Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - VERINT SYSTEMS INC | vrnt-ex322_2016430xform10xq.htm |
| EX-32.1 - EXHIBIT 32.1 - VERINT SYSTEMS INC | vrnt-ex321_2016430xform10xq.htm |
| EX-31.2 - EXHIBIT 31.2 - VERINT SYSTEMS INC | vrnt-ex312_2016430xform10xq.htm |
| EX-31.1 - EXHIBIT 31.1 - VERINT SYSTEMS INC | vrnt-ex311_2016430xform10xq.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 April 30, 2016
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.) | |
175 Broadhollow 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 62,198,014 shares of the registrant’s common stock outstanding on May 13, 2016.
Verint Systems Inc. and Subsidiaries | ||
Index to Form 10-Q | ||
As of and For the Period Ended April 30, 2016 | ||
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, evolving industry standards, and customer challenges, such as the proliferation and strengthening of encryption, to adapt to changing market potential from area to area within our markets, and to successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer needs, while simultaneously preserving our legacy businesses; |
• | 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, 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, developmental, strategic, or other opportunities, and risk that such investments 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 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 associated with the mishandling or perceived mishandling of sensitive or confidential information and with security vulnerabilities or lapses, including information technology system breaches, failures, or disruptions; |
• | risks that our products or services, or those of third-party suppliers, partners, or OEMs which we incorporate into our offerings or otherwise rely on, may contain defects or may be vulnerable to cyber-attacks; |
• | 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 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 applicable projects; |
ii
• | 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, including 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; |
• | challenges associated with pursuing larger sales opportunities that often involve longer sales cycles, including with respect to transaction reductions, deferrals, or cancellations during the sales cycle, our ability to accurately forecast when a sales opportunity will convert to an order, or 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 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 or our ability to incur additional debt, 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, Xura, Inc. (formerly, Comverse, Inc.) ("Xura"), 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 changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits. |
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, 2016. 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
VERINT SYSTEMS INC. AND SUBSIDIARIES | |
Index to Condensed Consolidated Financial Statements (Unaudited) | |
Page | |
1
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
April 30, | January 31, | |||||||
(in thousands, except share and per share data) | 2016 | 2016 | ||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 323,905 | $ | 352,105 | ||||
Restricted cash and bank time deposits | 11,089 | 11,820 | ||||||
Short-term investments | 48,087 | 55,982 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1.8 million and $1.2 million, respectively | 241,018 | 256,419 | ||||||
Inventories | 20,751 | 18,312 | ||||||
Deferred cost of revenue | 2,018 | 1,876 | ||||||
Prepaid expenses and other current assets | 65,493 | 57,598 | ||||||
Total current assets | 712,361 | 754,112 | ||||||
Property and equipment, net | 79,728 | 68,904 | ||||||
Goodwill | 1,248,110 | 1,207,176 | ||||||
Intangible assets, net | 268,649 | 246,682 | ||||||
Capitalized software development costs, net | 11,855 | 11,992 | ||||||
Long-term deferred cost of revenue | 12,450 | 13,117 | ||||||
Other assets | 54,576 | 53,752 | ||||||
Total assets | $ | 2,387,729 | $ | 2,355,735 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 58,126 | $ | 65,447 | ||||
Accrued expenses and other current liabilities | 211,769 | 209,071 | ||||||
Deferred revenue | 191,389 | 167,912 | ||||||
Total current liabilities | 461,284 | 442,430 | ||||||
Long-term debt | 737,878 | 735,983 | ||||||
Long-term deferred revenue | 20,719 | 20,488 | ||||||
Other liabilities | 101,638 | 88,670 | ||||||
Total liabilities | 1,321,519 | 1,287,571 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity: | ||||||||
Preferred stock - $0.001 par value; authorized 2,207,000 shares at April 30, 2016 and January 31, 2016, respectively; none issued. | — | — | ||||||
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 63,046,000 and 62,614,000 shares; outstanding 62,198,000 and 62,266,000 shares at April 30, 2016 and January 31, 2016, respectively. | 63 | 63 | ||||||
Additional paid-in capital | 1,401,897 | 1,387,955 | ||||||
Treasury stock, at cost - 848,000 and 348,000 shares at April 30, 2016 and January 31, 2016, respectively. | (27,413 | ) | (10,251 | ) | ||||
Accumulated deficit | (218,892 | ) | (201,436 | ) | ||||
Accumulated other comprehensive loss | (99,034 | ) | (116,194 | ) | ||||
Total Verint Systems Inc. stockholders' equity | 1,056,621 | 1,060,137 | ||||||
Noncontrolling interest | 9,589 | 8,027 | ||||||
Total stockholders' equity | 1,066,210 | 1,068,164 | ||||||
Total liabilities and stockholders' equity | $ | 2,387,729 | $ | 2,355,735 | ||||
See notes to condensed consolidated financial statements.
