impact the calculation of diluted net income per share, because their effect would be anti-dilutive. In the event of an actual conversion of any or all of the Notes, the common shares that would be delivered to us under the Note Hedges are designed to neutralize the dilutive effect of the common shares that we would issue under the Notes. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 6, "Long-Term Debt".


3. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

The following tables summarize our cash, cash equivalents, and short-term investments as of July 31, 2015 and January 31, 2015:

10


 
 
July 31, 2015
(in thousands) 
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
297,029

 
$

 
$

 
$
297,029

Money market funds
 
9,158

 

 

 
9,158

Total cash and cash equivalents
 
$
306,187

 
$

 
$

 
$
306,187

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
36,526

 
$
145

 
$

 
$
36,671

Bank time deposits
 
23,050

 

 

 
23,050

Total short-term investments
 
$
59,576

 
$
145

 
$

 
$
59,721

 
 
January 31, 2015
(in thousands)
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
281,890

 
$

 
$

 
$
281,890

Money market funds
 
183

 

 

 
183

Commercial paper
 
2,999

 

 

 
2,999

Total cash and cash equivalents
 
$
285,072

 
$

 
$

 
$
285,072

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
13,741

 
$
101

 
$

 
$
13,842

Bank time deposits
 
21,909

 
$

 
$

 
21,909

Total short-term investments
 
$
35,650

 
$
101

 
$

 
$
35,751


Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.

As of July 31, 2015 and January 31, 2015, all of our available-for-sale investments had contractual maturities of less than one year. Gains and losses on sales of available-for-sale securities during the six months ended July 31, 2015 and 2014 were not significant.

During the six months ended July 31, 2015 and 2014, proceeds from maturities and sales of available-for-sale securities were $15.5 million and $9.8 million, respectively.

We believe that the investments we held at July 31, 2015 were not other-than-temporarily impaired. We held no available-for-sale securities with unrealized losses at July 31, 2015.


4.
BUSINESS COMBINATIONS

Six Months Ended July 31, 2015

On February 12, 2015, we completed the acquisition of a business that is being integrated into our Enterprise Intelligence operating segment, and on May 1, 2015, we completed the acquisition of a business that is being integrated into our Communications Intelligence operating segment.

These business combinations were not material to our condensed consolidated financial statements, either individually or in the aggregate.


11


Year Ended January 31, 2015

KANA Software, Inc.

On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its affiliates (collectively, "KANA"), a leading global provider of on-premises and cloud-based solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market organizations. KANA, based in Sunnyvale, California, was acquired for $516.6 million of cash, which was net of KANA's cash acquired. KANA has been integrated into our Enterprise Intelligence operating segment.

The purchase price for KANA was funded by a combination of cash on hand, $300.0 million of incremental term loans incurred in connection with an amendment to our Credit Agreement, and $125.0 million of borrowings under our Revolving Credit Facility, further details for which appear in Note 6, "Long-Term Debt".

Transaction and related costs directly related to the acquisition of KANA, consisting primarily of professional fees and integration expenses, were $0.3 million and $2.9 million for the three and six months ended July 31, 2015, respectively. Such costs totaled $2.3 million and $4.7 million for the three and six months ended July 31, 2014, respectively. All transaction and related costs were expensed as incurred, and the vast majority of these expenses are included in selling, general and administrative expenses.

UTX Technologies Limited

On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited ("UTX"), a provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our Communications Intelligence operating segment prior to the acquisition. The purchase price consisted of $82.9 million of cash paid at closing, and $1.5 million paid subsequent to closing during the year ended January 31, 2015, upon UTX's achievement of certain performance targets. The acquisition date fair value of the contingent consideration was estimated to be $1.3 million.

UTX is based in the EMEA region and has been integrated into our Communications Intelligence operating segment.

Transaction and related costs directly related to the acquisition of UTX, consisting primarily of professional fees, integration expenses and related adjustments, were $0.1 million and $0.3 million for the three and six months ended July 31, 2015, respectively. Such costs totaled $0.4 million and $3.0 million for the three and six months ended July 31, 2014, respectively. All transaction and related costs were expensed as incurred, and the vast majority of these expenses are included in selling, general and administrative expenses.

