Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
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 value of cash, accounts receivable, and accounts payable approximates their carrying value. The estimated fair value of our debt approximates the carrying value because the interest rate on such debt adjusts to market rates on a periodic basis. Foreign exchange forward contracts, interest rate swaps, and contingent consideration payable are recorded at estimated fair value.
Foreign currency translation adjustments
Unrealized loss on derivatives
designated as cash flow
hedges (1) Other (2) Total
Balance at October 31, 2013 $ 18,301 $ (2,014) $ (1,440) $ 14,847
Gains (losses) before reclassifications, net of tax (121,068) 4,088 393 (116,587) Amounts reclassified from Accumulated other comprehensive income
(loss), net of tax — (2,794) (296) (3,090)
Other comprehensive gain (loss) (121,068) 1,294 97 (119,677)
Balance at October 31, 2014 (102,767) (720) (1,343) (104,830)
Gains (losses) before reclassifications, net of tax (183,895) (7,830) — (191,725) Amounts reclassified from Accumulated other comprehensive income
(loss), 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)
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2015 and the fiscal year ended October 31, 2014.
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):
Contingent consideration payable is comprised substantially of amounts payable for acquired media contracts. The contingent consideration payable 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 significant unobservable inputs we use 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 the contingent consideration payable is 18.5%. The maximum liability on contingent consideration payable is indeterminate because it is based on future revenues generated 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.
October 31, 2015 October 31, 2014
Changes in estimates, included in Other income (expense), net (2,474) (105)
Interest expense, net 2,140 432
Balance at end of period $ 12,786 $ 11,824
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 March 23, 2012, 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 to a 0.71% fixed rate plus applicable margin through March 31, 2015. On January 8, 2015, we entered into a number of new interest rate swap agreements to effectively convert
$500.0 million of the term A loan from a floating rate to a 1.20% fixed rate plus applicable margin effective April 1, 2015, after the expiration of the original swap agreements. The principal amount under the term A loan covered by the new interest rate swap agreements will decrease to $450.0 million from April 1, 2017 through August 31, 2017, and $400.0 million from September 1, 2017 through March 31, 2018. The swap agreements expire March 31, 2018.
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, 2015 and October 31, 2014 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, 2015, 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 $4.4 million.
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, 2015 and October 31, 2014 were $219.6 million and $241.1 million, respectively.
We recognized the following gains (losses) on foreign exchange forward contracts not designated as cash flow hedges (in thousands):
121
Years Ended October 31,
2015 2014 2013
Gains (losses) recognized in Other income (expense), net in our Consolidated Statements of
Operations $ 17,113 $ (2,661 ) $ (5,214 )
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 9. Goodwill and Purchased Intangible Assets
Goodwill
Activity related to goodwill consisted of the following (in thousands):
During the fourth quarter of fiscal years 2015, 2014, and 2013, we completed our annual impairment assessments and, based on a quantitative analysis, concluded that goodwill was not impaired in any of these years.
Purchased Intangible Assets, Net
Purchased Intangible assets, net consisted of the following (in thousands):
Other intangible assets, net, were comprised primarily of developed and core technology and trade name.
When intangibles reach the end of their useful lives, gross carrying amount and accumulated amortization are offset. During fiscal year 2015, we offset $10.4 million of Gross carrying amount and Accumulated amortization of intangible assets related to developed and core technology, $3.3 million related to customer relationships, and $0.2 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 2015 also includes a $93.5 million currency translation adjustment to Gross carrying amount and a $41.9 million currency translation adjustment to Accumulated amortization.
Amortization of purchased intangible assets was allocated as follows (in thousands):
October 31,
2015 2014
Balance at beginning of period $ 1,185,892 $ 1,252,472
Acquisitions 16,640 6,834
Other adjustments — (885)
Currency translation adjustments (118,501) (72,529)
Balance at end of period $ 1,084,031 $ 1,185,892
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, 2015, is estimated as follows (in thousands):
Note 10. Financings
Amounts outstanding under our financing arrangements consisted of the following (in thousands):
2011 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.
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.
Less: original issue discount and debt issuance cost (15,013 ) (19,291 )
Total amounts outstanding 799,329 868,415
Less: current portion (39,088 ) (31,792 )
Long-term portion $ 760,241 $ 836,623
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, 2015. 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:
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.
The interest rate of each of the term A loan and the revolving loan is currently one month LIBOR plus the applicable margin, and the interest rate of the term B loan is the higher of one month LIBOR or 0.75%, plus the applicable margin. As of October 31, 2015, we elected the "Eurodollar Rate"
margin option for our borrowings and the interest margins were 1.75% for the term A loan and the revolving loan, and 2.75% for term B loan.
Accordingly as of October 31, 2015, the interest rate was 1.94% for the term A loan and the revolving loan and 3.5% for the term B loan. As of October 31, 2015, the commitment fee for the unused portion of the revolving loan was 0.30% per annum, payable quarterly in arrears, and the amount available to draw under the revolving loan was $446.0 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.
We have outstanding a number of interest rate swap agreements to effectively convert $500.0 million of the term A loan from a floating rate to a 1.20% fixed rate plus applicable margin. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges and are effective through March 31, 2018. The principal amount under the term A loan covered by the new interest rate swap agreements will decrease to $450.0 million from April 1, 2017 through August 31, 2017, and $400.0 million from September 1, 2017 through March 31, 2018.
• 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.
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Principal Payments
Principal payments due under our financing arrangements over the next five years are as follows (in thousands):
Note 11. Restructurings
As part of cost optimization and corporate transformation initiatives, during fiscal year 2014 our management approved, committed to and initiated restructuring plans to reduce headcount, and consolidate facilities and data centers. These plans were substantially completed at the end of fiscal year 2015. In addition, during July 2015, our management approved, committed to and initiated another restructuring plan to further reduce headcount and consolidate operations as part of these transformation initiatives. The July 2015 Plan is expected to be substantially complete by the end of fiscal year 2016.
Activity related to our restructuring plans consisted of the following (in thousands):
The following table presents the restructuring expense recognized in our Consolidated Statements of Operations (in thousands):
Amounts
VERIFONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12. Commitments and Contingencies