2
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended April 30, | ||||||||
(in thousands, except per share data) | 2016 | 2015 | ||||||
Revenue: | ||||||||
Product | $ | 75,712 | $ | 102,799 | ||||
Service and support | 169,712 | 166,737 | ||||||
Total revenue | 245,424 | 269,536 | ||||||
Cost of revenue: | ||||||||
Product | 26,383 | 34,897 | ||||||
Service and support | 65,131 | 60,296 | ||||||
Amortization of acquired technology | 9,180 | 7,980 | ||||||
Total cost of revenue | 100,694 | 103,173 | ||||||
Gross profit | 144,730 | 166,363 | ||||||
Operating expenses: | ||||||||
Research and development, net | 44,720 | 43,166 | ||||||
Selling, general and administrative | 100,035 | 102,850 | ||||||
Amortization of other acquired intangible assets | 11,266 | 10,737 | ||||||
Total operating expenses | 156,021 | 156,753 | ||||||
Operating (loss) income | (11,291 | ) | 9,610 | |||||
Other income (expense), net: | ||||||||
Interest income | 153 | 194 | ||||||
Interest expense | (8,544 | ) | (8,337 | ) | ||||
Other income, net | 3,819 | 211 | ||||||
Total other expense, net | (4,572 | ) | (7,932 | ) | ||||
(Loss) income before provision for income taxes | (15,863 | ) | 1,678 | |||||
Provision for income taxes | 330 | 947 | ||||||
Net (loss) income | (16,193 | ) | 731 | |||||
Net income attributable to noncontrolling interest | 1,263 | 1,147 | ||||||
Net loss attributable to Verint Systems Inc. | $ | (17,456 | ) | $ | (416 | ) | ||
Net loss per common share attributable to Verint Systems Inc.: | ||||||||
Basic | $ | (0.28 | ) | $ | (0.01 | ) | ||
Diluted | $ | (0.28 | ) | $ | (0.01 | ) | ||
Weighted-average common shares outstanding: | ||||||||
Basic | 62,258 | 61,041 | ||||||
Diluted | 62,258 | 61,041 | ||||||
See notes to condensed consolidated financial statements.
3
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
Three Months Ended April 30, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Net (loss) income | $ | (16,193 | ) | $ | 731 | |||
Other comprehensive income (loss), net of reclassification adjustments: | ||||||||
Foreign currency translation adjustments | 13,531 | 5,169 | ||||||
Net unrealized gains on available-for-sale securities | 105 | 57 | ||||||
Net unrealized gains on foreign exchange contracts designated as hedges | 4,788 | 5,027 | ||||||
Net unrealized loss on interest rate swap designated as a hedge | (429 | ) | — | |||||
Provision for income taxes on net unrealized gains on foreign exchange contracts designated as hedges | (536 | ) | (582 | ) | ||||
Other comprehensive income | 17,459 | 9,671 | ||||||
Comprehensive income | 1,266 | 10,402 | ||||||
Comprehensive income attributable to noncontrolling interest | 1,562 | 937 | ||||||
Comprehensive (loss) income attributable to Verint Systems Inc. | $ | (296 | ) | $ | 9,465 | |||
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, 2015 | 60,905 | $ | 61 | $ | 1,321,455 | $ | (10,251 | ) | $ | (219,074 | ) | $ | (94,335 | ) | $ | 997,856 | $ | 7,047 | $ | 1,004,903 | |||||||||||||||
Net (loss) income | — | — | — | — | (416 | ) | — | (416 | ) | 1,147 | 731 | ||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 9,881 | 9,881 | (210 | ) | 9,671 | |||||||||||||||||||||||||
Stock-based compensation - equity-classified awards | — | — | 13,100 | — | — | — | 13,100 | — | 13,100 | ||||||||||||||||||||||||||
Exercises of stock options | 6 | — | 229 | — | — | — | 229 | — | 229 | ||||||||||||||||||||||||||
Common stock issued for stock awards and stock bonuses | 447 | 1 | (1 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||
Tax effects from stock award plans | — | — | 179 | — | — | — | 179 | — | 179 | ||||||||||||||||||||||||||
Balances at April 30, 2015 | 61,358 | $ | 62 | $ | 1,334,962 | $ | (10,251 | ) | $ | (219,490 | ) | $ | (84,454 | ) | $ | 1,020,829 | $ | 7,984 | $ | 1,028,813 | |||||||||||||||
Balances at January 31, 2016 | 62,266 | $ | 63 | $ | 1,387,955 | $ | (10,251 | ) | $ | (201,436 | ) | $ | (116,194 | ) | $ | 1,060,137 | $ | 8,027 | $ | 1,068,164 | |||||||||||||||
Net (loss) income | — | — | — | — | (17,456 | ) | — | (17,456 | ) | 1,263 | (16,193 | ) | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 17,160 | 17,160 | 299 | 17,459 | ||||||||||||||||||||||||||
Stock-based compensation - equity-classified awards | — | — | 13,966 | — | — | — | 13,966 | — | 13,966 | ||||||||||||||||||||||||||
Exercises of stock options | — | — | 1 | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||
Common stock issued for stock awards and stock bonuses | 432 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Purchases of treasury stock | (500 | ) | — | — | (17,162 | ) | — | — | (17,162 | ) | — | (17,162 | ) | ||||||||||||||||||||||
Tax effects from stock award plans | — | — | (25 | ) | — | — | — | (25 | ) | — | (25 | ) | |||||||||||||||||||||||
Balances at April 30, 2016 | 62,198 | $ | 63 | $ | 1,401,897 | $ | (27,413 | ) | $ | (218,892 | ) | $ | (99,034 | ) | $ | 1,056,621 | $ | 9,589 | $ | 1,066,210 | |||||||||||||||
See notes to condensed consolidated financial statements.