As a result of the UTX acquisition, we recorded a $2.6 million charge for the impairment of certain capitalized software development costs during the three months ended April 30, 2014, reflecting strategy changes in certain product development initiatives. This charge is reflected within cost of product revenue.

Other Business Combinations

We completed two separate acquisitions of certain technologies and other assets for use in our Communications Intelligence operating segment on April 16, 2014 and January 15, 2015, respectively, in transactions that qualified as business combinations. These business combinations were not material to our condensed consolidated financial statements, individually or in the aggregate.

Purchase Price Allocations

As of January 31, 2015, the purchase price allocation for UTX was preliminary, subject to change as additional information became available during the measurement period (up to one year from the acquisition date). During the six months ended July 31, 2015, there were no changes to the purchase price allocation for UTX, which is now complete.

Pro Forma Information

The following table provides unaudited pro forma operating results for the three and six months ended July 31, 2014, as if KANA and UTX had been acquired on February 1, 2013. These unaudited pro forma results reflect certain adjustments related to these acquisitions, including amortization expense on finite-lived intangible assets acquired from KANA and UTX, interest

12


expense and fees associated with additional long-term debt incurred to partially fund the acquisition of KANA, and adjustments to recognize the fair value of revenue associated with performance obligations assumed in the acquisition of KANA.

For purposes of the following unaudited pro forma operating results, a $45.2 million income tax benefit recorded during the three months ended April 30, 2014 resulting from a reduction of valuation allowances associated from the acquisition of KANA is not reflected in the pro forma operating results for the six months ended July 31, 2014.

The unaudited pro forma results do not include any operating efficiencies or potential cost savings which may result from these business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on February 1, 2013, nor are they indicative of future operating results.
(in thousands, except per share amounts) 
 
Three Months Ended
July 31, 2014
 
Six Months Ended
July 31, 2014
Revenue
 
$
284,792

 
$
554,505

Net loss
 
$
(347
)
 
$
(2,369
)
Net loss attributable to Verint Systems Inc.
 
$
(2,245
)
 
$
(5,130
)
Basic and diluted net loss per common share attributable to Verint Systems Inc.:
 
$
(0.04
)
 
$
(0.09
)

Other Business Combination Information

We include the financial results of all business combinations in our condensed consolidated financial statements from their respective acquisition dates.

For the three and six months ended July 31, 2015, we recorded charges of $0.8 million and $0.9 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. For the three and six months ended July 31, 2014, we recorded charges of $0.5 million and $0.4 million, respectively, within selling, general and administrative expenses for changes in the fair values of these obligations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was $28.6 million at July 31, 2015.

Payments of contingent consideration earned under these agreements were $0.9 million and $3.0 million for the three and six months ended July 31, 2015, respectively. Payments of contingent consideration earned under these agreements were $3.9 million and $7.0 million for the three and six months ended July 31, 2014, respectively.

In connection with a business combination completed during the year ended January 31, 2012, we assumed approximately $5.2 million of long-term liabilities associated with uncertain tax positions of the acquired company. A corresponding indemnification asset of $5.2 million was also recorded, recognizing the selling shareholders’ contractual obligation to indemnify us for these pre-acquisition liabilities. As of July 31, 2015 and January 31, 2015, these liabilities were $1.1 million and $1.4 million, respectively, and were included within other liabilities. The corresponding indemnification assets as of July 31, 2015 and January 31, 2015 were $0.3 million and $0.4 million, respectively, and were included within other assets. There was no activity in these accounts during the six months ended July 31, 2015 and 2014. The carrying values of these assets and liabilities were impacted by foreign currency exchange rate fluctuations.


