NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Principles of Consolidation and Summary of Significant Accounting Policies
Business Description
We are a global leader in payments and commerce solutions. We provide expertise, solutions and services that add value at the retail point-of-sale and enable innovative forms of commerce. We focus on delivering innovative POS payment capabilities, value-added services that increase merchant revenues and enhance the consumer experience, and solutions that enrich and improve the interaction between merchant and consumers. Today we are an industry leader in multi-application payment systems deployments. Key industries in which we operate include financial services, retail, petroleum, restaurant, hospitality, taxi, transportation, and healthcare.
VeriFone Systems, Inc. was incorporated in the state of Delaware on June 13, 2002 in order to acquire VeriFone, Inc. on July 1, 2002. VeriFone, Inc. was incorporated in 1981 and became our principal operating subsidiary on July 1, 2002. Effective May 18, 2010, we changed our corporate name from VeriFone Holdings, Inc. to VeriFone Systems, Inc. Shares of VeriFone Systems, Inc. are listed on the New York Stock Exchange under the trading symbol PAY.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of VeriFone Systems, Inc. ("Verifone") and our wholly-owned and majority-owned subsidiaries, including a variable interest entity where we are deemed to be the primary beneficiary. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of our majority-owned subsidiaries are reported as noncontrolling interests
.
All intercompany accounts and transactions have been eliminated. The Consolidated Financial Statements also include the results of companies acquired by us from the date of each acquisition.
Certain prior period amounts reported in our Consolidated Financial Statements and notes thereto have been reclassified to conform to the current period presentation, with no impact on previously reported operating results or financial position. For example, restructuring and related charges are now presented in a separate line in our Consolidated Statements of Operations for all periods presented.
During December 2015, our Chief Executive Officer realigned the company's organizational structure to focus on two global product lines: Verifone Systems and Verifone Services. Verifone Systems delivers point of sale electronic payment devices that run our unique operating systems, security and encryption software, and certified payment software for both payments and commerce. Verifone Services delivers device related leasing and maintenance, payment transaction routing and reporting, and commerce based services such as advertising on digital screens. As a result of this organizational change, effective for the first quarter of 2016, our operating and reportable segments shifted from geographic-based segments to two global product segments. All prior period amounts reported by geographic segment have been reclassified to conform to the current presentation, except goodwill. See Note 9,
Goodwill and Purchased Intangible Assets
for additional information.
Our Chief Executive Officer has announced that Verifone Systems and Verifone Services will be merged into a single business unit, Verifone Solutions, in fiscal year 2017. As a result of this organization change, our reportable segments may change in fiscal year 2017.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We determine our operating segments considering our overall management structure, how forecasts are approved, how executive compensation is determined, our organizational chart, as well as how our Chief Executive Officer, who is our chief operating decision maker, regularly reviews our operating results, assesses performance, allocates resources, and makes decisions regarding Verifone's operations. Our reportable segments in fiscal year 2016 were the same as our operating segments.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions about future events that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We evaluate our estimates on an ongoing basis when updated information related to such estimates becomes available. We base our estimates on historical experience and information available to us at the time these estimates are made. Actual results could differ materially from these estimates
.
Significant Accounting Policies
Foreign Currency
We determine the functional currency for Verifone and our subsidiaries by reviewing the currencies in which their respective operating activities occur. For our subsidiaries whose functional currencies are not the U.S. Dollar, we generally translate assets and liabilities using exchange rates in effect as of the applicable balance sheet dates. Revenue and expenses for these subsidiaries are translated using average rates which approximate those in effect during the period. Foreign currency translation gains and losses are included in stockholders' equity as a component of Accumulated other comprehensive loss in our Consolidated Balance Sheets.
Monetary assets and liabilities denominated in currencies other than the functional currency of that subsidiary are remeasured to the functional currency using exchange rates in effect as of the applicable balance sheet dates. Gains and losses from these remeasurements are recorded as Other income (expense), net in our Consolidated Statements of Operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition
System solutions net revenues include net revenues from the sale of products and associated perpetual software licenses and accessories. Services net revenues include net revenues from payment-related services, installation, customer support, repair services related to our System solutions, transaction processing, custom software development, and extended warranties, as well as from advertising in and on taxis and displays at petroleum dispensers, and leases of our products.
We recognize revenues net of sales taxes and value-added taxes when title and risk of loss have passed to the customer and all of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collection is reasonably assured and not contingent upon future performance.
Net revenues from sales to end-users, resellers, value-added resellers, and distributors are generally recognized upon shipment of the product. End-users, resellers, value-added resellers, and distributors generally have no rights of return, stock rotation rights, or price protection.
We recognize revenue from operating lease arrangements over the term of the applicable lease arrangements. Net revenues from operating lease arrangements represent less than 10% of our total net revenues and are classified as Services net revenues.
Net revenues from services obligations to be provided over a period of time are initially deferred and then recognized on a straight-line basis over the period during which the services are provided. Net revenues from services billed on a per incident basis are recognized as the services are rendered. Net revenues from fees for payment services are recognized when the payment services are complete. Advertising revenues are recognized as the related services are performed.
We periodically enter into software development contracts with our customers that we recognize as net revenues on a completed contract basis
.
During the period of performance of such contracts, billings and costs are accumulated on the balance sheet, but no profit is recorded before completion or substantial completion of the project or milestone. We generally use customers' acceptance as the specific criteria to determine when such contracts are substantially completed. Provisions for losses on software development contracts are recorded in the period they become evident. Net revenues from software development contracts comprise less than 1% of our total net revenues.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition for Multiple-Element Arrangements
When an arrangement includes multiple deliverables, we allocate the arrangement consideration to each deliverable qualifying as a separate unit of accounting based on its relative selling price at the inception of the arrangement. We determine the relative selling price based on the estimated selling price ("ESP") using vendor specific objective evidence ("VSOE"), if it exists, and otherwise third-party evidence ("TPE"). If neither VSOE nor TPE exists for a unit of accounting, we use best estimated selling price ("BESP").
VSOE is limited to the price charged when the same or similar product or service is sold separately. We define VSOE as substantial standalone transactions that are priced within a narrow range, as defined by us. In addition, we consider the geographies in which the products or services are sold, as well as the class of customers to which the products or services are sold. If a product or service is seldom sold separately, it is unlikely that we can determine VSOE for the product or service.
TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately to similarly situated customers. As our products and services contain a significant level of differentiation compared to our competitors' products, comparable prices are generally not available.
When we are unable to establish selling price using VSOE or TPE, we use BESP when allocating the arrangement consideration. BESP is the price at which management estimates that we would enter into a transaction with the customer if the product or service was to be sold by us regularly on a standalone basis. Our determination of BESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. The factors we consider include the geographies in which the products or services are sold, the anticipated gross margin on that deliverable, the cost to produce the deliverable, economic conditions and market trends, the selling price and gross margin for similar deliverables, and our ongoing pricing strategy and policies.
We analyze ESP at least annually or on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
In multiple element arrangements that include software, we first evaluate if a tangible product includes software. If a tangible product includes software and if both the tangible product and software components function together to deliver the tangible product's essential functionality, then we will treat the entire product as a non-software element. If the arrangement is deemed to have a software element, we first allocate the total arrangement consideration between the software group of elements as a whole and the non-software elements as a whole based on their relative selling prices, and then to the elements within those groups based on the applicable guidance.
Shipping and Handling Costs
Shipping and handling costs incurred for delivery to customers are expensed as incurred, and are included in Cost of net revenues in our Consolidated Statements of Operations. In those instances where we bill shipping and handling costs to customers, the amounts billed are classified as Net revenues in our Consolidated Statements of Operations.
Warranty Costs
We accrue for estimated warranty obligations when revenue is recognized based on an estimate of future warranty costs for delivered products. Such estimates are based on historical experience and expectations of future costs. At least annually or whenever circumstances warrant, we evaluate and adjust the accrued warranty costs to the extent actual warranty costs vary from the original estimates. Our warranty period typically extends from one to three years from the date of shipment. Actual warranty costs may differ materially from management's estimates.
Costs associated with maintenance contracts, including extended warranty contracts, are expensed when they are incurred.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
We measure stock-based compensation cost at the grant date, based on the estimated fair value of the award and the estimated number of shares we ultimately expect will vest. Stock-based compensation cost is recognized as expense on a straight-line basis over the requisite service period. Cash flows resulting from the tax benefits due to tax deductions in excess of the compensation cost recognized for those awards are classified as financing cash flows.
Advertising Costs
Advertising costs are expensed as incurred, and were immaterial for all periods presented in our Consolidated Statements of Operations.
Research and Software Development Costs
Research and development costs are generally expensed when incurred.
Software development costs incurred to develop software products for resale, including the costs of software components of our products, are subject to capitalization beginning when a product's technological feasibility has been established and ending when a software or product is available for general release to customers. In most instances, our products are released soon after technological feasibility has been established; therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. Capitalized costs of software for resale are amortized on a straight-line basis over the estimated life of the software or associated product, generally three to five years, commencing when the respective software or product is available to customers.
Software development costs for internal use software are subject to capitalization during the application development stage, beginning when a project, that will result in additional functionality, is approved and ending when the software is put into productive use. Capitalized internal use software costs are amortized on a straight-line basis over the estimated life of the software, generally three to six years, commencing when the respective software is put into productive use.
Amortization related to capitalized software development costs totaled
$5.1 million
,
$5.5 million
, and
$4.6 million
for the fiscal years ended October 31, 2016, 2015, and 2014, respectively. Unamortized capitalized software development costs totaled
$55.1 million
and
$35.5 million
as of October 31, 2016 and 2015, respectively, and are recorded as a component of Other long-term assets in our Consolidated Balance Sheets.
Restructuring
The determination of when we accrue for employee involuntary termination benefits depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement. We record charges for one-time benefit arrangements in accordance with ASC 420
Exit or Disposal Cost Obligations
and charges for on-going benefit arrangements in accordance with ASC 712
Nonretirement Postemployment Benefits
.
We recognize a liability for costs associated with the closure of facilities when the liability is incurred. We measure these liabilities at fair value. Costs to terminate a contract before the end of its term are recognized when we terminate the contract in accordance with the contract terms. Costs that will continue to be incurred under a contract for its remaining term without economic benefit, net of estimated sublease income, are recognized at the facility cease-use date.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities, and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. In evaluating our ability to recover our deferred tax assets management considers all available positive and negative evidence including the past operating results, the existence of cumulative losses in past fiscal years, and the forecasted future taxable income in the jurisdictions in which we have operations.
We have established valuation allowances on U.S. deferred tax assets and certain non-U.S. deferred tax assets because realization of these tax benefits through future taxable income is not more likely than not as of October 31, 2016 and 2015. We intend to maintain the valuation allowances until sufficient positive evidence exists to support the reversal of the valuation allowances. An increase in the valuation allowance would result in additional tax expense in such period. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from the estimates, the amount of the valuation allowance could be materially impacted.
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties relating to these uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. Our estimate for the potential outcome of any uncertain tax issue is based on detailed facts and circumstances of each issue. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial condition.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and time deposits with maturities of three months or less when purchased.
Allowance for doubtful accounts
An allowance for doubtful accounts is established with respect to those amounts that we determine to be doubtful of collection using specific identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Actual collection losses may differ materially from management's estimates. Uncollectible receivables are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted.
Accounts receivable payment terms are generally between net 30 to 60 days, unless special payment terms are arranged.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Inventories
Inventories are stated at the lower of standard cost and net realizable value. We compute inventory cost using standard costs, primarily on a FIFO method. Standard costs approximate actual costs, including materials, manufacturing costs, in-bound freight costs, and inbound-related supply chain costs. We regularly monitor inventory quantities on hand and committed orders with contract manufacturers, and record write-downs for excess and obsolete inventories based primarily on the shipment history and our estimated forecast of product demand. Such write-downs establish a new cost basis of accounting for the related inventory.
Consigned inventories from our contract manufacturers where title has not been transferred to us are excluded from our inventories. In certain circumstances, we are obligated to prepay deposits to our contract manufacturers based on a percentage of the value of the inventories consigned to us, and after a certain period of time has elapsed, we may be required to prepay the full amount if we have not taken title to the inventory. Prepayments for consigned inventory are included in Prepaid expenses and other current assets in our Consolidated Balance Sheets.
Generally, we take title to consigned inventories when we ship to our customers, and record the full cost of the inventories as Cost of net revenues at that time. We must purchase the consigned inventories from our contract manufacturers after a certain agreed-upon period of time, ranging from 30 days to one year. Consigned inventories are included in our calculation of minimum order commitments from our contract manufacturers.
Fair Value Measurements
Our financial assets and liabilities consist principally of cash, accounts receivable, accounts payable, debt, foreign exchange forward contracts, interest rate swaps, and contingent consideration payable. We measure and record certain of our financial assets and liabilities at fair value on a recurring basis. The estimated fair values of cash, accounts receivable, and accounts payable approximate their carrying value. The estimated fair value of our debt approximates the carrying value because the interest rate on such debt adjusts to market rates on a periodic basis. Contingent consideration payable, interest rate swaps, and foreign exchange forward contracts are recorded at estimated fair value.
We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When estimating fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, credit risk, and risk of non-performance.
In measuring fair value, we follow a three-level hierarchy based on the inputs used:
Level 1 — Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace, such as similar instruments in an active
market, or computations using, among other inputs, forward pricing curves, credit default spreads, or the Black-Scholes-Merton valuation model.