5
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended April 30, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (16,193 | ) | $ | 731 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 28,335 | 25,028 | ||||||
Stock-based compensation, excluding cash-settled awards | 15,312 | 14,791 | ||||||
Amortization of discount on convertible notes | 2,614 | 2,480 | ||||||
Non-cash losses (gains) on derivative financial instruments, net | 1,558 | (132 | ) | |||||
Other non-cash items, net | 2,747 | 9,072 | ||||||
Changes in operating assets and liabilities, net of effects of business combinations: | ||||||||
Accounts receivable | 25,545 | 4,950 | ||||||
Inventories | (2,587 | ) | (3,691 | ) | ||||
Deferred cost of revenue | 550 | 1,970 | ||||||
Prepaid expenses and other assets | (1,392 | ) | (9,074 | ) | ||||
Accounts payable and accrued expenses | (16,090 | ) | 1,400 | |||||
Deferred revenue | 21,509 | 22,046 | ||||||
Other, net | (46 | ) | (2,945 | ) | ||||
Net cash provided by operating activities | 61,862 | 66,626 | ||||||
Cash flows from investing activities: | ||||||||
Cash paid for business combinations, including adjustments, net of cash acquired | (69,751 | ) | (2,149 | ) | ||||
Purchases of property and equipment | (9,441 | ) | (5,206 | ) | ||||
Purchases of investments | (24,967 | ) | (38,355 | ) | ||||
Maturities and sales of investments | 32,908 | 5,479 | ||||||
Cash paid for capitalized software development costs | (696 | ) | (1,031 | ) | ||||
Change in restricted cash and bank time deposits, including long-term portion, and other investing activities, net | 693 | 11,376 | ||||||
Net cash used in investing activities | (71,254 | ) | (29,886 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayments of borrowings and other financing obligations | (149 | ) | (152 | ) | ||||
Proceeds from exercises of stock options | 1 | 229 | ||||||
Purchases of treasury stock | (17,162 | ) | — | |||||
Payments of contingent consideration for business combinations (financing portion) | (2,947 | ) | (2,006 | ) | ||||
Other financing activities | (600 | ) | (63 | ) | ||||
Net cash used in financing activities | (20,857 | ) | (1,992 | ) | ||||
Effect of foreign currency exchange rate changes on cash and cash equivalents | 2,049 | 1,208 | ||||||
Net (decrease) increase in cash and cash equivalents | (28,200 | ) | 35,956 | |||||
Cash and cash equivalents, beginning of period | 352,105 | 285,072 | ||||||
Cash and cash equivalents, end of period | $ | 323,905 | $ | 321,028 | ||||
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 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, 2016. The condensed consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for the periods ended April 30, 2016 and 2015, and the condensed consolidated balance sheet as of April 30, 2016, 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, 2016 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2016. 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, 2016. The results for interim periods are not necessarily indicative of a full year’s results.
Reclassification Within Condensed Consolidated Statements of Cash Flows
Certain amounts within the presentation of net cash provided by operating activities in our condensed consolidated statement of cash flows for the three months ended April 30, 2015 have been reclassified to conform to the current period's presentation. These reclassifications had no effect on net cash provided by operating activities.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned or otherwise controlled subsidiaries, and a joint venture in which we hold a 50% equity interest. The joint venture 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. We have two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interest. We consider the option to be an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries.
7
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost.
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.
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, 2016. There were no material changes to our significant accounting policies during the three months ended April 30, 2016.
Recent Accounting Pronouncements
New Accounting Pronouncements Not Yet Effective
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation—Stock Compensation (Topic 718), which amends the accounting for stock-based compensation and requires excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than stockholders' equity. This guidance also requires excess tax benefits to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The new guidance is effective for all periods beginning after December 15, 2018 and we are currently evaluating the effects that the adoption of ASU No. 2016-02 will have on our condensed consolidated financial statements, but anticipate that the new guidance will significantly impact our condensed consolidated financial statements given our significant number of leases.
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 PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC. |
The following table summarizes the calculation of basic and diluted net loss per common share attributable to Verint Systems Inc. for the three months ended April 30, 2016 and 2015:
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Three Months Ended April 30, | ||||||||
(in thousands, except per share amounts) | 2016 | 2015 | ||||||
Net (loss) income | $ | (16,193 | ) | $ | 731 | |||
Net income attributable to noncontrolling interest | 1,263 | 1,147 | ||||||
Net loss attributable to Verint Systems Inc. | $ | (17,456 | ) | $ | (416 | ) | ||
Weighted-average shares outstanding: | ||||||||
Basic | 62,258 | 61,041 | ||||||
Dilutive effect of employee equity award plans | — | — | ||||||
Dilutive effect of 1.50% convertible senior notes | — | — | ||||||
Dilutive effect of warrants | — | — | ||||||
Diluted | 62,258 | 61,041 | ||||||
Net loss per common share attributable to Verint Systems Inc.: | ||||||||
Basic | $ | (0.28 | ) | $ | (0.01 | ) | ||
Diluted | $ | (0.28 | ) | $ | (0.01 | ) | ||
We excluded the following weighted-average potential common shares from the calculations of diluted net income per common share during the applicable periods because their inclusion would have been anti-dilutive:
Three Months Ended April 30, | ||||||
(in thousands) | 2016 | 2015 | ||||
Common shares excluded from calculation: | ||||||
Stock options and restricted stock-based awards | 2,247 | 1,825 | ||||
1.50% convertible senior notes | 6,205 | 6,205 | ||||
Warrants | 6,205 | 6,205 | ||||
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.