5.
INTANGIBLE ASSETS AND GOODWILL
 
Acquisition-related intangible assets consisted of the following as of July 31, 2015 and January 31, 2015:
 

13


 
 
July 31, 2015
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets, with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
383,386

 
$
(197,670
)
 
$
185,716

Acquired technology
 
212,137

 
(118,969
)
 
93,168

Trade names
 
18,932

 
(10,604
)
 
8,328

Non-competition agreements
 
3,047

 
(1,956
)
 
1,091

Distribution network
 
4,440

 
(3,095
)
 
1,345

Total intangible assets with finite lives
 
621,942

 
(332,294
)
 
289,648

In-process research and development, with indefinite lives
 
900

 

 
900

    Total intangible assets
 
$
622,842

 
$
(332,294
)
 
$
290,548

 
 
 
January 31, 2015
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets, all with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
378,756

 
$
(176,796
)
 
$
201,960

Acquired technology
 
201,294

 
(104,117
)
 
97,177

Trade names
 
18,799

 
(9,131
)
 
9,668

Non-competition agreements
 
3,625

 
(2,331
)
 
1,294

Distribution network
 
4,440

 
(2,645
)
 
1,795

    Total intangible assets
 
$
606,914

 
$
(295,020
)
 
$
311,894


The following table presents net acquisition-related intangible assets by reportable segment as of July 31, 2015 and January 31, 2015: 
 
 
July 31,
 
January 31,
(in thousands)

2015

2015
Enterprise Intelligence

$
235,476


$
261,354

Communications Intelligence

54,533


49,670

Video Intelligence

539


870

Total

$
290,548


$
311,894

 
Total amortization expense recorded for acquisition-related intangible assets was $20.6 million and $39.3 million for the three and six months ended July 31, 2015, respectively, and $20.1 million and $37.7 million for the three and six months ended July 31, 2014, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
 
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
(in thousands)

 

Years Ending January 31,

Amount
2016 (remainder of year)

$
39,803

2017

77,248

2018

58,193

2019

29,868

2020

20,515

2021 and thereafter

64,021

   Total

$
289,648

 
During the three months ended July 31, 2015, we recorded a $2.3 million impairment of an acquired technology asset, which is included within cost of product revenue. No other impairments of acquired intangible assets were recorded during the six months ended July 31, 2015 and 2014.


14


Goodwill activity for the six months ended July 31, 2015, in total and by reportable segment, was as follows: 
 
 
 
 
Reportable Segment
(in thousands)
 
Total
 
Enterprise
Intelligence
 
Communications
Intelligence
 
Video
Intelligence
Year Ended January 31, 2015:
 
 
 
 
 
 
 
 
Goodwill, gross, at January 31, 2015
 
$
1,267,682

 
$
1,092,313

 
$
101,261

 
$
74,108

Accumulated impairment losses through January 31, 2015
 
(66,865
)
 
(30,791
)
 

 
(36,074
)
   Goodwill, net, at January 31, 2015
 
1,200,817

 
1,061,522

 
101,261

 
38,034

Business combinations
 
23,855

 
2,333

 
21,522

 

Foreign currency translation and other
 
7,168

 
8,510

 
(988
)
 
(354
)
   Goodwill, net, at July 31, 2015
 
$
1,231,840

 
$
1,072,365

 
$
121,795

 
$
37,680

 
 
 
 
 
 
 
 
 
Balance at July 31, 2015:
 


 
 

 
 

 
 

Goodwill, gross, at July 31, 2015
 
$
1,298,705

 
$
1,103,156

 
$
121,795

 
$
73,754

Accumulated impairment losses through July 31, 2015
 
(66,865
)
 
(30,791
)
 

 
(36,074
)
   Goodwill, net, at July 31, 2015
 
$
1,231,840

 
$
1,072,365

 
$
121,795

 
$
37,680


No events or circumstances indicating the potential for goodwill impairment were identified during the six months ended July 31, 2015.