Level 3 — Unobservable inputs that are supported by little or no market activity.
Our non-financial assets, such as goodwill, purchased intangible assets, and property, plant and equipment, are carried at cost until there are indicators of impairment, and are recorded at fair value only when an impairment charge is recognized.
Derivative Financial Instruments
We use derivative financial instruments to manage certain exposures to foreign currency exchange rate and interest rate risks. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments. Our derivative financial instruments do not include a right of offset, and we do not offset derivative financial assets against derivative financial liabilities.
Our derivative financial instruments consist primarily of foreign exchange forward contracts, which we use to hedge certain existing and anticipated foreign currency denominated transactions, and interest rate swaps, which we use to hedge a portion of the variability in cash flows related to our interest payments. We recognize the estimated fair value of our outstanding derivative financial instruments on our Consolidated Balance Sheets at the end of each reporting period as either assets or liabilities. Foreign exchange forward contracts generally mature within 90 days of inception. The interest rate swaps will mature on June 30, 2019.
Gains and losses arising from the effective portion of derivative financial instruments that are designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss), and are subsequently reclassified into earnings in the period or periods during which the underlying transactions affect earnings. Gains and losses on derivative financial instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in Other income (expense), net or Interest expense, net, respectively.
We formally document relationships between hedging instruments and associated hedged items, and formally assess hedge effectiveness, both at hedge inception and on an ongoing basis. When an anticipated transaction is no longer likely to occur, the corresponding derivative instrument is ineffective as a hedge, and changes in fair value of the instrument are recognized in Other income (expense), net.
Derivative financial instruments that are not designated as hedging instruments predominantly consist of foreign exchange forward contracts used to hedge foreign currency-denominated inter-company receivables and payables exposures arising from product sales and loans from one of our entities to another. Gains and losses arising from changes in the fair values of derivative financial instruments that are not designated as hedging instruments are recognized in Other income (expense), net.
Long-Lived Assets
Fixed assets are stated at cost, net of accumulated depreciation and amortization. Fixed assets are depreciated on a straight-line basis over the estimated useful lives of the assets, generally ranging from three to ten years, except buildings which are depreciated from 40 to 50 years. Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful life of the asset.
Revenue generating assets are comprised of tangible assets that we have placed at third party locations for the purpose of generating revenues, such as in taxi cabs, at gas stations, and at merchant locations, under rental or service based arrangements. Revenue generating assets are stated at cost, net of accumulated depreciation, and are generally depreciated on a straight-line basis over the estimated useful lives of the assets, generally five years. Payments to acquire revenue generating assets are included in Capital expenditures within cash flows from investing activities on our Consolidated Statements of Cash Flows.
Equipment under capital leases is recorded at the lesser of the present value of the minimum lease payments at the beginning of the lease term or the fair value of such equipment. Leased equipment is amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of such equipment.
Purchased intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated period of benefit, generally ranging from one to 20 years.
If the estimated period of benefit for any of our long-lived assets is determined to have changed, we amortize the remaining net book values over the revised period of benefit.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We periodically evaluate whether changes have occurred that would render our long-lived assets not recoverable. If such circumstances arise, we use an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying amount of the assets over the fair value of such assets, with the fair value generally determined based on an estimate of discounted future cash flows. For assets held for sale, to the extent the carrying value is greater than the asset's fair value less costs to sell, an impairment loss is recognized for the difference.
Goodwill
Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired and liabilities assumed in a business acquisition. Goodwill is not amortized for accounting purposes.
We review the goodwill allocated to each of our reporting units for possible impairment annually on August 1 and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform a two-step impairment test. If, we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test, we measure the recoverability of goodwill by comparing a reporting unit's carrying amount, including goodwill, to the estimated fair value of the reporting unit.
In assessing the qualitative factors, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit's fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance, Verifone-specific events, and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit, we allocate, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where we have had an acquisition that benefited more than one reporting unit, we have assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.
The estimated fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In order to assess the reasonableness of the calculated fair values of its reporting units, we compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). We evaluate the reasonableness of the premium over market capitalization by first quantifying certain controlling market participants' synergies included in the income approach. We then supplement this step by comparing the implied premiums for each reporting unit to the premiums implied by recent comparable transactions. If the implied control premium is not reasonable in light of these recent transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount rates or other assumptions.
If the carrying amount of a reporting unit is in excess of its fair value, an impairment may exist, and we must perform the second step of the impairment analysis to measure the amount of the impairment loss, by allocating the reporting unit's fair value to its assets and liabilities other than goodwill, comparing the carrying amount of the goodwill to the resulting implied fair value of the goodwill, and recording an impairment charge for any excess.
In the event that we realign our reporting units, we allocate our goodwill to the new reporting units using the relative fair value approach. We perform an assessment of any potential goodwill impairment immediately prior to and after the reallocation of goodwill to the new reporting units. As a result of the change to our two new operating segments in December 2015, we have realigned our reporting units and performed our goodwill impairment assessment. See Note 9,
Goodwill and Purchased Intangible Assets,
in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for additional information.
Debt Issuance Costs and Original Issue Discounts
Costs incurred in connection with the issuance of new debt are generally capitalized and amounts paid in connection with the modification of existing debt are generally expensed as incurred. Capitalizable debt issuance costs paid to third parties and original issue discounts paid to creditors, net of amortization, are offset against the associated Short-term and Long-term debt on our Consolidated Balance Sheets.
Amortization expense on capitalized debt issuance costs and original issue discounts related to loans with fixed payment terms is calculated using the effective interest method over the term of the associated loans. Amortization expense on capitalized debt issuance costs and original issue discounts related to revolving loans are calculated using the straight-line method over the term of the revolving loan commitment. Amortization expense is recorded in Interest expense, net in our Consolidated Statements of Operations. When debt is extinguished prior to the maturity date, any remaining associated debt issuance costs or original issue discounts are expensed to Interest expense, net in our Consolidated Statements of Operations.
Business Combinations
In a business combination, we recognize separately from goodwill the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to adjustment. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
For a given acquisition, we generally identify certain pre-acquisition contingencies as of the acquisition date, and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the purchase price allocation and, if so, to determine the estimated amounts.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
If we determine that a pre-acquisition non-income tax related contingency is probable in nature and estimable as of the acquisition date, we record our best estimate for such contingency as a part of the preliminary purchase price allocation. We often continue to gather related information and evaluate our pre-acquisition contingencies throughout the measurement period and if we make changes to the amounts recorded or if we identify additional pre-acquisition contingencies during the measurement period, such amounts will be recorded in the period in which they are identified. Subsequent to our final determination of the contingency's estimated value within the measurement period, changes to these contingencies could have a material impact on our results of operations and financial position.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period, and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the tax allowance’s estimated value, changes to these uncertain tax positions and tax-related valuation allowances will affect our Income tax provision (benefit) in our Consolidated Statements of Operations and could have a material impact on our results of operations and financial position.
Acquisition-related costs are expensed as incurred.
Redeemable Noncontrolling Interest in Subsidiary
The redeemable noncontrolling interest in subsidiary is recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss, or its redemption value.
Variable Interest Entities
We evaluate our equity method investments to determine whether any investee is a variable interest entity. If we conclude that an investee is a variable interest entity, we evaluate our power to direct the activities of the investee, our obligation to absorb the expected losses of the investee and our right to receive the expected residual returns of the investee to determine whether we are the primary beneficiary of the investee. If we are the primary beneficiary of a variable interest entity, we consolidate such entity and reflect the non-controlling interest of other beneficiaries of that entity. If we conclude that an investee is not a variable interest entity, we do not consolidate the investee and account for the investment under either the equity or cost method.
Concentrations of Credit Risk
Cash is placed on deposit in major financial institutions around the world. Some of these deposits may be in excess of insured limits. We believe that the financial institutions that hold our cash are financially sound and, accordingly, minimal credit risk exists with respect to these balances.
We invest cash not required for use in operations in high credit quality securities based on our investment policy. The investment policy has limits based on credit quality, investment concentration, investment type, and maturity that we believe reduce the risk of loss. Investments are of a short-term nature and include investments in money market funds and time deposits.
Our derivative financial instruments expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement when we have an unrealized gain on the instrument. We believe the counterparties for our outstanding contracts are large, financially sound institutions, and thus we do not anticipate nonperformance by these counterparties. However, given the high debt levels of many countries and institutions worldwide, the failure of the counterparties is possible. We have not experienced any investment losses due to institutional failure or bankruptcy.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our accounts receivable are derived from sales to a large number of direct customers, resellers, and distributors globally. We perform ongoing evaluations of our customers' financial condition and limit the amount of credit extended when deemed necessary, but generally require no collateral. As of October 31, 2016 and 2015 no single customer accounted for more than 10% of our total Accounts receivable, net. For fiscal years 2016, 2015, and 2014 no single customer accounted for more than 10% of our total Net revenues.
We utilize a limited number of third parties to manufacture our products, and rely upon these contract manufacturers to produce and deliver products on a timely basis and at an acceptable cost. Furthermore, a majority of our manufacturing activities are concentrated in China and Brazil. As a result, disruptions to the business or operations of the contract manufacturers or to their ability to produce the required products in a timely manner, and particularly disruptions to the manufacturing facilities located in China and Brazil, could significantly impact our business and operations. In addition, a number of components that are necessary to manufacture and assemble our systems are specifically customized for use in our products and are obtained from sole source suppliers on a purchase order basis. Because of the customized nature of these components and the limited number of available suppliers, if we were to experience a supply disruption, it would be difficult and costly to find alternative sources in a timely manner.
Recent Accounting Pronouncements
During May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
as amended by ASU 2015-14, 2016-08, 2016-10, and 2016-12, which provides new guidance on the recognition of revenue and states 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. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of reporting periods beginning after December 15, 2016. We expect to adopt ASU 2014-09 effective in the first interim period of our fiscal year ending October 31, 2019. We are currently evaluating the transition method we will use and the impact of this new pronouncement on our consolidated financial position and results of operations.
During January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,
which provides new guidance on the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. We are currently in the process of evaluating the impact of this new pronouncement on our consolidated financial position and results of operations.
During February 2016, the FASB issued ASU 2016-02,
Leases
, which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In connection with this new guidance, the FASB created Topic 842, Leases, which supersedes Topic 840, Leases. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently in the process of evaluating our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations.
During March 2016, the FASB issued ASU 2016-07,
Investments - Equity Method and Joint Ventures
, which eliminates the requirement to retrospectively apply the equity method in previous periods when an investor initially obtains significant influence over a previously held investment and requires the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The adoption of this standard is not expected to have a material impact on our consolidated financial position and results of operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
, to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued, however, all of the guidance must be adopted in the same period. The new standard must be adopted either prospectively, retrospectively, or using a modified retrospective transition method, depending on the area covered in this ASU. We are currently in the process of evaluating the impact of this new pronouncement on our consolidated financial position and results of operations.
During June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
, which introduces new guidance for the accounting for credit losses on financial instruments and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The new standard must be generally adopted using a modified retrospective transition method which is a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. We are currently in the process of evaluating the impact of this new pronouncement on our consolidated financial position and results of operations.
During August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on our consolidated statements of cash flow.
During October 2016, the FASB issued ASU 2016-16,
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory,
which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effective adjustment to retained earnings as of the beginning of the first effective reporting period. We are currently in the process of evaluating the impact of this new pronouncement on our consolidated financial position and results of operations.
During October 2016, the FASB issued ASU 2016-17,
Consolidation - Interests Held through Related Parties That Are under Common Control,
to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control within the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial position and results of operations.
During November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows - Restricted Cash,
which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. We are currently in the process of evaluating the impact of this new pronouncement on our consolidated statements of cash flows.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 2. Business Combinations
Fiscal Year 2016 Acquisitions
During fiscal year 2016, we completed three business combinations with net assets as described in the table below for an aggregate consideration totaling
$193.1 million
, including
$186.8 million
of cash paid on acquisition date, contingent consideration with a fair value of
$5.0 million
at the acquisition date and
$1.3 million
in future consideration based on the exchange rate at the acquisition date. No Verifone equity was issued, and in each transaction all the outstanding equity of the applicable business was acquired, except for Panaroma Bilisim Teknolojileri Sanayi Ve Ticaret Anonim Sirketi, in which we acquired
51%
of the voting equity interest. We acquired these businesses to expand our operations in Germany, North America, and Turkey. Each acquisition was accounted for using the acquisition method of accounting.