Our 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 (as defined in Note 6, "Long-Term Debt") 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 under the treasury stock method, because their effect would be anti-dilutive. However, 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 would neutralize the dilutive effect of the common shares that we would issue under the Notes. As a result, actual conversion of any or all of the Notes would not increase our outstanding common stock. Up to 6,205,000 common shares could be issued upon exercise of the Warrants. 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 April 30, 2016 and January 31, 2016:
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April 30, 2016 | ||||||||||||||||
(in thousands) | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Cash and bank time deposits | $ | 306,252 | $ | — | $ | — | $ | 306,252 | ||||||||
Money market funds | 170 | — | — | 170 | ||||||||||||
Commercial paper and corporate debt securities | 17,483 | — | — | 17,483 | ||||||||||||
Total cash and cash equivalents | $ | 323,905 | $ | — | $ | — | $ | 323,905 | ||||||||
Short-term investments: | ||||||||||||||||
Commercial paper and corporate debt securities (available-for-sale) | $ | 41,036 | $ | — | $ | (5 | ) | $ | 41,031 | |||||||
Bank time deposits | 7,056 | — | — | 7,056 | ||||||||||||
Total short-term investments | $ | 48,092 | $ | — | $ | (5 | ) | $ | 48,087 | |||||||
January 31, 2016 | ||||||||||||||||
(in thousands) | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Cash and bank time deposits | $ | 334,938 | $ | — | $ | — | $ | 334,938 | ||||||||
Money market funds | 12,137 | — | — | 12,137 | ||||||||||||
Commercial paper and corporate debt securities | 5,054 | — | (24 | ) | 5,030 | |||||||||||
Total cash and cash equivalents | $ | 352,129 | $ | — | $ | (24 | ) | $ | 352,105 | |||||||
Short-term investments: | ||||||||||||||||
Commercial paper and corporate debt securities (available-for-sale) | $ | 53,018 | $ | — | $ | (86 | ) | $ | 52,932 | |||||||
Bank time deposits | 3,050 | — | — | 3,050 | ||||||||||||
Total short-term investments | $ | 56,068 | $ | — | $ | (86 | ) | $ | 55,982 | |||||||
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 April 30, 2016 and January 31, 2016, 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 three months ended April 30, 2016 and 2015 were not significant.
During the three months ended April 30, 2016 and 2015, proceeds from maturities and sales of available-for-sale securities were $32.9 million and $5.5 million, respectively.
We believe that the investments we held at April 30, 2016 were not other-than-temporarily impaired. We held available-for-sale securities with aggregate fair values of $17.0 million which had insignificant unrealized losses at April 30, 2016. We do not intend to sell our available-for-sale securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.
4. | BUSINESS COMBINATIONS |
Three Months Ended April 30, 2016
Contact Solutions, LLC
On February 19, 2016, we completed the acquisition of Contact Solutions, LLC ("Contact Solutions"), a provider of real-time, contextual self-service solutions, based in Reston, Virginia. The purchase price consisted of $66.9 million of cash paid at
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closing, and a $2.4 million post-closing purchase price adjustment based upon a determination of Contact Solutions' acquisition-date working capital, which was unpaid at April 30, 2016. The cash paid at closing was funded with cash on hand.
In connection with the purchase price allocation for Contact Solutions, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $0.6 million of current and long-term deferred revenue, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not yet been received, we recorded a $2.9 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $1.2 million of which is included within prepaid expenses and other current assets, and $1.7 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.
Revenue and income (loss) before provision for income taxes attributable to Contact Solutions included in our condensed consolidated statement of operations for the three months ended April 30, 2016 were not significant.
Transaction and related costs directly related to the acquisition of Contact Solutions, consisting primarily of professional fees and integration expenses, were $0.3 million for the three months ended April 30, 2016, and were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocation for Contact Solutions has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the measurement period (up to one year from the acquisition date). Fair values still under review include values assigned to identifiable intangible assets and certain pre-acquisition loss contingencies.
The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Among the factors contributing to the recognition of goodwill as a component of the Contact Solutions purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Enterprise Intelligence segment and is deductible for income tax purposes.
The following table sets forth the components and the allocation of the purchase price for our acquisition of Contact Solutions.
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(in thousands) | Amount | |||
Components of Purchase Price: | ||||
Cash paid at closing | $ | 66,915 | ||
Other purchase price adjustments | 2,439 | |||
Total purchase price | $ | 69,354 | ||
Allocation of Purchase Price: | ||||
Net tangible assets (liabilities): | ||||
Accounts receivable | $ | 8,102 | ||
Other current assets, including cash acquired | 2,392 | |||
Property and equipment, net | 7,059 | |||
Other assets | 1,904 | |||
Current and other liabilities | (4,943 | ) | ||
Deferred revenue - current and long-term | (642 | ) | ||
Net tangible assets | 13,872 | |||
Identifiable intangible assets: | ||||
Customer relationships | 18,000 | |||
Developed technology | 13,100 | |||
Trademarks and trade names | 2,400 | |||
Total identifiable intangible assets | 33,500 | |||
Goodwill | 21,982 | |||
Total purchase price allocation | $ | 69,354 | ||
The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of ten years, four years, and five years, respectively, the weighted average of which is approximately 7.4 years.