6.
LONG-TERM DEBT

The following table summarizes our long-term debt at July 31, 2015 and January 31, 2015: 
 
 
July 31,
 
January 31,
(in thousands)
 
2015
 
2015
1.50% Convertible Senior Notes:
 
 
 
 
   Principal amount
 
$
400,000

 
$
400,000

   Unamortized debt discount
 
(69,091
)
 
(74,086
)
1.50% Convertible Senior Notes, net
 
330,909

 
325,914

February 2014 Term Loans:
 
 
 
 
Gross amount
 
130,729

 
130,729

Unamortized debt discount
 
(250
)
 
(277
)
February 2014 Term Loans, net
 
130,479

 
130,452

March 2014 Term Loans
 
280,413

 
280,413

Other debt
 

 
23

Total debt
 
741,801

 
736,802

Less: current maturities
 

 
23

Long-term debt
 
$
741,801

 
$
736,779


Current maturities of long-term debt are reported within accrued expenses and other current liabilities on the condensed consolidated balance sheet.

1.50% Convertible Senior Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes ("Notes") due June 1, 2021, unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Credit Agreement.

15


The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount of the Notes.
The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;

during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or

upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.

On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied.
As of July 31, 2015, the Notes were not convertible.

In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the carrying amount of the debt component of the Notes to be $319.9 million at the issuance date, assuming a 5.00% non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately $80.1 million by deducting the carrying amount of the debt component from the principal amount of the Notes, and was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the "debt discount") is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component were recorded within other assets and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at July 31, 2015. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the Notes was approximately 5.29% at July 31, 2015.

Based on the closing market price of our common stock on July 31, 2015, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.

Note Hedges and Warrants

Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the "Note Hedges") and sold warrants (the "Warrants"). The combination of the Note Hedges and the Warrants serves to increase the effective initial

16


conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of July 31, 2015, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of July 31, 2015, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreement
Background
In April 2011, we entered into a credit agreement with our lenders, which was amended and restated on March 6, 2013, and further amended on February 3, 2014, March 7, 2014, and June 18, 2014 (the "Credit Agreement"). The Credit Agreement, as amended and restated, provides for senior secured credit facilities, comprised of $943.5 million of term loans, of which $300.0 million was borrowed in February 2014 (the "February 2014 Term Loans") and $643.5 million was borrowed in March 2014 (the "March 2014 Term Loans"), all of which matures in September 2019, and a $300.0 million revolving credit facility maturing in September 2018 (the "Revolving Credit Facility"), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time.
At July 31, 2015, $130.7 million and $280.4 million of borrowings were outstanding under the February 2014 Term Loans and March 2014 Term Loans, respectively, and there were no outstanding borrowings under the Revolving Credit Facility.

As further described below, on March 7, 2014, $643.5 million of term loans previously borrowed under the Credit Agreement
(the "March 2013 Term Loans") were extinguished and replaced with the March 2014 Term Loans, and the basis for determining the interest rate on borrowings under the Revolving Credit Facility was also amended.

From March 6, 2013 through March 6, 2014, the March 2013 Term Loans and borrowings under the Revolving Credit Facility, if any, incurred interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at our election:

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.00% (or, if our corporate credit ratings are BB- and Ba3 or better, 2.75%). The Adjusted LIBO Rate is the greater of (i) 1.00% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the Credit Agreement), and

in the case of Base Rate loans, the Base Rate plus 2.00% (or, if our corporate credit ratings are BB- and Ba3 or better, 1.75%). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.


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Debt issuance costs incurred in connection with the Credit Agreement, as well as costs incurred for debt modifications, are deferred. These costs are amortized as adjustments to interest expense over the remaining contractual life of the associated borrowings. Original issuance discounts on term loans are also amortized as adjustments to interest expense over the remaining contractual life of the associated term loans. Upon early retirement of debt, the associated deferred debt issuance costs and unamortized original issuance discount, if any, are written off as a loss on early retirement of debt.

We are required to pay a commitment fee equal to 0.50% per annum of the undrawn portion on the Revolving Credit Facility, payable quarterly, and customary administrative agent and letter of credit fees.

2014 Amendments to Credit Agreement

During the year ended January 31, 2015, we entered into five separate amendments to the Credit Agreement as described below.

On February 3, 2014, in connection with the acquisition of KANA, we borrowed $125.0 million under the Revolving Credit Facility and entered into Amendment No. 1 pursuant to which, on such date, we incurred the February 2014 Term Loans of $300.0 million, maturing in September 2019. The net proceeds of these borrowings were used to fund a portion of the KANA purchase price.