The aggregate purchase consideration includes contingent consideration having a fair value as of the respective acquisition dates totaling
$5.0 million
. Future payments depend on the acquired entity reaching certain contribution levels during the first three years of operations after the acquisitions. The maximum liability on these contingent consideration payables is indeterminate because it is based on contributions from the acquired business. To date, we have not paid any amounts under the contingent consideration arrangements as measurement dates have not passed. The aggregate purchase price also includes holdback payments totaling
$1.3 million
that were paid in August 2016.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands) at the acquisition date of each transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InterCard
|
|
AJB
|
|
Panaroma
|
|
Total
|
Acquisition date
|
December 23, 2015
|
|
February 2, 2016
|
|
May 20, 2016
|
|
|
Tangible assets acquired (liabilities assumed), net
(1)
|
$
|
3,874
|
|
|
$
|
16,811
|
|
|
$
|
(2,479
|
)
|
|
$
|
18,206
|
|
Purchased intangible assets
(2)
|
52,681
|
|
|
41,100
|
|
|
14,220
|
|
|
108,001
|
|
Redeemable noncontrolling interest
(3)
|
—
|
|
|
—
|
|
|
(7,430
|
)
|
|
(7,430
|
)
|
Goodwill
(4)
|
37,292
|
|
|
30,989
|
|
|
6,090
|
|
|
74,371
|
|
Total purchase price
|
$
|
93,847
|
|
|
$
|
88,900
|
|
|
$
|
10,401
|
|
|
$
|
193,148
|
|
|
|
(1)
|
The net assets acquired include trade receivables valued at
$23.5 million
. The gross contractual value of the trade receivables was
$31.5 million
, of which
$8.0 million
was not expected to be collected.
|
|
|
(2)
|
Purchased intangible assets include customer relationships valued at
$76.9 million
, which are amortized over their estimated useful lives of one to thirteen years, acquired technology valued at
$21.0 million
, which are amortized over their estimated useful lives of four to six years, and other intangibles valued at
$10.1 million
, which are amortized over their estimated useful lives of one to seven years.
|
|
|
(3)
|
The minority shareholder holding the remaining
49%
of Panaroma has a put option that is exercisable for three years after January 1, 2020 and if exercised requires us to purchase the remaining
49%
equity of Panaroma at a multiple of earnings before taxes, depreciation and amortization for the year ended December 31, 2019. Since the noncontrolling interest is redeemable at the option of the minority shareholder and is outside our control, it is reported in the mezzanine section in the Consolidated Balance Sheets and recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss, or its redemption value.
|
|
|
(4)
|
Goodwill represents the expected benefits of combining the acquisitions' operations with our operations. Goodwill from the InterCard and AJB acquisitions was assigned to our Verifone Services reportable segment. The goodwill of the Panaroma acquisition was assigned to our Verifone Systems reportable segment. The goodwill associated with the AJB acquisition that is deductible for income tax purposes is
$19.3 million
and goodwill recognized on the other fiscal year 2016 acquisitions is not deductible for income tax purposes.
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The primary areas of the preliminary purchase price allocation that have not yet been finalized are the fair value of income and non-income based taxes related to the Panaroma acquisition, and residual goodwill as we need to perform more detailed analysis.
We have determined that Panaroma is a variable interest entity and that we are the primary beneficiary. Our determination is primarily based upon our conclusions that Panaroma's equity investment at risk is not sufficient to finance its activities without additional financial support, we have the power to direct the activities that most significantly impact the entity's economic performance, and we have the obligation to absorb losses or the right to receive benefits that could be significant to the entity.
Fiscal Year 2015 Acquisitions
In fiscal year 2015, we completed five business combinations for consideration totaling
$29.6 million
, including
$22.1 million
of cash paid on acquisition date,
$5.7 million
in future consideration and contingent consideration with a fair value of
$1.8 million
at the acquisition dates. Each acquisition was accounted for using the acquisition method of accounting. These acquisitions were completed to augment our existing service offerings. Purchased intangible assets totaled
$9.0 million
related to developed and core technology,
$2.8 million
related to customer relationships, and
$0.5 million
related to other intangible assets. Goodwill from these acquisitions totaled
$16.6 million
, of which
$5.1 million
was deductible for income tax purposes. The goodwill was substantially assigned to our North America reportable segment in fiscal year 2015. In fiscal year 2016, in conjunction with the realignment of the company's organizational structure, we reallocated our goodwill to the new reporting units within our two new operating segments: Verifone Systems and Verifone Services. See Note 9,
Goodwill and Purchased Intangible Assets
for additional information.
Fiscal Year 2014 Acquisitions
In fiscal year 2014, we completed one business combination for contingent consideration with an
$11.6 million
fair value at the acquisition date. This acquisition was completed to augment our existing media service offerings. Purchased intangible assets, which principally related to customer relationships, totaled
$4.8 million
. Goodwill related to this acquisition totaled
$6.8 million
and was deductible for income tax purposes. The goodwill was assigned to our North America reportable segment in fiscal year 2014. In fiscal year 2016, in conjunction with the realignment of the company's organizational structure, we realigned our goodwill to the new reporting units within our two new operating segments: Verifone Systems and Verifone Services. See Note 9,
Goodwill and Purchased Intangible Assets
for additional information.
Note 3. Net Income (loss) per Share of Common Stock
Basic net income (loss) per share of common stock is computed by dividing net income (loss) attributable to VeriFone Systems, Inc. stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share of common stock is computed using the weighted average number of shares of common stock outstanding plus the effect of common stock equivalents, unless the common stock equivalents are anti-dilutive. The potential dilutive shares of our common stock resulting from assumed exercises of equity related instruments are determined using the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock will result in a greater number of dilutive securities.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents the computation of net income (loss) per share of common stock (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Basic and diluted net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
|
$
|
(9,281
|
)
|
|
$
|
79,097
|
|
|
$
|
(38,130
|
)
|
Denominator:
|
|
|
|
|
|
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - basic
|
110,829
|
|
|
114,044
|
|
|
111,586
|
|
Weighted average effect of dilutive stock options, RSUs and RSAs
|
—
|
|
|
1,890
|
|
|
—
|
|
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - diluted
|
110,829
|
|
|
115,934
|
|
|
111,586
|
|
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
|
|
|
|
|
|
Basic
|
$
|
(0.08
|
)
|
|
$
|
0.69
|
|
|
$
|
(0.34
|
)
|
Diluted
|
$
|
(0.08
|
)
|
|
$
|
0.68
|
|
|
$
|
(0.34
|
)
|
For the
fiscal years
ended
October 31, 2016
and 2014, equity incentive awards representing
6.2 million
and
7.6 million
shares of common stock were anti-dilutive because we incurred net losses for those periods. For the fiscal year ended
October 31, 2015
, equity incentive awards representing
1.5 million
shares of common stock were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive. Anti-dilutive awards, which include stock options, RSUs and RSAs, could impact future calculations of diluted net income per share if the fair market value of our common stock increases.
Note 4. Employee Benefit Plans
Retirement and Post-employment Plans
We maintain defined contribution retirement plans in certain countries, including a 401(k) plan for our U.S. employees. During fiscal years 2016, 2015, and 2014, we contributed
$16.4 million
,
$13.9 million
, and
$15.4 million
, respectively, to these plans.
We have defined benefit pension plans, as required by local laws, for our employees in certain countries, primarily Germany, France, and Taiwan, and non-retirement post-employment benefit plans for our employees in certain other countries, primarily Israel. These plans are not considered material to our financial position or results of operations.
Equity Incentive Plans
We have granted stock awards, including stock options, restricted stock units ("RSUs") and restricted stock awards ("RSAs") pursuant to stockholder-approved equity incentive plans. Our stock awards include vesting provisions that are based on either time, performance or market conditions. Shares issued to employees upon the exercise or vesting of equity incentive awards are issued from authorized but unissued common stock.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2006 Equity Incentive Plan
In March 2006, our stockholders approved the 2006 Equity Incentive Plan for our officers, directors, employees, and consultants. Under this equity incentive plan, we have granted stock options, RSUs, and RSAs. Stock option awards are granted with an exercise price equal to the market price of our common stock at the date of grant, and have a maximum term of seven years. Awards under this plan are generally time-based awards with vesting over a period of 1 to 4 years from the date of grant, or performance-based awards with vesting based on achievement of specified criteria over a period of 1 to 3 years from the date of grant. The vesting conditions of all awards were set by the compensation committee of the Board of Directors at the time of the grant.
As of
October 31, 2016
,
8.1 million
shares remained available for future grants under this plan. For purposes of the number of shares issuable under this plan, any awards granted as stock options are counted as one share for every award granted; RSUs or RSAs granted on or after June 29, 2011 are counted as 2.0 shares for every RSU or RSA granted; and RSUs or RSAs granted prior to June 29, 2011 are counted as 1.75 shares for every RSU or RSA granted.
Other Equity Incentive Plans
Stock options remain outstanding under several other equity incentive plans, including plans assumed in connection with our acquisitions of Hypercom and Lipman. We no longer grant stock options under any of these plans.
Equity Incentive Plan Activity
The following table provides a summary of stock option activity for the fiscal year ended
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
(in thousands)
|
|
Weighted
Average
Exercise
Price
(per share)
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding at beginning of period
|
3,593
|
|
|
$
|
28.15
|
|
|
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
(450
|
)
|
|
$
|
11.24
|
|
|
|
|
|
Canceled
|
(70
|
)
|
|
$
|
24.40
|
|
|
|
|
|
Expired
|
(214
|
)
|
|
$
|
38.08
|
|
|
|
|
|
Outstanding at end of period
|
2,859
|
|
|
$
|
30.16
|
|
|
2.30
|
|
$
|
89,385
|
|
Vested or expected to vest at October 31, 2016
|
2,846
|
|
|
$
|
30.19
|
|
|
2.29
|
|
$
|
89,385
|
|
Exercisable at October 31, 2016
|
2,656
|
|
|
$
|
30.70
|
|
|
2.18
|
|
$
|
89,385
|
|
The weighted-average grant-date fair value per share for stock options granted during the fiscal years ended
October 31, 2015
, and 2014 was
$13.44
, and
$10.76
, respectively. The total intrinsic value of options exercised during the fiscal years ended
October 31, 2016
, 2015, and 2014 was
$5.8 million
,
$14.5 million
, and
$32.4 million
, respectively. We did not grant stock options in the fiscal year ended October 31, 2016.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides a summary of RSU and RSA activity for the fiscal year ended
October 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Aggregate
Intrinsic
Value
|
Outstanding at beginning of period
|
3,324
|
|
|
|
Granted
|
1,863
|
|
|
|
Vested
|
(1,042
|
)
|
|
|
Canceled
|
(767
|
)
|
|
|
Outstanding at end of period
|
3,378
|
|
|
$
|
52,291
|
|
Vested or expected to vest at October 31, 2016
|
2,880
|
|
|
$
|
44,579
|
|
Vested and deferred at October 31, 2016
|
96
|
|
|
$
|
1,492
|
|
During the fiscal year ended
October 31, 2016
we granted
1.4 million
RSUs with time-based vesting conditions and
0.4 million
RSUs with performance-based vesting conditions contingent upon meeting certain financial and operational targets.
The weighted-average grant-date fair value per share for RSUs granted during the years ended
October 31, 2016
, 2015, and 2014 was
$24.06
,
$36.14
, and
$34.93
, respectively. There were no RSAs granted during the fiscal years ended
October 31, 2016
, 2015 or 2014.
The total fair value of RSUs and RSAs that vested during the fiscal years ended
October 31, 2016
, 2015, and 2014 was
$23.3 million
,
$39.6 million
, and
$53.4 million
, respectively.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equity Incentive Award Valuation
The grant date fair value of RSUs and RSAs that have time or performance based vesting conditions contingent upon meeting financial and operational targets are equal to the closing market price of our common stock on the grant date.
We estimate the grant date fair value of RSUs that have market based vesting conditions using the Monte Carlo simulation method, using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Expected term (in years)
|
3.0
|
|
|
3.0
|
|
|
3.0
|
|
Risk-free interest rate
|
1.3
|
%
|
|
1.1
|
%
|
|
1.0
|
%
|
Expected dividend rate
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected stock price volatility
|
46.8
|
%
|
|
52.7
|
%
|
|
54.5
|
%
|
Stock-Based Compensation Expense
The following table presents the stock-based compensation expense recognized in our Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Cost of net revenues
|
$
|
3,324
|
|
|
$
|
2,548
|
|
|
$
|
1,994
|
|
Research and development
|
7,207
|
|
|
6,669
|
|
|
10,720
|
|
Sales and marketing
|
13,503
|
|
|
16,219
|
|
|
19,151
|
|
General and administrative
|
18,244
|
|
|
16,817
|
|
|
22,032
|
|
Total stock-based compensation expense
|
$
|
42,278
|
|
|
$
|
42,253
|
|
|
$
|
53,897
|
|
Our computation of stock-based compensation expense includes an estimate of award forfeitures based on historical experience. We record compensation expense only for those awards that are expected to vest.
As of
October 31, 2016
, total unrecognized stock-based compensation expense was
$1.6 million
related to unvested stock options and
$64.9 million
related to unvested RSUs. These amounts are expected to be recognized over the remaining weighted-average vesting periods of
1.1
years for stock options and
2.5
years for RSUs.