The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
The pro forma impact of the acquisition of Contact Solutions was not material to our historical consolidated operating results and is therefore not presented.
Other Business Combination
During the three months ended April 30, 2016, we completed a transaction that qualified as a business combination in our Enterprise Intelligence segment. This business combination was not material to our condensed consolidated financial statements.
Year Ended January 31, 2016
During the year ended January 31, 2016, we completed three business combinations:
• | On February 12, 2015, we completed the acquisition of a business that has been integrated into our Enterprise Intelligence operating segment. |
• | On May 1, 2015, we completed the acquisition of a business that has been integrated into our Cyber Intelligence operating segment. |
• | On August 11, 2015, we acquired certain technology and other assets for use in our Enterprise Intelligence operating segment in a transaction that qualified as a business combination. |
These business combinations were not individually material to our condensed consolidated financial statements.
The combined consideration for these business combinations was approximately $49.5 million, including $33.2 million of combined cash paid at the closings. For one of these business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $30.5 million, contingent upon the achievement of certain performance targets over periods extending through April 2020. The fair value of these contingent consideration obligations was estimated to be $16.2 million at the applicable acquisition date.
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Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $28.7 million of goodwill associated with these business combinations, $7.7 million and $21.0 million was assigned to our Enterprise Intelligence and Cyber Intelligence segments, respectively. For income tax purposes, $5.1 million of this goodwill is deductible and $23.6 million is not deductible.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $0.1 million and $0.5 million for the three months ended April 30, 2016 and 2015, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the year ended January 31, 2016 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes and reserves for uncertain income tax positions.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the year ended January 31, 2016:
(in thousands) | Amount | |||
Components of Purchase Prices: | ||||
Cash | $ | 33,222 | ||
Fair value of contingent consideration | 16,237 | |||
Total purchase prices | $ | 49,459 | ||
Allocation of Purchase Prices: | ||||
Net tangible assets (liabilities): | ||||
Accounts receivable | $ | 992 | ||
Other current assets, including cash acquired | 4,274 | |||
Other assets | 395 | |||
Current and other liabilities | (3,037 | ) | ||
Deferred revenue - current and long-term | (1,872 | ) | ||
Deferred income taxes - current and long-term | (2,922 | ) | ||
Net tangible liabilities | (2,170 | ) | ||
Identifiable intangible assets: | ||||
Customer relationships | 1,212 | |||
Developed technology | 20,300 | |||
Trademarks and trade names | 300 | |||
In-process research and development | 1,100 | |||
Total identifiable intangible assets | 22,912 | |||
Goodwill | 28,717 | |||
Total purchase price allocations | $ | 49,459 | ||
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from five years to ten years, from four years to five years, and three years, respectively, the weighted average of which is approximately 4.4 years.
The pro forma impact of these acquisitions was not material to our historical consolidated operating results and is therefore not presented.
Other Business Combination Information
The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general and administrative expenses in our condensed consolidated statements of operations. Changes in
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the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
In connection with an immaterial business combination that closed during the three months ended April 30, 2016, we recorded a contingent consideration obligation with a fair value of $7.7 million.
For the three months ended April 30, 2016 and 2015, we recorded benefits of $0.7 million and $0.1 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was $27.9 million at April 30, 2016, of which $3.8 million was recorded within accrued expenses and other current liabilities, and $24.1 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $3.0 million and $2.2 million for the three months ended April 30, 2016 and 2015, respectively.
5. | INTANGIBLE ASSETS AND GOODWILL |
Acquisition-related intangible assets consisted of the following as of April 30, 2016 and January 31, 2016:
April 30, 2016 | ||||||||||||
(in thousands) | Cost | Accumulated Amortization | Net | |||||||||
Intangible assets, with finite lives: | ||||||||||||
Customer relationships | $ | 398,474 | $ | (223,495 | ) | $ | 174,979 | |||||
Acquired technology | 226,877 | (145,179 | ) | 81,698 | ||||||||
Trade names | 21,952 | (12,561 | ) | 9,391 | ||||||||
Non-competition agreements | 3,047 | (2,228 | ) | 819 | ||||||||
Distribution network | 4,440 | (3,778 | ) | 662 | ||||||||
Total intangible assets with finite lives | 654,790 | (387,241 | ) | 267,549 | ||||||||
In-process research and development, with indefinite lives | 1,100 | — | 1,100 | |||||||||
Total intangible assets | $ | 655,890 | $ | (387,241 | ) | $ | 268,649 | |||||
January 31, 2016 | ||||||||||||
(in thousands) | Cost | Accumulated Amortization | Net | |||||||||
Intangible assets, with finite lives: | ||||||||||||
Customer relationships | $ | 371,722 | $ | (211,824 | ) | $ | 159,898 | |||||
Acquired technology | 211,388 | (134,391 | ) | 76,997 | ||||||||
Trade names | 18,457 | (11,570 | ) | 6,887 | ||||||||
Non-competition agreements | 3,047 | (2,137 | ) | 910 | ||||||||
Distribution network | 4,440 | (3,550 | ) | 890 | ||||||||
Total intangible assets with finite lives | 609,054 | (363,472 | ) | 245,582 | ||||||||
In-process research and development, with indefinite lives | 1,100 | — | 1,100 | |||||||||
Total intangible assets | $ | 610,154 | $ | (363,472 | ) | $ | 246,682 | |||||
The following table presents net acquisition-related intangible assets by reportable segment as of April 30, 2016 and January 31, 2016:
April 30, | January 31, | |||||||
(in thousands) | 2016 | 2016 | ||||||
Enterprise Intelligence | $ | 227,661 | $ | 201,503 | ||||
Cyber Intelligence | 40,692 | 44,802 | ||||||
Video Intelligence | 296 | 377 | ||||||
Total | $ | 268,649 | $ | 246,682 | ||||
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Total amortization expense recorded for acquisition-related intangible assets was $20.5 million and $18.7 million for the three months ended April 30, 2016 and 2015, 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 | |||
2017 (remainder of year) | $ | 61,842 | ||
2018 | 64,653 | |||
2019 | 36,757 | |||
2020 | 27,063 | |||
2021 | 21,046 | |||
2022 and thereafter | 56,188 | |||
Total | $ | 267,549 | ||
No impairments of acquired intangible assets were recorded during the three months ended April 30, 2016 and 2015.