The February 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or less, at the end of the applicable interest period, at a per annum rate of, at our election:

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i) 0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the Credit Agreement), and

in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.

We incurred debt issuance costs of approximately $7.1 million associated with the February 2014 Term Loans, which were deferred and classified within other assets. The February 2014 Term Loans were also subject to an original issuance discount of 0.25%, or $0.8 million.
On February 3, 2014, we also entered into Amendment No. 2 to, among other things, (i) permit us to increase the permitted amount of additional incremental term loans and revolving credit commitments under the Credit Agreement (beyond the February 2014 Term Loans borrowed under Amendment No. 1) by up to, in the aggregate, $200.0 million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2) would not exceed the specified maximum ratio set forth therein, (ii) increase the size of certain negative covenant basket carve-outs, (iii) permit us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permit us to refinance all or a portion of any existing class of term loans under the Credit Agreement with replacement term loans.
On February 3, 2014, we also entered into Amendment No. 3 to extend by one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to our Revolving Credit Facility and, subject to the effectiveness of Amendment No. 4 (as described below), reprice the interest rate applicable to borrowings under the Revolving Credit Facility to the interest rate applicable to the February 2014 Term Loans.

On March 7, 2014, we entered into Amendment No. 4 to refinance all $643.5 million of outstanding March 2013 Term Loans at that date with the March 2014 Term Loans of $643.5 million, maturing in September 2019. The provisions for determining the interest rate on the March 2014 Term Loans are identical to such provisions for the February 2014 Term Loans. The repricing of the interest rate applicable to borrowings under the Revolving Credit Facility contemplated by Amendment No. 3 became effective on March 7, 2014, upon the effectiveness of Amendment No. 4.

The refinancing of the March 2013 Term Loans with the proceeds of the March 2014 Term Loans pursuant to Amendment No. 4 was accounted for as an early retirement of the March 2013 Term Loans and, as a result, $4.3 million of unamortized deferred debt issuance costs and $2.8 million of unamortized discount associated with the March 2013 Term Loans as of the March 7, 2014 effective date of Amendment No. 4 were written off as a $7.1 million loss on early retirement of debt.


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As of July 31, 2015 and January 31, 2015, the interest rate on both the February 2014 Term Loans and the March 2014 Term Loans was 3.50%. Taking into account the impact of original issuance discounts, if any, and related deferred debt issuance costs, the effective interest rates on the February 2014 Term Loans and March 2014 Term Loans were approximately 4.03% and 3.58%, respectively, at July 31, 2015.

We incurred $2.4 million of debt issuance costs in consideration of Amendment No. 4. There was no original issuance discount on the March 2014 Term Loans.

On June 18, 2014, we entered into Amendment No. 5, which increased the commitments under the Revolving Credit Facility to $300.0 million and extended the termination of the Revolving Credit Facility to September 2018.
Early Partial Retirement of Term Loans - June 2014

On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and all $106.0 million of then-outstanding borrowings under the Revolving Credit Facility. As a result, $3.8 million and $1.3 million of deferred debt issuance costs associated with the February 2014 Term Loans and March 2014 Term Loans, respectively, and $0.4 million of unamortized discount associated with the February 2014 Term Loans, were written off as a $5.5 million loss on early retirement of debt.
Borrowings Under Revolving Credit Facility

There were no borrowings under the Revolving Credit Facility at July 31, 2015 and January 31, 2015.
Other Provisions of the Credit Agreement

The Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type, which include limitations on us and our subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. The Revolving Credit Facility also contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1 until January 31, 2016 (as amended on February 3, 2014 by Amendment No. 3, as described above) and no greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.