Note 5. Stock Repurchase Program
In September 2015, our Board of Directors authorized a program to repurchase shares of our common stock with an aggregate value of up to
$200.0 million
, with no expiration from the date of authorization. As of
October 31, 2016
, there was
$50.0 million
remaining available for stock repurchases under this program. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing and actual amount of the share repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities, including mergers and acquisitions, market conditions and other factors. We are not obligated to repurchase any specific number of shares under the program and the repurchase program may be modified, suspended or discontinued at any time.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6. Income Taxes
Income (loss) before income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
(2,894
|
)
|
|
$
|
69,458
|
|
|
$
|
(89,764
|
)
|
Foreign
|
4,721
|
|
|
3,490
|
|
|
49,880
|
|
Income (loss) before income taxes
|
$
|
1,827
|
|
|
$
|
72,948
|
|
|
$
|
(39,884
|
)
|
The provision for (benefit from) income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(917
|
)
|
|
$
|
1,965
|
|
|
$
|
6,568
|
|
State
|
961
|
|
|
206
|
|
|
351
|
|
Foreign
|
26,093
|
|
|
21,664
|
|
|
25,306
|
|
Total current provision for income taxes
|
26,137
|
|
|
23,835
|
|
|
32,225
|
|
Deferred:
|
|
|
|
|
|
Federal
|
3,377
|
|
|
(306
|
)
|
|
(395
|
)
|
State
|
336
|
|
|
(44
|
)
|
|
(18
|
)
|
Foreign
|
(18,323
|
)
|
|
(30,894
|
)
|
|
(35,254
|
)
|
Total deferred benefit from income taxes
|
(14,610
|
)
|
|
(31,244
|
)
|
|
(35,667
|
)
|
Income tax provision (benefit)
|
$
|
11,527
|
|
|
$
|
(7,409
|
)
|
|
$
|
(3,442
|
)
|
A reconciliation of taxes computed at the federal statutory income tax rate to the provision for (benefit from) income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Provision for (benefit from) income taxes computed at the federal statutory rate
|
$
|
638
|
|
|
$
|
25,532
|
|
|
$
|
(13,960
|
)
|
State income tax, net of federal tax benefit
|
961
|
|
|
469
|
|
|
210
|
|
Foreign income taxes at other than U.S. rates
|
17,155
|
|
|
(2,544
|
)
|
|
(22,726
|
)
|
Valuation allowance, net
|
(1,919
|
)
|
|
(31,065
|
)
|
|
41,096
|
|
Impact of tax rate changes
|
(1,523
|
)
|
|
485
|
|
|
(4,279
|
)
|
Investment write-off
|
—
|
|
|
—
|
|
|
(9,612
|
)
|
Unrealized inter-company profits
|
(130
|
)
|
|
409
|
|
|
5,559
|
|
Foreign exchange
|
1,067
|
|
|
(2,692
|
)
|
|
(832
|
)
|
Stock compensation
|
918
|
|
|
1,516
|
|
|
1,244
|
|
Research Credit
|
(2,926
|
)
|
|
(1,662
|
)
|
|
(577
|
)
|
Other
|
(2,714
|
)
|
|
2,143
|
|
|
435
|
|
Income tax provision (benefit)
|
$
|
11,527
|
|
|
$
|
(7,409
|
)
|
|
$
|
(3,442
|
)
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Loss carry forwards
|
$
|
111,955
|
|
|
$
|
121,717
|
|
Basis differences in deductible goodwill and purchased intangibles
|
49,807
|
|
|
66,296
|
|
Foreign tax credit carry forwards
|
14,544
|
|
|
10,962
|
|
Foreign taxes on basis differences
|
54,170
|
|
|
55,113
|
|
Accrued expenses and reserves
|
29,609
|
|
|
32,733
|
|
Deferred revenue
|
55,657
|
|
|
35,653
|
|
Stock based compensation
|
19,965
|
|
|
20,770
|
|
Unrealized foreign currency losses
|
17,144
|
|
|
23,074
|
|
R&D credit carry forwards
|
10,712
|
|
|
7,316
|
|
Interest carry forward
|
11,221
|
|
|
9,973
|
|
Inventories
|
7,637
|
|
|
6,959
|
|
Other deferred tax assets
|
6,895
|
|
|
7,594
|
|
Total deferred tax assets
|
389,316
|
|
|
398,160
|
|
Valuation allowance
|
(326,935
|
)
|
|
(332,289
|
)
|
Deferred tax liabilities:
|
|
|
|
Basis differences on purchased intangibles
|
(52,827
|
)
|
|
(62,549
|
)
|
Basis differences in investments in foreign subsidiaries
|
(57,657
|
)
|
|
(56,763
|
)
|
Other deferred tax liabilities
|
(14,278
|
)
|
|
(13,583
|
)
|
Total deferred tax liabilities
|
(124,762
|
)
|
|
(132,895
|
)
|
Net deferred tax liabilities
|
$
|
(62,381
|
)
|
|
$
|
(67,024
|
)
|
Other deferred tax assets and liabilities are comprised primarily of the tax effects of depreciation and amortized debt issuance costs.
The realization of deferred tax assets is dependent primarily on generating sufficient U.S. and foreign taxable income in future fiscal years. We regularly assess the need for a valuation allowance against deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we consider the cumulative loss in the U.S. as a significant piece of negative evidence. Therefore, in fiscal 2013, we established a
$245.0 million
valuation allowance against a significant portion of our deferred tax assets, including U.S. federal and state deferred tax assets, as well as certain other foreign deferred tax assets.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During fiscal 2015 the
$119.0 million
reduction in valuation allowance was primarily due to the reduction of foreign tax credit carryforwards for the contemplated conversion to foreign tax deductions for purposes of offsetting unrecognized tax benefits related to the adoption of ASU 2013-11 and the utilization of U.S. loss carryforwards. Additionally, we released
$16.1 million
of valuation allowance against certain non-U.S. foreign deferred tax assets due to cumulative income in the jurisdiction and expected continued profitability. We will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward and adjust the valuation allowance accordingly. We intend to maintain the valuation allowances until sufficient positive evidence exists to support the reversal of the valuation allowances.
The tax loss carry forwards as of October 31, 2016 were related primarily to tax losses of
$318.5 million
in the U.S.,
$118.8 million
in Ireland,
$35.2 million
in Brazil,
$13.6 million
in the United Kingdom,
$13.7 million
in Norway, and
$74.6 million
in various other non-U.S. countries. Approximately
$244.5 million
of foreign tax losses may be carried forward indefinitely. The remaining approximately
$329.9 million
of tax losses is subject to limited carry forward terms of 5 to 20 years, and will expire at various dates beginning in 2017, if not utilized.
The excess tax benefits associated with stock option exercises are recorded directly to stockholders' equity only when realized. The excess tax benefits that have not yet been realized at October 31, 2016, but which are included in net operating loss carryforwards at October 31, 2016, total
$132.9 million
.
The U.S. net operating loss carryforward includes acquired net operating losses of
$187.7 million
. The utilization of the U.S. and the acquired net operating losses may be restricted due to change in ownership provisions of Section 382 of the Internal Revenue Code.
As of October 31, 2016, we have recorded U.S. foreign tax credit carry forwards of
$97.4 million
which will expire at various dates beginning in 2017, if not utilized. In addition we have recorded U.S. research and development tax credit carry forwards of
$18.5 million
which will expire at various dates beginning in 2019, if not utilized.
We recognize deferred tax liabilities associated with outside basis differences on investments in foreign subsidiaries unless the difference is considered essentially permanent in duration. As of October 31, 2016, we have recorded a deferred tax liability of
$57.7 million
associated with
$151.1 million
of taxable outside basis differences which are not considered permanently reinvested. We have not recorded deferred taxes on approximately
$800.1 million
of undistributed earnings as they are considered permanently reinvested. As of October 31, 2016, the determination of the unrecorded deferred tax liability related to these earnings is not practicable. If circumstances change and it becomes apparent that some or all of the undistributed earnings will not be invested indefinitely, or will be remitted in the foreseeable future, an additional deferred tax liability will be recorded for some or all of the outside basis difference.
U.S. Internal Revenue Service Tax Audit Assessment
We were audited by the U.S. Internal Revenue Service for fiscal years 2005 through 2010 related to our five year net operating loss carry back for fiscal year 2010. In December 2014 we received a Notice of Proposed Adjustment indicating the denial of our worthless stock deduction of
$154.3 million
, related to the insolvency of one of our U.K. subsidiaries, recorded on our 2010 tax return. The impact of the Notice of Proposed Adjustment was the denial of the loss carryback to 2005 and 2006 which resulted in an approximately
$25.0 million
cash refund and the disallowance of approximately
$29.0 million
of future tax benefits residing in the NOL carryover which are offset with a valuation allowance. We filed a protest to the Notice of Proposed Assessment in April 2015. In June 2016 we reached a final settlement with the U.S. Internal Revenue Service sustaining our worthless stock deduction at 75% of the originally claimed value. The impact of this settlement is a reduction in our net operating loss carryforward of
$38.6 million
and an offsetting reduction of our valuation allowance against the deferred tax asset. The net result did not have a material impact on our financial position or results of operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Israel Tax Audit Assessment
We are currently under audit by the Israeli Tax Authorities for fiscal years 2008 through 2009 and 2011 through 2013. The Israeli Tax Authorities issued a tax assessment in October 2014 for fiscal year 2009 or alternatively for fiscal year 2008 claiming there was a business restructuring that resulted in a transfer of some functions, assets and risks from VeriFone Israel Ltd. to the U.S. parent company that the Israeli Tax Authorities claim was a sale valued at
1.36 billion
New Israeli Shekels
(approximately
$354.2 million
at the foreign exchange rate as of
October 31, 2016
). We filed our objection to the tax assessment in January 2015 and received the Israeli Tax Authorities decision through an Order (a second stage assessment) in January 2016. The Order increased the value of the sale to
2.20 billion
New Israeli Shekels in fiscal year 2009 (approximately
$572.6 million
at the foreign exchange rate as of
October 31, 2016
) or alternatively
2.23 billion
New Israeli Shekels in fiscal year 2008 (approximately
$579.2 million
at the foreign exchange rate as of
October 31, 2016
) and contended secondary adjustments relating to a deemed dividend and/or interest.
Based on the Order, these and other claims result in a tax liability and deficiency penalty assessment in the amount of
1.28 billion
New Israeli Shekels (approximately
$332.4 million
at the foreign exchange rate as of
October 31, 2016
), if the claim was assessed for fiscal year 2009, to
1.52 billion
New Israeli Shekels (approximately
$394.7 million
at the foreign exchange rate as of
October 31, 2016
) if the claim was assessed for fiscal year 2008, including interest, the required Israeli price index adjustments (referred to as the linkage differentials) and deficiency fines (as applicable) through
October 31, 2016
. The Israeli Tax Authorities' contention regarding secondary adjustments relating to deemed dividend was not quantified by them.
We continue to believe the Israeli Tax Authorities' assessment position is without merit and appealed the assessment to the district court. We have agreed with the Israeli Tax Authorities to repay our
$69.0 million
intercompany loan from VeriFone Israel Ltd. to the extent of the amount of a final agreed tax assessment concerning fiscal year 2008 and fiscal year 2009 or a judgment of a district court in an appeal on the decision of the Israeli Tax Authorities in the objection, if any.
We have certain other foreign subsidiaries under audit by foreign tax authorities, including India for fiscal years 2008 to 2015, Spain for fiscal years 2011 to 2013, and New Zealand for fiscal year 2014. Although we believe we appropriately have provided for income taxes for the years subject to audit, the India, Israel, Spain, and New Zealand taxing authorities may adopt different interpretations. We have not yet received any final determinations with respect to these audits. We have accrued tax liabilities associated with these audits. With few exceptions, we are no longer subject to tax examination for periods prior to 2008.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
$
|
110,564
|
|
|
$
|
111,002
|
|
|
$
|
114,528
|
|
Lapse of statute of limitations
|
(1,185
|
)
|
|
(501
|
)
|
|
(2,072
|
)
|
Increases in balances related to tax positions taken during prior periods
|
488
|
|
|
2,988
|
|
|
358
|
|
Decreases in balances related to tax positions taken during prior periods
|
(3,834
|
)
|
|
(3,615
|
)
|
|
(2,551
|
)
|
Increases in balances related to tax positions taken during current period
|
5,100
|
|
|
1,246
|
|
|
739
|
|
Settlements
|
(5,030
|
)
|
|
(556
|
)
|
|
—
|
|
Balance at end of period
|
$
|
106,103
|
|
|
$
|
110,564
|
|
|
$
|
111,002
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total gross unrecognized tax benefits, if recognized, will affect our effective tax rate. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the tax authorities. We believe that it is reasonably possible that there could be an immaterial reduction in unrecognized tax benefits due to statute of limitation expirations in multiple tax jurisdictions during the next 12 months. Interest and penalties accrued on these uncertain tax positions will also be released upon the expiration of statutes of limitations. Interest and penalties recognized in each statement of operations were not material. As of October 31, 2016 we have accrued
$5.1 million
for the payment of interest and penalties related to unrecognized tax benefits.
Note 7. Balance Sheet and Statement of Operations Details
Cash and Cash Equivalents
As of
October 31, 2016
and 2015, Prepaid expenses and other current assets included
$9.0 million
and
$4.8 million
, respectively, of restricted cash. As of
October 31, 2016
and 2015, Other long-term assets included
$1.8 million
and
$2.2 million
, respectively, of restricted cash. Restricted cash was mainly comprised of pledged deposits as of
October 31, 2016
and 2015.