Goodwill activity for the three months ended April 30, 2016, in total and by reportable segment, was as follows:
Reportable Segment | ||||||||||||||||
(in thousands) | Total | Enterprise Intelligence | Cyber Intelligence | Video Intelligence | ||||||||||||
Year Ended January 31, 2016: | ||||||||||||||||
Goodwill, gross, at January 31, 2016 | $ | 1,274,041 | $ | 1,079,746 | $ | 120,719 | $ | 73,576 | ||||||||
Accumulated impairment losses through January 31, 2016 | (66,865 | ) | (30,791 | ) | — | (36,074 | ) | |||||||||
Goodwill, net, at January 31, 2016 | 1,207,176 | 1,048,955 | 120,719 | 37,502 | ||||||||||||
Business combinations | 30,612 | 30,612 | — | — | ||||||||||||
Foreign currency translation and other | 10,322 | 9,076 | 517 | 729 | ||||||||||||
Goodwill, net, at April 30, 2016 | $ | 1,248,110 | $ | 1,088,643 | $ | 121,236 | $ | 38,231 | ||||||||
Balance at April 30, 2016: | ||||||||||||||||
Goodwill, gross, at April 30, 2016 | $ | 1,314,975 | $ | 1,119,434 | $ | 121,236 | $ | 74,305 | ||||||||
Accumulated impairment losses through April 30, 2016 | (66,865 | ) | (30,791 | ) | — | (36,074 | ) | |||||||||
Goodwill, net, at April 30, 2016 | $ | 1,248,110 | $ | 1,088,643 | $ | 121,236 | $ | 38,231 | ||||||||
No events or circumstances indicating the potential for goodwill impairment were identified during the three months ended April 30, 2016.
6. | LONG-TERM DEBT |
The following table summarizes our long-term debt at April 30, 2016 and January 31, 2016:
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April 30, | January 31, | |||||||
(in thousands) | 2016 | 2016 | ||||||
1.50% Convertible Senior Notes | $ | 400,000 | $ | 400,000 | ||||
February 2014 Term Loans | 130,729 | 130,729 | ||||||
March 2014 Term Loans | 280,413 | 280,413 | ||||||
Other debt | 1,015 | — | ||||||
Less: Unamortized debt discounts and issuance costs | (70,108 | ) | (73,055 | ) | ||||
Total debt | 742,049 | 738,087 | ||||||
Less: current maturities | 4,171 | 2,104 | ||||||
Long-term debt | $ | 737,878 | $ | 735,983 | ||||
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 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. If converted, we currently intend to pay cash in respect of the principal amount of the Notes.
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.
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 other specified conditions for conversion have been satisfied.
As of April 30, 2016, 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 debt and equity components of the Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component 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.
Issuance costs attributable to the debt component of the Notes were netted against long-term debt 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 April 30, 2016.
As of April 30, 2016, the carrying value of the debt component was $332.9 million, which is net of unamortized debt discount and issuance costs of $61.3 million and $5.8 million, respectively. 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 April 30, 2016.
Based on the closing market price of our common stock on April 30, 2016, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.
Note Hedges and Warrants
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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 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 April 30, 2016, 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 April 30, 2016, 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
In April 2011, we entered into a credit agreement with our lenders, which was amended and restated in March 2013, and further amended in February, March, and June 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 and reduction from time to time, as described in the Credit Agreement.
The February 2014 Term Loans were borrowed in connection with our February 2014 acquisition of Kana Software, Inc. (“Kana”). The March 2014 Term Loans were borrowed as part of a refinancing of previously outstanding amounts under the Credit Agreement. In June 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 million of then-outstanding borrowings under the Revolving Credit Facility.
The outstanding February 2014 Term Loans and March 2014 Term Loans incur interest at our option at either a base rate plus a spread of 1.75% or an Adjusted LIBOR Rate as defined in the Credit Agreement, plus a spread of 2.75%.