Future Principal Payments on Term Loans

Prior to June 2014, we were required to make quarterly principal payments on the February 2014 Term Loans and March 2014 Term Loans of $0.8 million and $1.6 million, respectively, through August 1, 2019, with the remaining balances due in September 2019. Following the partial retirements of the February 2014 Term Loans and March 2014 Term Loans in June 2014, future scheduled principal payments on the February 2014 Term Loans and March 2014 Term Loans as of July 31, 2015 were as follows:
(in thousands)
 
February 2014
 
March
2014
Years Ending January 31,
 
Term Loans
 
Term Loans
2016 (remainder of year)
 
$

 
$

2017
 
669

 
1,434

2018
 
1,337

 
2,869

2019
 
1,337

 
2,869

2020
 
127,386

 
273,241

   Total
 
$
130,729

 
$
280,413

Interest Expense


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The following table presents the components of interest expense incurred on the Notes and on borrowings under our Credit Agreement for the three and six months ended July 31, 2015 and 2014:
 
 
Three Months Ended July 31,
 
Six Months Ended
July 31,
(in thousands)
 
2015
 
2014
 
2015
 
2014
1.50% Convertible Senior Notes:
 
 
 
 
 
 
 
 
Interest expense at 1.50% coupon rate
 
$
1,500

 
$
717

 
$
3,000

 
$
717

Amortization of debt discount
 
2,514

 
1,148

 
4,995

 
1,148

Amortization of deferred debt issuance costs
 
237

 
107

 
471

 
107

Total Interest Expense - 1.50% Convertible Senior Notes
 
$
4,251

 
$
1,972

 
$
8,466

 
$
1,972

 
 
 
 
 
 
 
 
 
Borrowings under Credit Agreement:
 
 
 
 
 
 
 
 
Interest expense at contractual rates
 
$
3,677

 
$
6,635

 
$
7,235

 
$
15,882

Amortization of debt discounts
 
14

 
21

 
28

 
88

Amortization of deferred debt issuance costs
 
562

 
612

 
1,069

 
1,357

Total Interest Expense - Borrowings under Credit Agreement
 
$
4,253

 
$
7,268

 
$
8,332

 
$
17,327


7.
SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
 
Condensed Consolidated Balance Sheets
 
Inventories consisted of the following as of July 31, 2015 and January 31, 2015: 
 
 
July 31,
 
January 31,
(in thousands)
 
2015
 
2015
Raw materials
 
$
9,296

 
$
6,203

Work-in-process
 
5,193

 
8,481

Finished goods
 
3,978

 
2,821

Total inventories
 
$
18,467

 
$
17,505


Condensed Consolidated Statements of Operations
 
Other (expense) income, net consisted of the following for the three and six months ended July 31, 2015 and 2014:
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Foreign currency (losses) gains, net
 
$
(3,361
)
 
$
(2,280
)
 
$
(2,916
)
 
$
915

Gains on derivative financial instruments, net
 
142

 
840

 
274

 
103

Other, net
 
(532
)
 
(289
)
 
(898
)
 
81

Total other (expense) income, net
 
$
(3,751
)
 
$
(1,729
)
 
$
(3,540
)
 
$
1,099


Condensed Consolidated Statements of Cash Flows
 
The following table provides supplemental information regarding our condensed consolidated cash flows for the six months ended July 31, 2015 and 2014:

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Six Months Ended July 31,
(in thousands)
 
2015
 
2014
Cash paid for interest
 
$
10,189

 
$
18,972

Cash payments of income taxes, net
 
$
7,967

 
$
3,908

Non-cash investing and financing transactions:
 
 

 
 
Accrued but unpaid purchases of property and equipment
 
$
4,179

 
$
2,277

Inventory transfers to property and equipment
 
$
1,031

 
$
103

Liabilities for contingent consideration in business combinations
 
$
16,238

 
$
4,947

Accrued but unpaid equity issuance, debt issuance and other debt-related costs
 
$

 
$
1,255



8.
STOCKHOLDERS’ EQUITY
 
Dividends on Common Stock

We did not declare or pay any dividends on our common stock during the six months ended July 31, 2015 and 2014. Under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.

Treasury Stock
 
Repurchased shares of common stock are recorded as treasury stock, at cost. At July 31, 2015 and January 31, 2015, we held approximately 348,000 shares of treasury stock with a cost of $10.3 million.
 
We did not acquire any shares of treasury stock du