Allowances for doubtful accounts
Activity related to the allowances for doubtful accounts consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
$
|
7,904
|
|
|
$
|
8,510
|
|
|
$
|
10,463
|
|
Charges to bad debt expense
|
7,607
|
|
|
2,329
|
|
|
2,339
|
|
Write-offs, recoveries, and adjustments
|
(2,915
|
)
|
|
(2,935
|
)
|
|
(4,292
|
)
|
Balance at end of period
|
$
|
12,596
|
|
|
$
|
7,904
|
|
|
$
|
8,510
|
|
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
35,453
|
|
|
$
|
30,297
|
|
Work-in-process
|
3,884
|
|
|
2,588
|
|
Finished goods
|
135,894
|
|
|
96,831
|
|
Total inventories
|
$
|
175,231
|
|
|
$
|
129,716
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
Estimated Useful Life (Years)
|
|
2016
|
|
2015
|
Revenue generating assets
|
5
|
|
$
|
209,725
|
|
|
$
|
191,337
|
|
Computer hardware and software
|
3-5
|
|
112,984
|
|
|
96,711
|
|
Machinery and equipment
|
3-10
|
|
57,020
|
|
|
51,136
|
|
Leasehold improvements
|
Lesser of the term of the lease or the estimated useful life
|
|
31,328
|
|
|
27,927
|
|
Office equipment, furniture, and fixtures
|
3-5
|
|
18,573
|
|
|
17,606
|
|
Buildings
|
40-50
|
|
6,011
|
|
|
6,652
|
|
Total depreciable property and equipment, at cost
|
|
|
435,641
|
|
|
391,369
|
|
Accumulated depreciation
|
|
|
(243,127
|
)
|
|
(213,526
|
)
|
Depreciable property and equipment, net
|
|
|
192,514
|
|
|
177,843
|
|
Construction in progress
|
|
|
8,600
|
|
|
11,923
|
|
Land
|
|
|
1,163
|
|
|
1,199
|
|
Total property and equipment, net
|
|
|
$
|
202,277
|
|
|
$
|
190,965
|
|
Total depreciation expense for the fiscal years ended October 31, 2016, 2015, and 2014 was
$62.5 million
,
$58.7 million
, and
$59.7 million
, respectively.
Accruals and Other Current Liabilities
Accruals and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Accrued expenses
|
$
|
76,187
|
|
|
$
|
85,973
|
|
Accrued compensation
|
52,555
|
|
|
69,174
|
|
Other current liabilities
|
84,669
|
|
|
74,753
|
|
Total accruals and other current liabilities
|
$
|
213,411
|
|
|
$
|
229,900
|
|
Other current liabilities were comprised primarily of accrued warranty, sales and value-added taxes payable, income taxes payable, and accrued restructuring expense.
Accrued Warranty
Activity related to accrued warranty consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
16,320
|
|
|
$
|
15,411
|
|
Warranty charged to Cost of net revenues
|
13,111
|
|
|
17,611
|
|
Utilization of warranty accrual
|
(12,957
|
)
|
|
(14,983
|
)
|
Other
|
182
|
|
|
(1,719
|
)
|
Balance at end of period
|
16,656
|
|
|
16,320
|
|
Less: current portion
|
(13,640
|
)
|
|
(13,527
|
)
|
Long-term portion
|
$
|
3,016
|
|
|
$
|
2,793
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred Revenue, Net
Deferred revenue, net of related costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Deferred revenue
|
$
|
185,788
|
|
|
$
|
157,747
|
|
Deferred cost of revenue
|
(14,475
|
)
|
|
(19,526
|
)
|
Deferred revenue, net
|
171,313
|
|
|
138,221
|
|
Less: current portion
|
(104,797
|
)
|
|
(82,899
|
)
|
Long-term portion
|
$
|
66,516
|
|
|
$
|
55,322
|
|
Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Unrecognized tax benefits liability, net
|
$
|
33,745
|
|
|
$
|
35,860
|
|
Contingent consideration payable
|
5,254
|
|
|
10,776
|
|
Other long-term liabilities
|
37,841
|
|
|
32,260
|
|
Total other long-term liabilities
|
$
|
76,840
|
|
|
$
|
78,896
|
|
Redeemable Noncontrolling Interest in Subsidiary
Activity related to Redeemable noncontrolling interest in subsidiary are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended October 31
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
—
|
|
|
$
|
774
|
|
Additions due to acquisition
|
7,430
|
|
|
—
|
|
Adjustment on redemption of noncontrolling interest
|
—
|
|
|
(797
|
)
|
Net income (loss) attributable to redeemable noncontrolling interest in subsidiary
|
(2,450
|
)
|
|
23
|
|
Balance at end of period
|
$
|
4,980
|
|
|
$
|
—
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accumulated Other Comprehensive Loss
Activity related to Accumulated other comprehensive loss consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Unrealized loss on derivatives designated as cash flow hedges
(1)
|
|
Adjustment of pension plan obligations
(2)
|
|
Total
|
Balance at October 31, 2014
|
|
$
|
(102,767
|
)
|
|
$
|
(720
|
)
|
|
$
|
(1,343
|
)
|
|
$
|
(104,830
|
)
|
Losses before reclassifications, net of tax
|
|
(183,895
|
)
|
|
(7,830
|
)
|
|
—
|
|
|
(191,725
|
)
|
Amounts reclassified from Accumulated other comprehensive income, net of tax
|
|
—
|
|
|
4,141
|
|
|
93
|
|
|
4,234
|
|
Other comprehensive gain (loss)
|
|
(183,895
|
)
|
|
(3,689
|
)
|
|
93
|
|
|
(187,491
|
)
|
Balance at October 31, 2015
|
|
(286,662
|
)
|
|
(4,409
|
)
|
|
(1,250
|
)
|
|
(292,321
|
)
|
Losses before reclassifications, net of tax
|
|
(46,618
|
)
|
|
(1,971
|
)
|
|
—
|
|
|
(48,589
|
)
|
Amounts reclassified from Accumulated other comprehensive income (loss), net of tax
|
|
—
|
|
|
3,961
|
|
|
(4,045
|
)
|
|
(84
|
)
|
Other comprehensive gain (loss)
|
|
(46,618
|
)
|
|
1,990
|
|
|
(4,045
|
)
|
|
(48,673
|
)
|
Balance at October 31, 2016
|
|
$
|
(333,280
|
)
|
|
$
|
(2,419
|
)
|
|
$
|
(5,295
|
)
|
|
$
|
(340,994
|
)
|
(1) Amounts reclassified from Accumulated other comprehensive loss, net of tax, were recorded in Interest expense, net in the Consolidated Statements of Operations. The related tax impacts were insignificant.
(2) Amounts reclassified from Accumulated other comprehensive loss, net of tax, were recorded in General and administrative expenses in the Consolidated Statements of Operations. The related tax impacts were insignificant.
Note 8. Financial Instruments
Fair Value Measurements
Our financial assets and liabilities consist principally of cash, accounts receivable, accounts payable, debt, foreign exchange forward contracts, interest rate swaps, and contingent consideration payable. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value. The estimated fair value of our debt approximates the carrying value because the interest rate on such debt adjusts to market rates on a periodic basis. Contingent consideration payable, interest rate swaps, and foreign exchange forward contracts are recorded at estimated fair value. We measure and record certain of our financial assets and liabilities at fair value on a recurring basis.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following tables present our significant assets and liabilities that are measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands). There were no transfers between levels of fair value hierarchy in the
fiscal year
ended
October 31, 2016
and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts not designated as hedging instruments
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
Interest rate swap agreements designated as cash flow hedges
|
301
|
|
|
—
|
|
|
301
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets measured and recorded at fair value
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
$
|
5,997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,997
|
|
|
$
|
12,786
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,786
|
|
Foreign exchange forward contracts not designated as hedging instruments
|
153
|
|
|
—
|
|
|
153
|
|
|
—
|
|
|
377
|
|
|
—
|
|
|
377
|
|
|
—
|
|
Interest rate swap agreements designated as cash flow hedges
|
2,676
|
|
|
—
|
|
|
2,676
|
|
|
—
|
|
|
4,407
|
|
|
—
|
|
|
4,407
|
|
|
—
|
|
Total liabilities measured and recorded at fair value
|
$
|
8,826
|
|
|
$
|
—
|
|
|
$
|
2,829
|
|
|
$
|
5,997
|
|
|
$
|
17,570
|
|
|
$
|
—
|
|
|
$
|
4,784
|
|
|
$
|
12,786
|
|
Fair Value of Contingent Consideration Payable
The following table presents changes in our contingent consideration payable which is categorized in Level 3 of the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
12,786
|
|
|
$
|
11,824
|
|
Additions
|
5,252
|
|
|
1,781
|
|
Payments
|
(2,010
|
)
|
|
(485
|
)
|
Changes in estimates, included in Other income (expense), net
|
(12,003
|
)
|
|
(2,474
|
)
|
Interest expense, net
|
1,972
|
|
|
2,140
|
|
Balance at end of period
|
$
|
5,997
|
|
|
$
|
12,786
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Contingent consideration payable is comprised of amounts payable related to acquisitions and is classified as Level 3 because we use significant unobservable inputs to determine the expected payments and an appropriate discount rate to calculate the fair value. The contingent consideration balance at
October 31, 2016
is primarily related to acquired media contracts. The significant unobservable inputs we use to value the acquired media contracts include our estimate of the future net revenues we expect to generate from the acquired media contracts, the probability of achieving those revenues, and the revenue share rate for a media contract. The discount rate used to determine the fair value of this contingent consideration payable is 18.5%. The maximum liability of this contingent consideration payable is indeterminate because it is based on future revenues generated from the acquired media contracts. The remaining contingent consideration payable relates primarily to acquisition-related earn-out payables, and we generally use a Monte Carlo simulation or option pricing model to determine the expected payout and an appropriate discount rate to calculate the fair value. The significant unobservable inputs are the internally forecasted operating results and other performance measures for the acquired businesses, and an appropriate discount rate. The maximum liability on this contingent consideration payable is indeterminate because it is based on contributions from the acquired business.
We evaluate changes in the assumptions used to calculate the fair value of contingent consideration payable at the end of each period.
Derivative Financial Instruments
Interest Rate Swap Agreements Designated as Cash Flow Hedges
We use interest rate swap agreements to hedge the variability in cash flows related to interest payments. On January 8, 2015, we entered into a number of interest rate swap agreements to effectively convert
$500.0 million
of the term A loan from a floating rate plus applicable margin to a fixed rate of
1.20%
plus applicable margin through March 30, 2018. The principal amount under the term A loan covered by the interest rate swap agreements will decrease to
$450.0 million
from April 1, 2017 through September 30, 2017, and
$400.0 million
from October 1, 2017 through March 30, 2018. On June 17, 2016, we entered into a number of new interest rate swap agreements to convert
$350.0 million
of the term A loan to a fixed rate of
0.975%
plus applicable margin from March 30, 2018 through June 30, 2019.
The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The notional amounts of interest rate swap agreements outstanding as of
October 31, 2016
and 2015 were each
$500.0 million
.
Gains and losses arising from the effective portion of interest rate swap agreements are recorded in Accumulated other comprehensive loss, and are subsequently reclassified into earnings in the period or periods during which the underlying transactions affect earnings. As of
October 31, 2016
, the estimated net derivative loss related to our cash flow hedges included in Accumulated other comprehensive loss that will be reclassified into earnings in the next 12 months is
$2.2 million
.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Foreign Exchange Forward Contracts Not Designated as Hedging Instruments
We arrange and maintain foreign exchange forward contracts so as to yield gains or losses to offset changes in foreign currency denominated assets or liabilities due to changes in foreign exchange rates, with the objective to mitigate the volatility associated with foreign currency transaction gains or losses. Our foreign currency exposures are predominantly inter-company receivables and payables arising from product sales and loans from one of our entities to another. Our foreign exchange forward contracts generally mature within
90
days. The notional amounts of such contracts outstanding as of
October 31, 2016
and 2015 were
$175.0 million
and
$219.6 million
, respectively.
We recognized the following gains (losses) on foreign exchange forward contracts not designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Gains (losses) recognized in Other income (expense), net in our Consolidated Statements of Operations
|
$
|
(1,988
|
)
|
|
$
|
17,113
|
|
|
$
|
(2,661
|
)
|
Note 9. Goodwill and Purchased Intangible Assets
Goodwill
Activity related to goodwill by reportable segment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
EMEA
|
|
Latin America
|
|
Asia-Pacific
|
|
Verifone Systems
|
|
Verifone Services
|
|
Total
|
Balance at October 31, 2014
|
$
|
90,156
|
|
|
$
|
906,866
|
|
|
$
|
100,846
|
|
|
$
|
88,024
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,185,892
|
|
Acquisitions
|
16,640
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,640
|
|
Other adjustments
|
12
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency translation adjustments
|
(167
|
)
|
|
(96,804
|
)
|
|
(15,037
|
)
|
|
(6,493
|
)
|
|
—
|
|
|
—
|
|
|
(118,501
|
)
|
Balance at October 31, 2015
|
106,641
|
|
|
810,062
|
|
|
85,797
|
|
|
81,531
|
|
|
—
|
|
|
—
|
|
|
1,084,031
|
|
Segment reallocation
|
(106,641
|
)
|
|
(810,062
|
)
|
|
(85,797
|
)
|
|
(81,531
|
)
|
|
512,182
|
|
|
571,849
|
|
|
—
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,090
|
|
|
68,281
|
|
|
74,371
|
|
Other adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,431
|
)
|
|
(3,431
|
)
|
Currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,146
|
)
|
|
(23,332
|
)
|
|
(44,478
|
)
|
Balance at October 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
497,126
|
|
|
$
|
613,367
|
|
|
$
|
1,110,493
|
|
During December 2015, our Chief Executive Officer realigned the company's organizational structure to focus on two operating segments: Verifone Systems and Verifone Services. As a result of the change to our
two
new operating segments in December 2015, we have realigned our reporting units. Verifone Systems represents
one
reporting unit, and Verifone Services is comprised of
two
reporting units, Taxi Solutions and Verifone Payment Services. In connection with this reporting unit realignment, during the three months ended January 31, 2016, we also updated our goodwill impairment assessment based on a quantitative analysis. We first evaluated the goodwill of our reporting units immediately prior the realignment and concluded that there was no impairment. We then allocated our goodwill to the new reporting units using a relative fair value approach, and re-confirmed that there is no impairment.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During the fourth quarter of fiscal years 2016, 2015, and 2014, we completed our annual impairment assessments and concluded that goodwill was not impaired in any of these years. We used the optional qualitative method in our 2016 assessment related to the Verifone Systems and Verifone Payment Services reporting units. We used the quantitative approach in our 2016 assessment related to the Taxi Solutions reporting unit.