As of April 30, 2016 and January 31, 2016, 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 that date.
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.
Debt issuance and debt modification costs, as well as original issuance discounts, incurred in connection with the Credit Agreement are deferred and amortized as adjustments to interest expense over the remaining contractual life of the associated borrowing.
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The Credit Agreement, contains certain customary affirmative and negative covenants for credit facilities of this type, as well as a financial covenant that currently requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.
Future Principal Payments on Term Loans
As of April 30, 2016, future scheduled principal payments on the February 2014 Term Loans and March 2014 Term Loans are presented in the following table:
(in thousands) | February 2014 | March 2014 | ||||||
Years Ending January 31, | Term Loans | Term Loans | ||||||
2017 (remainder of year) | $ | 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
The following table presents the components of interest expense incurred on the Notes and on borrowings under our Credit Agreement for the three months ended April 30, 2016 and 2015:
Three Months Ended April 30, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
1.50% Convertible Senior Notes: | ||||||||
Interest expense at 1.50% coupon rate | $ | 1,500 | $ | 1,500 | ||||
Amortization of debt discount | 2,615 | 2,481 | ||||||
Amortization of deferred debt issuance costs | 247 | 234 | ||||||
Total Interest Expense - 1.50% Convertible Senior Notes | $ | 4,362 | $ | 4,215 | ||||
Borrowings under Credit Agreement: | ||||||||
Interest expense at contractual rates | $ | 3,597 | $ | 3,558 | ||||
Amortization of debt discounts | 14 | 14 | ||||||
Amortization of deferred debt issuance costs | 541 | 507 | ||||||
Total Interest Expense - Borrowings under Credit Agreement | $ | 4,152 | $ | 4,079 | ||||
7. | SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION |
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of April 30, 2016 and January 31, 2016:
April 30, | January 31, | |||||||
(in thousands) | 2016 | 2016 | ||||||
Raw materials | $ | 8,520 | $ | 7,177 | ||||
Work-in-process | 7,581 | 6,668 | ||||||
Finished goods | 4,650 | 4,467 | ||||||
Total inventories | $ | 20,751 | $ | 18,312 | ||||
Condensed Consolidated Statements of Operations
Other income, net consisted of the following for the three months ended April 30, 2016 and 2015:
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Three Months Ended April 30, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Foreign currency gains, net | $ | 5,925 | $ | 445 | ||||
(Loss) gains on derivative financial instruments, net | (1,559 | ) | 132 | |||||
Other, net | (547 | ) | (366 | ) | ||||
Total other income, net | $ | 3,819 | $ | 211 | ||||
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the three months ended April 30, 2016 and 2015:
Three Months Ended April 30, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Cash paid for interest | $ | 3,698 | $ | 3,643 | ||||
Cash payments of income taxes, net | $ | 16,541 | $ | 3,311 | ||||
Non-cash investing and financing transactions: | ||||||||
Accrued but unpaid purchases of property and equipment | $ | 3,642 | $ | 3,385 | ||||
Inventory transfers to property and equipment | $ | 59 | $ | 895 | ||||
Liabilities for contingent consideration in business combinations | $ | 7,700 | $ | — | ||||
8. | STOCKHOLDERS’ EQUITY |
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the three months ended April 30, 2016 and 2015. Under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.
Share Repurchase Program
On March 29, 2016, we announced that our board of directors had authorized a share repurchase program whereby we may make up to $150.0 million in purchases of our outstanding shares of common stock over the two years following the date of announcement. Under the share repurchase program, purchases can be made from time to time using a variety of methods, which may include open market purchases. The specific timing, price and size of purchases will depend on prevailing stock prices, general market and economic conditions, and other considerations, including the amount of cash generated in the U.S. and other potential uses of cash, such as acquisitions. Purchases may be made through a Rule 10b5-1 plan pursuant to pre-determined metrics set forth in such plan. The authorization of the share repurchase program does not obligate us to acquire any particular amount of common stock, and the program may be suspended or discontinued at any time.
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost. We periodically purchase treasury stock from directors, officers, and other employees to facilitate income tax withholding and payment requirements upon vesting of equity awards.
During the three months ended April 30, 2016, we acquired 500,000 shares of treasury stock at a cost of $17.2 million, under the aforementioned share repurchase program. We did not acquire any shares of treasury stock during the three months ended April 30, 2015.
At April 30, 2016, we held approximately 848,000 shares of treasury stock with a cost of $27.4 million. At January 31, 2016, we held approximately 348,000 shares of treasury stock with a cost of $10.3 million.