Purchased Intangible Assets, Net
Purchased Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
$
|
521,964
|
|
|
$
|
(249,513
|
)
|
|
$
|
272,451
|
|
|
$
|
591,930
|
|
|
$
|
(298,812
|
)
|
|
$
|
293,118
|
|
Other
|
73,175
|
|
|
(39,328
|
)
|
|
33,847
|
|
|
115,143
|
|
|
(90,744
|
)
|
|
24,399
|
|
Total
|
$
|
595,139
|
|
|
$
|
(288,841
|
)
|
|
$
|
306,298
|
|
|
$
|
707,073
|
|
|
$
|
(389,556
|
)
|
|
$
|
317,517
|
|
Other intangible assets, net, were comprised primarily of developed and core technology.
When intangibles reach the end of their useful lives, gross carrying amount and accumulated amortization are offset. During fiscal year 2016, we offset
$123.7 million
of Gross carrying amount and Accumulated amortization of intangible assets related to customer relationships and
$68.2 million
related to other intangible assets, because they reached the end of their useful lives.
Activity related to purchased intangible assets during the fiscal year ended
October 31, 2016
includes a
$26.4 million
currency translation adjustment to Gross carrying amount and a
$14.5 million
currency translation adjustment to Accumulated amortization.
Amortization of purchased intangible assets was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Included in Cost of net revenues
|
$
|
15,130
|
|
|
$
|
18,307
|
|
|
$
|
42,682
|
|
Included in Operating expenses
|
90,534
|
|
|
82,492
|
|
|
97,580
|
|
Total amortization of purchased intangible assets
|
$
|
105,664
|
|
|
$
|
100,799
|
|
|
$
|
140,262
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of
October 31, 2016
, is estimated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Net Revenues
|
|
Operating
Expenses
|
|
Total
|
Fiscal Years Ending October 31:
|
|
|
|
|
|
2017
|
$
|
7,278
|
|
|
$
|
69,063
|
|
|
$
|
76,341
|
|
2018
|
5,241
|
|
|
55,707
|
|
|
60,948
|
|
2019
|
4,861
|
|
|
49,994
|
|
|
54,855
|
|
2020
|
3,198
|
|
|
42,335
|
|
|
45,533
|
|
2021
|
2,460
|
|
|
30,783
|
|
|
33,243
|
|
Thereafter
|
946
|
|
|
34,432
|
|
|
35,378
|
|
Total future amortization expense
|
$
|
23,984
|
|
|
$
|
282,314
|
|
|
$
|
306,298
|
|
Note 10. Financings
Amounts outstanding under our financing arrangements consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Credit Agreement
|
|
|
|
Term A loan
|
$
|
525,000
|
|
|
$
|
562,500
|
|
Term B loan
|
195,500
|
|
|
197,500
|
|
Revolving loan
|
204,684
|
|
|
54,000
|
|
Capital leases and other debt
|
11,573
|
|
|
342
|
|
Total principal payments due
|
936,757
|
|
|
814,342
|
|
Less: original issue discount and debt issuance cost
|
(10,844
|
)
|
|
(15,013
|
)
|
Total amounts outstanding
|
925,913
|
|
|
799,329
|
|
Less: current portion
|
(66,017
|
)
|
|
(39,088
|
)
|
Long-term portion
|
$
|
859,896
|
|
|
$
|
760,241
|
|
Credit Agreement
On December 28, 2011, we entered into a credit agreement, which initially consisted of a
$918.5 million
term A Loan,
$231.5 million
term B Loan, and
$350.0 million
revolving loan commitment. On October 15, 2012, we entered into a credit extension amendment of this credit agreement consisting of
$109.5 million
add-on term A Loans and
$75.5 million
add-on revolving loan commitment increase. On July 19, 2013 we entered into a second credit extension amendment of this credit agreement, which extended from November 1, 2013 to November 1, 2014 the date on which the required total leverage ratio declined from
3.75
to
3.50
, and revised the definition of cash on hand used in calculating the total leverage ratio. As a condition to the effectiveness of the second amendment, on July 19, 2013 we prepaid the term A Loan in the aggregate principal amount of
$20.0 million
and the term B Loan in the aggregate principal amount of
$50.0 million
. On December 24, 2013, we repaid the entire
$48.4 million
balance due on the outstanding term B Loan. This payment was partially funded through
$47.0 million
in additional borrowings under the revolving loan.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On July 8, 2014, we entered into an amendment and restatement agreement, which amended and restated the credit agreement to extend the maturity dates, provide more favorable interest rates, and make certain changes to the covenants and other terms. As part of the amendment and restatement, the outstanding loan balances were repaid in full, and new debt was issued.
The amended and restated credit agreement provides for an aggregate amount of up to
$1.3 billion
of debt consisting of a
$600.0 million
term A loan,
$200.0 million
term B loan and
$500.0 million
revolving loan commitment. The initial amounts borrowed, together with cash on hand, were used to repay the
$938.6 million
of outstanding balances due under the original credit agreement as well as
$13.2 million
of costs associated with the amendment and restatement. No penalties were due in connection with such repayments.
Borrowings under the amended and restated credit agreement bear interest at a “Base Rate” or “Eurodollar Rate”, at our option, plus an applicable margin based on certain financial ratios, determined and payable quarterly. In addition, we pay an undrawn commitment fee on the unused portion of the revolving loan ranging from
0.25%
to
0.50%
per annum, depending on our leverage ratio.
The outstanding principal balance of the term A loan is required to be repaid in quarterly installments of the following percentages of the original balance outstanding under the term A loan:
1.25%
for each quarter from the quarter ending September 30, 2014 through the quarter ending June 30, 2016;
2.50%
for each quarter from the quarter ending September 30, 2016 through the quarter ending June 30, 2019, with the balance being due at maturity on July 8, 2019. The outstanding principal balance of the term B loan is required to be repaid in equal quarterly installments of
0.25%
of the original balance outstanding under the term B loan, with the balance being due at maturity on July 8, 2021. The revolving loan terminates on July 8, 2019. Outstanding amounts may also be subject to mandatory repayment with the proceeds of certain asset sales, and debt issuances, and, in the case of the term B loan only, from a portion of annual excess cash flows depending on our total leverage ratio, as defined under the agreement.
Additional terms of the amended and restated credit agreement require compliance with financial covenants that require us to maintain financial ratios related to interest coverage and financial leverage. We were in compliance with these financial covenants as of
October 31, 2016
. The amended and restated credit agreement also contains representations and warranties, affirmative covenants, negative covenants, financial covenants and conditions that are customarily required for similar financings including the following, among others:
|
|
•
|
A restriction on incurring additional indebtedness, subject to specified permitted debt;
|
|
|
•
|
A restriction on creating certain liens, subject to specified exceptions;
|
|
|
•
|
A restriction on mergers and consolidations, subject to specified exceptions;
|
|
|
•
|
A restriction on asset dispositions, subject to specified exceptions for ordinary course and other transactions;
|
|
|
•
|
A restriction on certain investments, subject to certain exceptions and a suspension if we achieve certain credit ratings;
|
|
|
•
|
A restriction on the payment of dividends, subject to specified exceptions; and
|
|
|
•
|
A restriction on entering into certain transactions with affiliates, subject to specified exceptions.
|
Borrowings under the amended and restated credit agreement are guaranteed by certain of our wholly owned domestic subsidiaries and secured by a first priority lien and security interest in certain of our assets, subject to customary exceptions.
As of
October 31, 2016
, we have elected the Eurodollar option for all of our borrowings. Eurodollar loans bear interest at a monthly market interest rate plus a margin according to the credit agreement. As of
October 31, 2016
, the monthly market interest rate was
0.54%
for our term A and revolver loans, and
0.75%
for our term B loan, and the margins were
1.75%
for our term A and revolver loans and
2.75%
for our term B loan. Accordingly, as of
October 31, 2016
, the interest rate was
2.29%
for the term A and revolving loans and
3.50%
for the term B loan.
We have a number of interest rate swap agreements under which we pay banks a fixed rate of
1.20%
and receive a monthly floating rate, which effectively converts
$500.0 million
of the term A loan from a floating interest rate to a fixed interest rate as of
October 31, 2016
. See Note 8,
Financial Instruments
for additional information.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of
October 31, 2016
, the commitment fee for the unused portion of the revolving loan was
0.250%
per annum, payable quarterly in arrears, and the amount available to draw under the revolving loan was
$295.3 million
.
The repayment of outstanding debt as part of the amendment and restatement was deemed an extinguishment of
$153.5 million
of outstanding debt. As a result, during July 2014, we expensed
$5.2 million
of previously capitalized debt issuance costs to Interest expense in our Consolidated Statements of Operations.
Capital Lease
In February 2016, we entered into a
$15.0 million
capital leasing facility. As of
October 31, 2016
, we have leased approximately
$9.2 million
under this arrangement which represents a non-cash capital expenditure.
Principal Payments
Future principal payments due under our financing arrangements are as follows (in thousands):
|
|
|
|
|
|
Amounts
|
Years Ending October 31:
|
|
2017
|
$
|
66,524
|
|
2018
|
64,466
|
|
2019
|
614,211
|
|
2020
|
3,767
|
|
2021
|
187,572
|
|
Thereafter
|
217
|
|
Total
|
$
|
936,757
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11. Restructuring and related charges
As part of cost optimization and corporate transformation initiatives, during fiscal years 2014, 2015, and 2016 our management approved, committed to and initiated restructuring plans to reduce headcount, exit under-performing businesses, and consolidate facilities and data centers. These plans are expected to be substantially complete by the end of fiscal year 2017.
Activity related to our restructuring plan accruals for the fiscal years ended
October 31, 2016
and 2015 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Plans
|
|
|
|
April 2014 Plan
|
|
June 2014 Plan
|
|
July 2015 Plan
|
|
June 2016 Plan
|
|
|
|
Employee Involuntary Termination Benefits
|
|
Facilities Related Costs
|
|
Employee
Involuntary Termination Benefits
|
|
Facilities
Related
Costs
|
|
Employee
Involuntary Termination Benefits
|
|
Employee Involuntary Termination Benefits
|
|
Facilities Related Costs
|
|
Total
|
Balance at October 31, 2014
|
$
|
319
|
|
|
$
|
1,194
|
|
|
$
|
5,500
|
|
|
$
|
399
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,412
|
|
Charges, net of adjustments
|
(69
|
)
|
|
537
|
|
|
884
|
|
|
82
|
|
|
7,343
|
|
|
—
|
|
|
—
|
|
|
8,777
|
|
Cash payments
|
(250
|
)
|
|
(1,866
|
)
|
|
(5,357
|
)
|
|
(476
|
)
|
|
(2,253
|
)
|
|
—
|
|
|
—
|
|
|
(10,202
|
)
|
Other
|
—
|
|
|
135
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135
|
|
Balance at October 31, 2015
|
—
|
|
|
—
|
|
|
1,027
|
|
|
5
|
|
|
5,090
|
|
|
—
|
|
|
—
|
|
|
6,122
|
|
Charges, net of adjustments
|
—
|
|
|
—
|
|
|
549
|
|
|
—
|
|
|
(721
|
)
|
|
11,907
|
|
|
3,430
|
|
|
15,165
|
|
Cash payments
|
—
|
|
|
—
|
|
|
(579
|
)
|
|
(5
|
)
|
|
(3,666
|
)
|
|
(6,682
|
)
|
|
(623
|
)
|
|
(11,555
|
)
|
Balance at October 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
997
|
|
|
$
|
—
|
|
|
$
|
703
|
|
|
$
|
5,225
|
|
|
$
|
2,807
|
|
|
$
|
9,732
|
|
Cumulative costs to date
|
$
|
5,140
|
|
|
$
|
1,967
|
|
|
$
|
12,772
|
|
|
$
|
853
|
|
|
$
|
6,622
|
|
|
$
|
11,907
|
|
|
$
|
3,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net of adjustments were allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31
|
|
2016
|
|
2015
|
|
2014
|
Included in Cost of net revenues
|
$
|
2,202
|
|
|
$
|
348
|
|
|
$
|
2,847
|
|
Included in Operating expenses
|
12,963
|
|
|
8,429
|
|
|
15,289
|
|
Total restructuring charges, net of adjustments
|
$
|
15,165
|
|
|
$
|
8,777
|
|
|
$
|
18,136
|
|
During fiscal year 2016, our management committed to a plan to exit certain under-performing businesses. We have classified the assets of these businesses as held for sale and recorded a
$22.0 million
write-down to reflect the assets held for sale at fair value during fiscal year 2016. This write-down is included in
Restructuring and related charges
in the Consolidated Statements of Operations. The
$5.1 million
fair value of the assets held for sale was determined based upon several considerations, including evaluation of carrying value and potential sales transactions, and is included within Prepaid expenses and other current assets in the Consolidated Balance Sheet as of
October 31, 2016
. During the fiscal year ended
October 31, 2016
, the revenues and operating results generated from these businesses were not significant.
Additionally, during fiscal year 2016 we recorded a
$9.2 million
charge for costs to terminate a contract related to a service we will no longer offer, of which
$2.9 million
is included in cost of net revenues and
$6.3 million
is included in Restructuring and related charges in the Consolidated Statement of Operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12. Commitments and Contingencies
Commitments
Leases
We lease certain facilities under non-cancelable operating leases that contain free rent periods, leasehold improvement rebates or rent escalation clauses. Rent expense under these leases is recorded on a straight-line basis over the lease term. We are committed to pay a portion of the related actual operating expenses under some of these lease agreements, and those operating expenses are not included in the table below. The difference between amounts paid and rent expense is recorded as deferred rent. The short-term and long-term portions are included in Accruals and other current liabilities and Other long-term liabilities, respectively, in our Consolidated Balance Sheets.
In connection with our taxi solutions business, we enter into operating lease arrangements for the right to place advertising in or on taxicabs. In general, these lease arrangements are non-cancelable for terms ranging from three to eight years, require us to pay minimum lease amounts based on the types and locations of the advertising displays in or on the taxicabs, and are subject to fee escalation clauses. Based upon the number of operational taxicabs with our advertising displays at
October 31, 2016
, we had total lease commitments of
$74.4 million
relating to such lease arrangements, which are included in the future minimum lease payments in the table below.
Future minimum lease payments under these leases as of October 31, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Lease Payments
|
|
Sublease
Rental Income
|
|
Net Minimum
Lease Payments
|
Years Ending October 31:
|
|
|
|
|
|
|
2017
|
$
|
48,065
|
|
|
$
|
(13
|
)
|
|
$
|
48,052
|
|
2018
|
28,782
|
|
|
(13
|
)
|
|
28,769
|
|
2019
|
24,210
|
|
|
(13
|
)
|
|
24,197
|
|
2020
|
18,166
|
|
|
(13
|
)
|
|
18,153
|
|
2021
|
13,575
|
|
|
(13
|
)
|
|
13,562
|
|
Thereafter
|
14,926
|
|
|
(37
|
)
|
|
14,889
|
|
Total
|
$
|
147,724
|
|
|
$
|
(102
|
)
|
|
$
|
147,622
|
|
Rent expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Rent expense for non-cancelable taxi operating leases
|
$
|
32,543
|
|
|
$
|
35,297
|
|
|
$
|
36,413
|
|
Facility and other rent expense
|
27,706
|
|
|
26,885
|
|
|
29,521
|
|
Total rent expense
|
$
|
60,249
|
|
|
$
|
62,182
|
|
|
$
|
65,934
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Manufacturing Agreements
We work on a purchase order basis with our contract manufacturers, which are located in China, Singapore, Malaysia, Brazil, and Germany, and component suppliers located throughout the world, to supply nearly all of our finished goods inventories, spare parts, and accessories. We provide each such supplier with a purchase order to cover the manufacturing requirements, which generally constitutes a binding commitment by us to purchase materials and finished goods produced by the manufacturer as specified in the purchase order. Most of these purchase orders are considered to be non-cancelable and are expected to be paid within one year of the issuance date. As of October 31, 2016, the amount of purchase commitments issued to contract manufacturers and component suppliers totaled approximately
$110.9 million
. Of this amount,
$11.2 million
has been recorded in Accruals and other current liabilities in our Consolidated Balance Sheets because these commitments are not expected to have future value to us.
Bank Guarantees
We have issued bank guarantees with maturities ranging from two months to nine years to certain of our customers and vendors as required in some countries to support certain performance obligations under our service or other agreements with those parties. As of
October 31, 2016
, the maximum amount that may become payable under these guarantees was
$13.0 million
, of which
$1.6 million
was collateralized by restricted cash deposits.
Contingencies
We evaluate the circumstances regarding outstanding and potential litigation and other contingencies on a quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure, and if so, whether an estimate of the possible loss or range of loss can be made, or whether such an estimate cannot be made. When a loss is probable and reasonably estimable, we accrue for such amount based on our estimate of the probable loss considering information available at the time. When a loss is reasonably possible, we disclose the estimated possible loss or range of loss in excess of amounts accrued if material. Except as otherwise disclosed below, we do not believe that material losses were probable or that there was a reasonable possibility that a material loss may have been incurred with respect to the matters disclosed.
Brazilian Tax Assessments
State Value-Added Tax
The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the São Paulo State Revenue Department for collection of state sales taxes related to purported sales of software for the 1998 and 1999 tax years. In 2004, an appeal against this unfavorable administrative decision was filed in a judicial proceeding. The first level decision in the judicial proceeding was issued in our favor. The São Paulo State Revenue Department filed an appeal of this decision. The second level administrative decision ordered that the case be returned to the lower court in order to allow the production of further evidence. Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding. The tax assessment including estimated interest through
October 31, 2016
for this matter totals approximately
9.0 million
Brazilian reais (approximately
$2.9 million
at the foreign exchange rate as of
October 31, 2016
). As of
October 31, 2016
, we have not accrued for this matter, but we have posted a bank bond as a guaranty.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Federal Tax Assessments and Amnesty
In December 2013, without admitting any fault or liability, we elected to enroll certain of our pending Brazilian tax assessments in the Brazilian Federal Tax Amnesty Program created by Law n. 11.941/2009 in 2009 and reopened for enrollment from October 2013 to December 2013, known as the
“
REFIS Amnesty.” The REFIS Amnesty is a program administered by the Brazilian tax authorities and allows entities charged with tax assessments that fall within the program’s scope to voluntarily settle such assessments with certain discounts applied to the amounts due. After conducting an evaluation of our existing Brazilian federal tax assessments and the terms offered by the REFIS Amnesty, we determined to voluntarily settle a number of our pending assessments.
Tax assessment matters that fall within the REFIS Amnesty's scope are generally listed in the program's web-based portal for enrollment. Although no formal acceptance by the tax authorities is issued at the time of our enrollment of a matter, we expect the tax authorities to confirm our enrollment as they complete their process to formally consolidate the matters we enrolled in the REFIS Amnesty. In connection with our enrollment of the tax assessments into the REFIS Amnesty, we were required to forgo any further legal defense or proceedings with respect to the merits of such assessments. In exchange, the enrolled assessments were closed and we were granted discounts on our payment of the related accrued interest and penalties and are able to pay under an installment plan, subject to our compliance with the terms of the program. For certain assessments, existing net operating loss carryforwards, or net operating losses, may be used to satisfy a portion of the settlement obligation. Under the terms of the REFIS Amnesty, our right to fund the settlement through the installment payment plan would be canceled after three instances of our not timely paying the installment amounts as scheduled, in which case the full amounts of the original tax debts, including interest and penalties without the benefit of discount, would become immediately due and payable.
As previously reported, the Brazilian subsidiaries we acquired as part of our acquisitions of Lipman Electronic Engineering Ltd. ("Lipman") in November 2006 and Hypercom in August 2011 elected to enroll certain tax assessments and offset requests in the REFIS Amnesty, which amounts we no longer believe are reasonably possible to have a material adverse effect on our financial condition.
Excluding the assessments that have been enrolled in the REFIS Amnesty for these subsidiaries, which have been accrued net of the net operating losses that we expect to apply against the settlement obligations, the remaining assessments total approximately
3.2 million
Brazilian reais (approximately
$1.0 million
at the foreign exchange rate as of
October 31, 2016
), including estimated penalties and interest, as of
October 31, 2016
. Based on our current understanding of the underlying facts of this matter, we believe there is a remote risk that we may receive an unfavorable decision related to these remaining assessments.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Municipality Services Tax Assessments
In December 2009, one of the Brazilian subsidiaries that was acquired as part of the Lipman acquisition was notified of a tax assessment regarding alleged nonpayment of tax on services rendered for the period from September 2004 to December 2004. This assessment was issued by the municipality of São Paulo (the "municipality"), and asserts a services tax deficiency and related penalties totaling
875,000
Brazilian reais (approximately
$280,000
at the foreign exchange rate as of
October 31, 2016
), excluding interest. The municipality claims that the Brazilian subsidiary rendered certain services within the municipality of São Paulo but simulated that those services were rendered in another city. At the end of December 2010 the municipality issued further tax assessments alleging the same claims for 2005 through June 2007. These additional subsequent claims assert services tax deficiencies and related penalties totaling
5.9 million
Brazilian reais (approximately
$1.9 million
at the foreign exchange rate as of
October 31, 2016
), excluding interest. We received unfavorable decisions from the administrative courts, which ruled to maintain the tax assessments for each of these matters. No further grounds of appeal are available to us for these assessments within the administrative courts. In October 2012, as a result of the decision at the administrative level, the tax authorities filed an enforcement action in the civil courts to collect on the services tax assessments amounts awarded by the administrative court, and seeking other related costs and fees. On March 6, 2013, we filed our defensive claims in the civil courts in response to the tax authorities' enforcement action. In February 2013 the tax authorities filed an additional enforcement action in the civil courts to collect on the penalties related to the services tax assessments amounts awarded by the administrative courts. Based on our understanding of the underlying facts of this matter and our evaluation of the potential outcome at the judicial level, we believe it is reasonably possible that our Brazilian subsidiary will be required to pay some amount of the alleged tax assessments and penalties related to these matters, as well as amounts of interest and certain costs and fees imposed by the court related thereto. As of
October 31, 2016
, the amount of the alleged tax assessments and penalties related to these matters was approximately
24.8 million
Brazilian reais (approximately
$7.9 million
at the foreign exchange rate as of
October 31, 2016
), including interest, costs and fees related thereto.
The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the municipality of Curitiba for collection of alleged services tax deficiency. An appeal against this unfavorable administrative decision was filed in a judicial proceeding and currently the case is pending the municipality of Curitiba's compliance with the writ of summons. As of
October 31, 2016
, the underlying assessment, including estimated interest, was approximately
5.7 million
Brazilian reais (approximately
$1.8 million
at the foreign exchange rate as of
October 31, 2016
). Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding.
Israel Securities Class Actions
On January 27, 2008, a class action complaint was filed against us in the Central District Court in Tel Aviv, Israel on behalf of purchasers of our stock on the Tel Aviv Stock Exchange. The complaint sought compensation for damages allegedly incurred by the class of plaintiffs due to the publication of erroneous financial reports. On April 2, 2015, the Israeli Supreme Court ruled that the applicable law is U.S. law and dismissed this action as estopped by settlement of the similar consolidated federal securities class action in the U.S. (
In re VeriFone Holdings, Inc., previously reported).
The plaintiff and putative class members in this Israeli action are included in the stipulated settlement of the U.S. class action unless an individual plaintiff opts out. On June 29, 2015, the plaintiff filed a motion for award of compensation and attorneys' fees based on the amount of settlement compensation received by Israelis in the U.S. class action. On January 14, 2016, the Israeli District Court denied this motion. Plaintiff has not timely appealed, that ruling is now final, and this 2008 action is now concluded.
On May 12, 2015, a new class action complaint was filed against us in Israel alleging similar claims as the dismissed Israeli class action, and alleging that Israeli shareholders were deprived of due process in the U.S. class action settlement proceedings. We are opposing the new class action and plaintiff's class certification motion on substantially the same grounds on which the previous case was dismissed. The court held a pretrial hearing on that motion on May 19, 2016 at which it requested additional information including expert reports, a position paper from the Israel Securities Authority ("ISA"), and further briefing. In July 2016, the ISA submitted a position paper supporting our position regarding applicable law. Other requested information has also now been submitted, but the court has not yet ruled.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In re VeriFone Securities Litigation
On March 7, 2013, a putative securities class action was filed in the U.S. District Court for the Northern District of California against us, certain of our former officers and one of our current officers and alleged claims in connection with our February 20, 2013 announcement of preliminary financial results for the fiscal quarter ended January 31, 2013. The action, captioned
Sanders
v.
VeriFone Systems, Inc. et al.
, Case No. C 13-1038, and subsequently re-captioned
In re VeriFone Securities Litigation
, was initially brought on behalf of a putative class of purchasers of VeriFone securities between December 14, 2011 and February 19, 2013 and asserted claims under the Securities Exchange Act Sections 10(b) and 20(a) and SEC Rule 10b-5 for securities fraud and control person liability. The claims were based on allegations that we and the individual defendants made false or misleading public statements regarding our business, operations, and financial controls during the putative class period. The complaint sought unspecified monetary damages and other relief. Two additional class actions related to the same matter (
Laborers Local 235 Benefit Funds
v.
VeriFone Systems, Inc. et al.,
Case No. CV 13-1676 and
Bland
v.
VeriFone Systems, Inc. et al.,
Case No. CV 13-1853) were filed in April 2013. On May 6, 2013, several putative plaintiffs and plaintiffs' law firms filed motions to consolidate these three securities class actions and requesting appointment as lead plaintiff and lead counsel, respectively. The plaintiffs in
Laborers Local 235 Benefit Funds v. VeriFone Systems, Inc. et al. and Bland v. VeriFone Systems, Inc. et al.
voluntarily dismissed their respective actions, without prejudice, on July 10, 2013 and July 17, 2013, respectively, and filed motions to be appointed lead plaintiff in the action previously captioned
Sanders v. VeriFone Systems, Inc. et al.
On October 7, 2013, the court entered an order appointing the Selz Funds as lead plaintiffs and appointing Gold Bennett Cera & Sidener LLP as lead counsel. Lead plaintiffs' first amended complaint was filed on December 16, 2013. The first amended complaint expanded the putative class period to December 14, 2011 and February 20, 2013, inclusive, and removed the current officer who was named in the original complaint from the action. On August 8, 2014, the court dismissed the amended complaint, with leave to amend. Lead plaintiffs filed their second amended complaint on October 7, 2014. On March 29, 2016, the court granted our motion to dismiss the second amended complaint, finding it insufficiently pled, and granted leave to amend by June 3, 2016. Instead of filing a third amended complaint, lead plaintiffs stipulated to a judgment of dismissal with prejudice so they could appeal the court’s dismissal of their second amended complaint, which judgment the court entered on June 6, 2016. On June 9, 2016, the lead plaintiff filed a notice of appeal. That appeal has since been dismissed, and this matter is now concluded.
Dolled v. Bergeron et al.
On April 19, 2013, a derivative action,
Dolled v. Bergeron et al.
, Case No. 113-CV-245056, was filed in the Superior Court of California, County of Santa Clara in connection with our February 20, 2013 announcement of preliminary financial results for the fiscal quarter ended January 31, 2013. The action, brought derivatively on behalf of Verifone, names Verifone as a nominal defendant and brings claims for insider selling, breach of fiduciary duty and unjust enrichment variously against certain of our current and former officers and directors. The complaint seeks unspecified monetary damages, restitution and disgorgement of profits and compensation paid to defendants, injunctive relief directing us to reform its corporate governance, and payment of the plaintiff's costs and attorneys' fees. On May 30, 2013, the court entered the parties' stipulation and proposed order, which appointed plaintiff and plaintiff's counsel as lead plaintiff and lead counsel, respectively, in the consolidated action, captioned
In re VeriFone Systems, Inc. Derivative Litigation
. The next case management conference is scheduled for March 3, 2017.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Zoumboulakis v. McGinn et al.
On May 24, 2013, a federal derivative action,
Zoumboulakis v. McGinn et al.
, Case No. 13-CV-02379, was filed in the U.S. District Court for the Northern District of California against certain current and former directors and officers derivatively on our behalf. The complaint, which named us as a nominal defendant, alleges breach of fiduciary duty and abuse of control and asserts claims under Section 14(a) of the Securities Exchange Act of 1934 for false or misleading financial statements and proxy statement disclosures. The original complaint sought unspecified monetary damages, including exemplary damages, restitution from defendants, injunctive relief directing us to make certain corporate governance reforms, and payment of the plaintiff's costs and attorneys' fees. On August 12, 2013, the court granted defendants' motion to relate this action to the pending shareholder class action,
Sanders v. VeriFone Systems, Inc. et al
. On January 21, 2014, plaintiff filed a first amended complaint, which removed one of our former officers from the action and added an additional former director as a defendant. The first amended complaint asserted claims against the defendants for breach of fiduciary duty, abuse of control, violations of Securities Exchange Act Section 14(a), and unjust enrichment. The first amended complaint also included claims for insider trading against three of the named former and current directors. On August 7, 2014, the court granted our motion to dismiss the first amended complaint with leave to amend. On October 17, 2014, plaintiff filed a second amended complaint, to which we responded by filing another motion to dismiss. On December 3, 2015, the court granted our motion to dismiss, again with leave to amend. On January 20, 2016, plaintiff filed a third amended complaint alleging demand futility with respect to the current Board. On March 1, 2016, we filed another motion to dismiss, on which the court has not yet ruled.
If any of these class action or derivative lawsuits is resolved adversely to us, it could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Indian Antitrust Proceedings
The Competition Commission of India ("CCI") investigated certain complaints made against us alleging unfair practices based on certain provisions in our software development license arrangements in India. We cooperated with requests by the CCI in its investigation. In March 2014, the Director General of the CCI investigating the allegations issued a report rejecting certain of the allegations, but also finding that certain provisions of our licenses may constitute unfair business practices. VeriFone India Sales Pvt. Ltd. filed objections to that report.
In April 2015, the CCI issued rulings directing Verifone India to cease and desist from engaging in the alleged anti-competitive conduct and imposing a penalty, the amount of which is not material to our results of operations. We have deposited 10% of this penalty amount and accrued the balance while we appeal these rulings.
On June 15, 2015, we filed appeals and interim applications to stay the CCI orders. The appellate court has granted our interim applications to stay all proceedings at least until the final appellate hearing, which commenced on January 19, 2016, and is next scheduled to continue on January 24, 2017.
The CCI's rulings reserved the right to pursue additional proceedings against individuals that it deems responsible for the alleged conduct. We are unable to make any estimate of potential loss for any further proceedings the CCI may pursue but do not expect it to be material to our results of operations.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Litigation
Certain of the foregoing cases are still in the preliminary stages, and we are not able to quantify the extent of our potential liability, if any, other than as described above. Further, the outcome of litigation is inherently unpredictable and subject to significant uncertainties. If any of these matters are resolved adversely to us, this could have a material adverse effect on our business, financial condition, results of operations, and cash flows. In addition, defending these legal proceedings is likely to be costly, which may have a material adverse effect on our financial condition, results of operations and cash flows, and may divert management's attention from the day-to-day operations of our business. We are subject to various other legal proceedings related to commercial, customer, and employment matters that have arisen during the ordinary course of business. The outcome of such legal proceedings is inherently unpredictable and subject to significant uncertainties. Although there can be no assurance as to the ultimate disposition of these matters, our management has determined, based upon the information available at the date of these financial statements, including anticipated expected availability of insurance coverage, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Income Tax Uncertainties
As of
October 31, 2016
, the amount payable for unrecognized tax benefits was
$33.7 million
, including accrued interest and penalties, none of which is expected to be paid within one year. This amount is included in Other long-term liabilities in our Consolidated Balance Sheet as of
October 31, 2016
. We are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur.
Note 13. Segment and Geographic Information
In December 2015, we realigned our organizational structure and changed our reportable segments to be Verifone Systems and Verifone Services. Net revenues and operating income of each segment reflect net revenues and expenses that are directly attributable to that segment. Net revenues and expenses not allocated to segment net revenues and segment operating income include amortization of purchased intangible assets, amortization of step-down in deferred services net revenues and associated costs of net revenues at acquisition, restructuring and related charges, stock-based compensation, as well as general and administrative and corporate research and development expense. We do not separately evaluate assets by segment, and therefore assets by segment are not presented below.
The following table sets forth net revenues for our reportable segments and reconciles segment net revenues to total net revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Segment net revenues:
|
|
|
|
|
|
Verifone Systems
|
$
|
1,236,361
|
|
|
$
|
1,309,629
|
|
|
$
|
1,162,226
|
|
Verifone Services
|
769,715
|
|
|
691,822
|
|
|
708,762
|
|
Total segment net revenues
|
2,006,076
|
|
|
2,001,451
|
|
|
1,870,988
|
|
Amortization of step down in deferred services net revenues at acquisition
|
(13,927
|
)
|
|
(994
|
)
|
|
(2,114
|
)
|
Total net revenues
|
$
|
1,992,149
|
|
|
$
|
2,000,457
|
|
|
$
|
1,868,874
|
|
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth operating income for our reportable segments and reconciles segment operating income to consolidated operating income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Operating income by segment:
|
|
|
|
|
|
Verifone Systems
|
$
|
252,326
|
|
|
$
|
294,857
|
|
|
$
|
239,593
|
|
Verifone Services
|
198,426
|
|
|
178,754
|
|
|
184,334
|
|
Total segment operating income
|
450,752
|
|
|
473,611
|
|
|
423,927
|
|
Items not attributable to segment operating income:
|
|
|
|
|
|
Amortization of step down in deferred services gross margin at acquisition
|
(9,839
|
)
|
|
(994
|
)
|
|
(2,114
|
)
|
Restructuring and related charges
|
(46,814
|
)
|
|
(8,777
|
)
|
|
(18,136
|
)
|
Amortization of purchase intangible assets
|
(105,664
|
)
|
|
(100,799
|
)
|
|
(140,262
|
)
|
Stock-based compensation expense
|
(42,278
|
)
|
|
(42,253
|
)
|
|
(53,897
|
)
|
Litigation settlement and loss contingency (expense) benefit
|
(650
|
)
|
|
(1,213
|
)
|
|
8,632
|
|
Unallocated general and administrative expenses
|
(186,308
|
)
|
|
(187,161
|
)
|
|
(181,972
|
)
|
Unallocated research and development expenses
|
(14,593
|
)
|
|
(18,112
|
)
|
|
(19,206
|
)
|
Other unallocated costs
|
(11,827
|
)
|
|
(7,311
|
)
|
|
(11,087
|
)
|
Total operating income
|
$
|
32,779
|
|
|
$
|
106,991
|
|
|
$
|
5,885
|
|
Depreciation and amortization of property and equipment was allocated to segments as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Verifone Systems
|
$
|
6,177
|
|
|
$
|
5,648
|
|
|
$
|
8,534
|
|
Verifone Services
|
43,184
|
|
|
41,484
|
|
|
39,427
|
|
Unallocated
|
13,097
|
|
|
11,537
|
|
|
11,704
|
|
Total depreciation and amortization expense
|
$
|
62,458
|
|
|
$
|
58,669
|
|
|
$
|
59,665
|
|
Geographic Information
Our net revenues, by country with net revenues over 10% of total net revenues, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
807,229
|
|
|
$
|
789,386
|
|
|
$
|
522,982
|
|
Brazil
|
117,432
|
|
|
137,936
|
|
|
197,472
|
|
Other countries
|
1,067,488
|
|
|
1,073,135
|
|
|
1,148,420
|
|
Total net revenues
|
$
|
1,992,149
|
|
|
$
|
2,000,457
|
|
|
$
|
1,868,874
|
|
Net revenues are allocated to countries based on the shipping destination or service delivery location of customer orders.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property and equipment, net, by country with fixed assets over 10% of total fixed assets, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
United States
|
$
|
99,807
|
|
|
$
|
99,961
|
|
Other countries
|
102,470
|
|
|
91,004
|
|
Property and equipment, net
|
$
|
202,277
|
|
|
$
|
190,965
|
|
VERIFONE SYSTEMS, INC.
Selected Quarterly Results of Operations (Unaudited)
The following selected quarterly data should be read in conjunction with our Consolidated Financial Statements and accompanying notes appearing in this Item 8,
Financial Statements and Supplementary Data,
and Item 7
, Management’s Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on Form 10-K. This information has been derived from our unaudited Consolidated Financial Statements that, in our opinion, reflect all recurring adjustments necessary to fairly present our financial information when read in conjunction with our Consolidated Financial Statements and Notes. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
The tables below sets forth selected unaudited financial data for each quarter for the last two fiscal years (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2016
|
|
First
Quarter
|
|
Second
Quarter
(1)
|
|
Third
Quarter
(1)
|
|
Fourth
Quarter
(1)
|
Net revenues
|
$
|
513,539
|
|
|
$
|
526,278
|
|
|
$
|
488,132
|
|
|
$
|
464,200
|
|
Gross margin
|
215,285
|
|
|
210,379
|
|
|
191,147
|
|
|
177,500
|
|
Operating income (loss)
|
36,216
|
|
|
19,779
|
|
|
(22,345
|
)
|
|
(871
|
)
|
Consolidated net income (loss)
|
23,733
|
|
|
3,340
|
|
|
(31,498
|
)
|
|
(5,275
|
)
|
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
|
$
|
23,501
|
|
|
$
|
2,899
|
|
|
$
|
(31,138
|
)
|
|
$
|
(4,543
|
)
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
$
|
0.21
|
|
|
$
|
0.03
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
Diluted net income (loss) per share
|
$
|
0.21
|
|
|
$
|
0.03
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.04
|
)
|
|
|
(1)
|
The second, third, and fourth fiscal quarters of 2016 include $0.6 million, $38.8 million, and
$7.1 million
, respectively, of restructuring and related charges as part of cost optimization and corporate transformation initiatives. For further information, see Note 11,
Restructurings and related charges,
in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
|
First
Quarter
(1)
|
|
Second
Quarter
(1)
|
|
Third
Quarter
(1)
|
|
Fourth
Quarter
(1)(2)
|
Net revenues
|
$
|
486,226
|
|
|
$
|
490,144
|
|
|
$
|
509,940
|
|
|
$
|
514,147
|
|
Gross margin
|
199,170
|
|
|
203,903
|
|
|
206,541
|
|
|
216,369
|
|
Operating income
|
23,175
|
|
|
29,716
|
|
|
20,284
|
|
|
33,816
|
|
Consolidated net income
|
14,128
|
|
|
17,666
|
|
|
10,080
|
|
|
38,483
|
|
Net income attributable to VeriFone Systems, Inc. stockholders
|
$
|
13,848
|
|
|
$
|
17,564
|
|
|
$
|
9,454
|
|
|
$
|
38,231
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
0.12
|
|
|
$
|
0.15
|
|
|
$
|
0.08
|
|
|
$
|
0.33
|
|
Diluted net income per share
|
$
|
0.12
|
|
|
$
|
0.15
|
|
|
$
|
0.08
|
|
|
$
|
0.33
|
|
|
|
(1)
|
The first, second, third, and fourth fiscal quarters of 2015 include $1.4 million, $0.1 million, $6.0 million, and $1.3 million, respectively, of restructuring and related charges as part of cost optimization and corporate transformation initiatives. For further information, see Note 11,
Restructurings and related charges,
in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
|
|
|
(2)
|
In the fourth fiscal quarter of 2015 we recorded a $16.1 million tax benefit as a result of releasing a portion of our valuation allowance against certain non-U.S. foreign deferred tax assets. For further information, see Note 6,
Income Taxes,
in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
|