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Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income as presented in our condensed consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the three months ended April 30, 2016:
(in thousands) | Unrealized (Losses) Gains on Foreign Exchange Contracts Designated as Hedges | Unrealized Loss on Interest Rate Swap Designated as Hedge | Unrealized (Losses) Gains on Available-for-Sale Investments | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Accumulated other comprehensive loss at January 31, 2016 | $ | (1,871 | ) | $ | — | $ | (110 | ) | $ | (114,213 | ) | $ | (116,194 | ) | ||||||
Other comprehensive income (loss) before reclassifications | 4,797 | (429 | ) | 105 | 13,232 | 17,705 | ||||||||||||||
Gains reclassified out of accumulated other comprehensive income (loss) | 545 | — | — | — | 545 | |||||||||||||||
Net other comprehensive income (loss), current period | 4,252 | (429 | ) | 105 | 13,232 | 17,160 | ||||||||||||||
Accumulated other comprehensive income (loss) at April 30, 2016 | $ | 2,381 | $ | (429 | ) | $ | (5 | ) | $ | (100,981 | ) | $ | (99,034 | ) | ||||||
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statement of operations, with presentation location, for the three months ended April 30, 2016 and 2015 were as follows:
Three Months Ended April 30, | ||||||||||
(in thousands) | 2016 | 2015 | Location | |||||||
Unrealized gains (losses) on derivative financial instruments: | ||||||||||
Foreign currency forward contracts | $ | 57 | $ | (289 | ) | Cost of product revenue | ||||
43 | (254 | ) | Cost of service and support revenue | |||||||
334 | (1,805 | ) | Research and development, net | |||||||
172 | (845 | ) | Selling, general and administrative | |||||||
606 | (3,193 | ) | Total, before income taxes | |||||||
(61 | ) | 363 | (Provision) benefit for income taxes | |||||||
$ | 545 | $ | (2,830 | ) | Total, net of income taxes | |||||
9. | INCOME TAXES |
Our interim provision for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
For the three months ended April 30, 2016, we recorded an income tax provision of $0.3 million on a pre-tax loss of $15.9 million, which represented a negative effective income tax rate of 2.1%. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. Our pre-tax losses in domestic and foreign jurisdictions where we
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maintain valuation allowances and do not record tax benefits were significantly higher than the pre-tax income in our profitable jurisdictions where we record a tax provision.
For the three months ended April 30, 2015, we recorded an income tax provision of $0.9 million on pre-tax income of $1.7 million, which represented an effective income tax rate of 56.4%. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. In addition, following the receipt of a tax ruling in a foreign jurisdiction, we reorganized certain operations within the foreign jurisdiction, resulting in a discrete income tax benefit of $3.0 million. Our pre-tax income in profitable jurisdictions, where we record tax provisions, was slightly higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record tax benefits.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting guidance for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against our federal and certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in the U.S. and in certain foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized tax benefits of $144.9 million and $142.3 million (excluding interest and penalties) as of April 30, 2016 and January 31, 2016, respectively. The accrued liability for interest and penalties was $3.2 million and $3.3 million at April 30, 2016 and January 31, 2016, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. As of April 30, 2016 and January 31, 2016, the total amount of unrecognized tax benefits that, if recognized, would impact our effective income tax rate were approximately $139.3 million and $136.6 million, respectively. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized tax benefits at April 30, 2016 could decrease by approximately $3.5 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized tax benefits; however, an estimate of such changes cannot reasonably be made.
10. | FAIR VALUE MEASUREMENTS |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of April 30, 2016 and January 31, 2016:
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April 30, 2016 | ||||||||||||
Fair Value Hierarchy Category | ||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | |||||||||
Assets: | ||||||||||||
Money market funds | $ | 170 | $ | — | $ | — | ||||||
Commercial paper and corporate debt securities, classified as cash and cash equivalents | — | 17,483 | — | |||||||||
Short-term investments, classified as available-for-sale | — | 41,031 | — | |||||||||
Foreign currency forward contracts | — | 2,801 | — | |||||||||
Total assets | $ | 170 | $ | 61,315 | $ | — | ||||||
Liabilities: | ||||||||||||
Foreign currency forward contracts | $ | — | $ | 1,841 | $ | — | ||||||
Interest rate swap agreement | — | 429 | — | |||||||||
Contingent consideration - business combinations | — | — | 27,933 | |||||||||
Total liabilities | $ | — | $ | 2,270 | $ | 27,933 | ||||||
January 31, 2016 | ||||||||||||
Fair Value Hierarchy Category | ||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | |||||||||
Assets: | ||||||||||||
Money market funds | $ | 12,137 | $ | — | $ | — | ||||||
Commercial paper and corporate debt securities, classified as cash and cash equivalents | — | 5,030 | — | |||||||||
Short-term investments, classified as available-for-sale | — | 52,932 | — | |||||||||
Foreign currency forward contracts | — | 113 | — | |||||||||
Total assets | $ | 12,137 | $ | 58,075 | $ | — | ||||||
Liabilities: | ||||||||||||
Foreign currency forward contracts | $ | — | $ | 2,377 | $ | — | ||||||
Contingent consideration - business combinations | — | — | 22,391 | |||||||||
Total liabilities | $ | — | $ | 2,377 | $ | 22,391 | ||||||
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the three months ended April 30, 2016 and 2015:
Three Months Ended April 30, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Fair value measurement at beginning of period | $ | 22,391 | $ | 14,507 | ||||
Contingent consideration liabilities recorded for business combinations | 7,700 | — | ||||||
Changes in fair values, recorded in operating expenses | 702 | 53 | ||||||
Payments of contingent consideration | (2,956 | ) | (2,158 | ) | ||||
Foreign currency translation and other | 96 | (2 | ) | |||||
Fair value measurement at end of period | $ | 27,933 | $ | 12,400 | ||||
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments and Commercial Paper - The fair values of short-term investments, as well as commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active
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markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Interest Rate Swap Agreement - The fair value of our interest rate swap agreement is based in part on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreement, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration - Business Combinations - The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable