Nuance Communications, Inc. - Annual Report: 2021 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
| (Mark One) | ||||||||
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the fiscal year ended | September 30, 2021 | |||||||
| OR | ||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to | ||||||||
Commission file number 001-27038
NUANCE COMMUNICATIONS, INC.
(Exact name of Registrant as Specified in its Charter)
| Delaware | 94-3156479 | ||||||||||
| (State or Other Jurisdiction of | (I.R.S. Employer | ||||||||||
| Incorporation or Organization) | Identification No.) | ||||||||||
| 1 Wayside Road | 01803 | ||||||||||
| Burlington, | Massachusetts | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (781) 565-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
| Common stock, $0.001 par value | NUAN | Nasdaq Stock Market LLC | ||||||
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | þ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Emerging growth company | ☐ | |||||||||||
| Smaller reporting company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on attestation to its management's assessment of the effectiveness of its internal control over financial reporting under section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of March 31, 2021, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $10.0 billion based on the closing sale price as reported on the Nasdaq Global Select Market for such date.
The number of shares of the registrant’s common stock, outstanding as of October 31, 2021, was 319,452,053.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the registrant’s 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
NUANCE COMMUNICATIONS, INC.
TABLE OF CONTENTS
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| PART I | ||||||||
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| PART II | ||||||||
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| Item 6. | Selected Consolidated Financial Data | |||||||
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| PART III | ||||||||
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| PART IV | ||||||||
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PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking, including statements pertaining to: our future revenue, cost of revenue, research and development expense, selling, general and administrative expenses, amortization of intangible assets and gross margin, earnings, cash flows and liquidity; our strategy relating to our segments; the potential of future product releases; our product development plans and investments in research and development; future acquisitions and anticipated benefits from acquisitions; international operations and localized versions of our products; our contractual commitments; our fiscal year 2022 revenue and expense expectations and legal proceedings and litigation matters. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Item 1A of this Annual Report under the heading “Risk Factors.” All forward-looking statements included in this document are based on information available to us on the date hereof. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof. We will not undertake and specifically decline any obligation to update any forward-looking statements, except to the extent required by law.
Item 1.Business
Overview
Nuance Communications, Inc. ("We", "Nuance", or the "Company") is a technology pioneer and market leader in conversational artificial intelligence ("AI") and ambient clinical intelligence. We deliver intuitive solutions that understand, analyze, and respond to people - amplifying their ability to help others with increased productivity and security. We work with thousands of organizations globally across healthcare, financial services, telecommunications, government, and retail - to create stronger relationships and better experiences for their customers and workforce. We offer our customers a wide range of products and services, including clinical documentation, solutions for clinicians, radiologists and care teams, as well as intelligent customer engagement and security and biometric solutions for leading brands. In addition, our solutions increasingly utilize our innovations in AI, including cognitive sciences and machine learning to create smarter, more natural experiences with technology. Using advanced analytics and algorithms, our technologies create personalized experiences and transform the way people interact with information and the technology around them. We market and sell our solutions and technologies around the world directly through a dedicated sales force and a global network of resellers, including system integrators, independent software vendors, value-added resellers, distributors, hardware vendors, telecommunications carriers and e-commerce websites.
We are a global organization steeped in research and development ("R&D"). We have approximately 1,700 language scientists, developers, and engineers dedicated to continually refining our technologies and advancing our portfolio to better meet our customers’ diverse and changing needs. As of September 30, 2021, we had operations and a sales force in 27 countries. Our corporate headquarters is in Burlington, Massachusetts, and our international headquarters is in Dublin, Ireland. In fiscal year 2021, our revenue was approximately $1.4 billion.
On April 11, 2021, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Microsoft Corporation ("Microsoft"). Subject to the terms and conditions of the Merger Agreement, Microsoft agreed to acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the merger of a wholly-owned subsidiary of Microsoft with and into Nuance (the"Merger"), Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515.0 million (including in connection with our entry into an agreement with respect to a Superior Proposal, as defined in the Merger Agreement, if certain conditions are met). The consummation of the Merger remains subject to customary closing conditions, including satisfaction of certain regulatory approvals and other customary
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closing conditions. The Merger is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022.
For additional information related to the Merger Agreement, please refer to the definitive proxy statement previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about Nuance and the Merger.
Our Strategy
With recent sales, spin-offs and exits from various business lines, including most recently the sale of our medical transcription and EHR implementation businesses, we are positioned to be a simpler and more growth-oriented company, which enables us to prioritize and execute our conversational AI strategies within Healthcare and Enterprise. The key elements of our strategy include:
•Transitioning to and expansion of our Healthcare cloud-based offerings. We are transitioning our Healthcare solutions to the cloud, enabling us to shift our revenue mix to a more subscription-based, higher-value recurring model. We have established Nuance as a cloud platform in all our strategic solutions within Healthcare. During fiscal year 2021, we continued to make significant progress migrating our customers to the cloud with Dragon Medical One ("DMO"), PowerScribe One, and CDE One. We continued to bolster the sales of our newer cloud solutions, such as cloud-based Computer-Assisted Physician Documentation ("CAPD") solutions, and Nuance® Dragon Ambient eXperience™ (DAX™), an ambient clinical intelligence ("ACI") solution. We have created a go-to-market approach that aligns sales compensation to our cloud models, and have enabled our channel to sell Dragon Medical cloud. We also offer Dragon Medical cloud offerings in certain international markets, including UK, France, Belgium, Netherlands, Germany, and Finland.
•Expanding our Intelligent Engagement portfolio in Enterprise, with a focus on cloud. While we maintain leadership in interactive voice response ("IVR") offerings, we have increased our focus on Intelligent Engagement growth opportunities, including digital, voice, and Security and Biometrics solutions. We expanded the cloud-native stack with the roll-out of Nuance Mix™ and Intelligent Engagement Services for Conversational AI, Messaging, and Agent AI. We continue to grow our market share of Nuance Gatekeeper, a cloud-native voice biometrics and authentication solution. These solutions offer customers more flexible integration with third-party systems and the ability to deploy across hosted, public, or private clouds. It gives large enterprises flexible deployment options while making Nuance technology available to smaller organizations via the cloud model.
•Accelerating our innovation activities. We are accelerating investment in R&D, focusing on new AI products that deliver additional value to our existing customer base. In Healthcare we continued to expand the number of specialties supported by Nuance DAX and the capabilities of Nuance DAX for telehealth. Building on our DMO platform, we offer CAPD solutions for sub-specialties, including surgical, cardiovascular, and the emergency department, as well as new capabilities for the clinical documentation specialists through CDE One. Building on our large radiology installed base, we offer a suite of additional offerings for image sharing, communication, workflow orchestration, incidental findings follow-up, and the AI marketplace for Diagnostic Imaging in Healthcare. In Enterprise, building on our strong footprint in the Fortune 100 with IVR, we increase revenue, cost savings, and customer satisfaction through the addition of digital offerings and security and biometrics solutions for a seamless omnichannel experience. Enterprises have a choice of deployment whether they leverage our world-class professional services team or leverage Nuance Mix, an open enterprise-grade, SaaS tooling suite for creating advanced conversational experiences that power virtual assistants and IVR using Nuance’s industry-leading and cloud-agnostic conversational AI.
•Expanding our go-to-market presence. We are increasing sales coverage in new markets and developing solutions to build on our platform approach to increase our customer lifetime value. In Healthcare, we are pursuing under-served markets, including community hospitals, ambulatory clinics, and surgery centers. We also launched new solutions for specialty areas such as the emergency department, cardiovascular, and surgical. In Enterprise, we are expanding our Intelligent Engagement solutions into our existing IVR customer base and delivering new rapid AI development tools that will allow us to increase our penetration into mid-market accounts.
•Expanding internationally. In Healthcare, we continue to expand our international presence in the U.K., France, DACH region, Nordics, Australia, and Canada with a growing direct sales force and new offerings. In Enterprise, we continue to expand our international presence in the U.K., France, Spain, Germany, Italy, Japan, Australia, New Zealand, Mexico, Brazil, Argentina, and Canada with expanded Intelligent Engagement offerings and sales focus.
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•Growing through targeted acquisitions and strategic investments. While organic growth is our priority, we also expect to selectively and opportunistically pursue acquisitions and investments in businesses and technologies that advance the strategies described above.
Segments
As of September 30, 2021, we had three reportable segments: Healthcare, Enterprise, and Other. See Note 22 to the consolidated financial statements for additional information about our reportable segments. We offer our solutions and technologies to our customers in a variety of ways, including via hosted cloud-based solutions, perpetual and term software licenses, implementation and custom solution development services and maintenance and support. Our product revenues include traditional perpetual licensing, term-based licensing, royalties, and consumer sales. Our hosting, royalty, term license and maintenance and support revenues are recurring in nature as our customers use our products on an ongoing basis to handle their needs in clinical documentation, radiology diagnosis, and enterprise customer services. Our professional services offer a continuing revenue stream, whether it is provided in connection with our software solutions or on a standalone basis, as we have a backlog of engagements that take time to complete.
Healthcare
Our Healthcare segment provides intelligent systems that support a more natural and insightful approach to clinical documentation, freeing clinicians to spend more time caring for patients. Our Healthcare solutions capture, improve, and communicate more than 300 million patient stories each year, helping more than 550,000 clinicians in 10,000 global healthcare organizations to drive meaningful clinical and financial outcomes. Our clinical speech recognition, medical transcription, clinical documentation improvement ("CDI"), coding, quality, and medical imaging solutions provide a more complete and accurate view of patient care.
Our Healthcare segment revenues from continuing operations were $806.1 million, $720.2 million, and $700.6 million in fiscal years 2021, 2020 and 2019, respectively. Healthcare segment revenues represented 59.2%, 56.1% and 55.0% of total segment revenue in fiscal years 2021, 2020 and 2019, respectively. For each of fiscal years 2021, 2020 and 2019, no customer accounted for more than 10% of Healthcare revenue.
Our principal solutions for the Healthcare segment include the following:
•Dragon Medical One: Our cloud-based speech solution provides a consistent and personalized clinical documentation experience across solutions, platforms, and devices, regardless of physical location. DMO allows clinicians to use their voice to securely capture the patient story and control applications more naturally and efficiently - anywhere, anytime. DMO is HITRUST CSF-certified and uses a secure desktop app to keep data private and protected. It helps increase productivity and offers more flexibility and personalization while establishing a firm foundation for organizations to take advantage of new and future innovations, including virtual assistants and ACI.
•Computer-Assisted Physician Documentation: Powered by AI, our solutions give physicians in-workflow guidance to drive better outcomes across the continuum of care. Our CAPD solutions apply workflow and knowledge automation, proven clinical strategies and point-of-care advice to capture complete and accurate documentation while improving productivity and satisfaction. We make it easier to add specificity to existing diagnoses, discover evidence of undocumented diagnoses and support various specialties and care settings, including inpatient, outpatient, emergency medicine, surgical, and cardiovascular. Details are extracted from patient narratives for fast and accurate translation into discrete data, while coding assistance helps capture professional charges, improve quality and reduce retrospective queries.
•Diagnostic Imaging Solutions: Our diagnostic imaging solutions improve the efficiency and effectiveness of the radiologists’ work to improve clinical and financial outcomes across the continuum of care. Driving both speed and precision in how radiology is applied to patient care to maximize reimbursement, we reduce duplications and errors and help alleviate burnout. Using AI, we help automate time-consuming, non-value-added tasks, freeing radiologists to perform more important tasks. By focusing more on integrating patients’ clinical and imaging information and collaborating better with peers, we help radiologists uplift their role within the care team. Our industry-leading solutions for radiology deliver real-time intelligence in the workflow and include PowerScribe, which is used for 80% of radiology reports in the U.S. and PowerShare, which offers an image sharing network with more than 10,000 connected healthcare facilities. Our PowerScribe One cloud-based platform supports workflow orchestration,
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communication, incidental findings follow-up management, and works with our AI Marketplace for our diagnostic imaging solutions.
•Nuance® Dragon Ambient eXperience™: The Nuance DAX™ solution is a comprehensive, AI-powered, voice-enabled solution that uses ambient sensing technology to securely listen to clinician-patient encounter conversations while offering workflow and knowledge automation to complement the EHR. Exceeding the capabilities of a virtual or on-site scribe, Nuance DAX™ promotes a better patient experience by accurately capturing and appropriately contextualizing every word of the patient encounter and automatically documenting patient care without taking the physician's attention off the patient. The Nuance DAX™ solution is built on Microsoft Azure, a highly secure HITRUST CSF certified platform, compliant with the Health Information Technology for Economic and Clinical Health ("HITECH") Act, and that has implemented the physical, technical, and administrative safeguards required by HIPAA.
•Clinical Documentation Improvement and Coding: Our comprehensive portfolio of cloud-based technologies is designed to help increase the productivity and effectiveness of CDI teams. Our clinically focused program and services deliver documentation guidance, AI-powered encounter prioritization, workflow management, denials support and analytics to drive better documentation across the care continuum. Designed with scale and reliability in mind, these solutions require lower installation, deployment and maintenance costs and are hosted on Microsoft Azure, a HITRUST CSF-certified infrastructure to support privacy, security and compliance. We provide real-time insights that promote a performance-driven program, allow peer comparisons and identify opportunities for improvement. Our Coding solutions offer cloud-based, enterprise-wide products and services that are designed to improve coder productivity and maintain the highest levels of accuracy and compliance. These solutions effectively manage and monitor the types of compliance coding challenges that can put a health system at risk for delayed and reduced reimbursement. We help manage the workflow by bringing together the tools needed to provide better visibility into key coding performance indicators. Coder productivity can be enhanced by enabling a more complete and accurate review of both inpatient and outpatient encounters that are associated with facility and professional service fees.
The channels for distribution in the Healthcare segment utilize our direct sales force to address the market and our professional services organization to support the implementation requirements of the healthcare industry. Direct distribution is supplemented by distributors, resellers, and partnerships with a variety of healthcare IT providers.
Areas of expansion and focus for our Healthcare segment include innovation in AI and development of deeply verticalized and specialized intelligence to integrate with and further enhance our existing products; expansion of Nuance DAX which takes advantage of our cloud‑based speech recognition technology and benefits from increasing levels of workflow, task, and knowledge automation; investment in our cloud-based offerings, operations, and network security; entering new and adjacent markets such as ambulatory care; and expanding our international capabilities.
Enterprise
Our Enterprise segment is a leading provider of AI-powered intelligent customer engagement solutions and services, which enable enterprises and contact centers to enhance and automate customer service and sales engagement.
Our market-leading Intelligent Engagement platform powered by conversational AI has been recognized and awarded by independent industry research firms like Forrester, Gartner and Opus. We are also differentiated by our ability to enable enterprises to implement voice and text-based virtual assistants and to provide automated service and sales engagement across voice and digital channels, as well as the ability of our solutions to seamlessly transition to agent-assisted engagement to complete a customer service request. Our intelligent self-service solutions are highly secure, predictive, and accurate, resulting in increased customer acquisition and satisfaction while simultaneously reducing the costs associated with delivering customer service for the enterprise.
Our solutions and services portfolio now spans voice, behavioral and conversational biometrics, digital virtual assistant capabilities, across voice, mobile, web and messaging channels, with inbound and outbound customer service and engagement in over 85 languages for voice, text, dialog and natural language understanding ("NLU"). Our Enterprise segment utilizes a hybrid go-to-market model, selling both direct and through reseller partners.
Enterprise segment revenues were $535.4 million, $530.0 million, and $510.8 million in fiscal years 2021, 2020 and 2019, respectively. Enterprise segment revenues represented 39.3%, 41.3% and 40.1% of total segment revenues in fiscal years 2021,
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2020 and 2019, respectively. For each of fiscal years 2021, 2020 and 2019, no customer accounted for more than 10% of Enterprise revenue.
Our principal solutions for the Enterprise segment include the following:
•Intelligent Engagement Solutions: Our open, modular cloud platform provides enterprises with the ability to implement virtual- and live-engagement across nearly all digital voice and text channels. The platform supports virtual assistant, live engagement and proactive notification services, using our conversational AI, engagement AI and security AI capabilities. Our Intelligent Engagement cloud is sold both directly and through partners and largely in multi-year agreements with volume-based transactional pricing and associated professional services.
•Conversational AI: Nuance Mix™ is our open, enterprise-grade SaaS rapid application development suite that is used to create advanced conversational experiences that power virtual assistants and IVR systems, using our industry-leading and cloud-agnostic conversational AI. As global organizations increasingly look to integrate Conversational AI into their digital and voice customer engagements, the ability to build a conversational experience once and deploy it across nearly any channel and modality has become critical. Nuance Mix also allows these organizations to build, maintain and deliver the complex enterprise-grade conversational experiences that help brands provide automated customer service, acquire customers and increase sales. Our Conversational AI solutions are integrated with IVR systems provided to the customer by us or by a wide range of third-party IVR and contact center vendors, who often resell our Conversational AI solutions. Our solutions in this category include automated speech recognition ("ASR"), TTS, NLU and dialog engines. We also offer a cloud hosted IVR and voice automation platform which is largely sold direct through multi-year agreements with volume-based transactional pricing and associated professional services.
•Engagement AI: Our digital solutions include intelligent virtual assistants, agent AI and live engagement capabilities. This enables companies to engage with their customers on any voice and digital channel, with high levels of automated customer self-service – and should an agent be needed – using agent AI to reduce agent handle time. Our solutions support a design-once, deploy many approach, allowing companies to deliver the same or similar customer experience across any voice and digital channel, including IVR/phone, web, mobile apps and messaging systems, including SMS text messaging, and messaging systems and apps such as Apple Business Chat and Google Business Messages, Facebook Messenger and WhatsApp. Our Engagement AI solutions also enable contact center agents to be more productive by giving them easier access to information with relevant, real-time insights, visibility into active conversations, and proactive recommendations to improve the customer and agent experience.
•Security AI: These solutions enable organizations to automate the identification and verification of their customers while preventing fraud in digital and voice channels. Nuance Gatekeeper is our cloud-native biometric security platform that combines industry-leading voice and behavioral conversational biometrics with intelligent detectors and an underlying risk engine to authenticate customers, identify fraudsters, and detect cases of potential fraud – quickly and accurately. We license our on-premise solutions via term license, and occasionally via perpetual license plus maintenance and support ("M&S"). We license our cloud solutions via transactional and/or annual volume agreements, frequently with multi-year commitments.
Areas of focus and expansion for our Enterprise segment include increasing the penetration of our full portfolio into our large existing customer base; bringing our Intelligent Engagement cloud to new customers, the mid-market and new international markets, especially Western Europe, Japan and Australia; expansion of our security and biometrics cloud solution; and continued investment in our AI-powered solutions to ensure we retain leadership throughout our solutions.
Other
Our Other segment currently consists primarily of voicemail transcription services following the sale of our Mobile Operator Services business in 2019 and the wind-down of our Devices business.
Other segment revenues were $20.9 million, $33.9 million, and $61.5 million in fiscal years 2021, 2020 and 2019, respectively. Other segment revenues represented 1.5%, 2.6% and 4.8% of total segment revenues in fiscal years 2021, 2020 and 2019, respectively.
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Intellectual Property
Over our history, we have developed and acquired extensive technology assets, intellectual property, and industry expertise in ASR and NLU technologies that provide us with a competitive advantage in our markets. Our technologies are based on complex algorithms that require extensive amounts of acoustic and language models, and recognition and understanding techniques. A significant investment in capital and time would be necessary to replicate our current capabilities.
We continue to invest in technologies to maintain our market-leading position and to develop new applications. We rely on a portfolio of patents, copyrights, trademarks, services marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. As of September 30, 2021, we held approximately 2,020 patents and 250 patent applications.
Competition
The markets in which we compete are highly competitive and are subject to rapid technology changes. There are a number of companies that develop or may develop solutions and technologies that compete in our target markets; however, currently no company directly competes with us across all of our solutions and technologies. While we expect competition to continue to increase both from existing competitors and new market entrants, we believe that we will compete effectively based on many factors, including:
•Data Driven Technological Superiority. We have deep domain expertise and our conversational AI technologies, applications and solutions are often recognized as the most innovative and proficient in their respective categories. Our ASR and NLU solutions have industry-leading recognition accuracy and provide a natural, voice-enabled interaction with systems, devices and applications. This technological superiority and AI verticalization are driven by our massive data repository of over 3,000 terabytes aggregated over more than two decades. Technology publications, analyst research and independent benchmarks have consistently indicated that our solutions and technologies rank at or above performance levels of alternative solutions.
•Leverageable Base of Strategic Partnerships. We are able to leverage our strong partnerships with EHR vendors, imaging providers, and contact center infrastructure players to integrate tightly into the workflow of our clients, across clinical environments and customer service centers. Additionally, our strategic partnerships with leading technology firms allow us to accelerate the continued progress and delivery of a broad suite of offerings, through joint research, development, and selling efforts.
•Flexible Deployment with Specialized Professional Services. By providing the optionality of supporting various hosting environments as well as offering premise-based solutions, we are flexible in how our superior technology can be deployed to the world’s largest companies. This flexibility is coupled with the high quality and domain knowledge of our professional services organization, allowing our customers and partners to place a high degree of confidence and trust in our ability to deliver results. We support our customers in designing and building powerful innovative solutions that specifically address their needs and requirements.
•Privileged Footprint with Established, Long-Tenured Client Base. With a presence in 77% of U.S. hospitals and with 80% of radiologists, we are an established market leader within Healthcare. Our flagship product Dragon Medical has a user base of over 550,000 physicians and over 55% market share of the entire U.S. physician market, creating an exciting opportunity to deploy incremental AI solutions and added intelligence across our installed base. Within our Enterprise division, we service 85% of Fortune 100 companies, reinforcing our established position in the upper end of the market.
•International Coverage. The international reach of our solutions and technologies is due to the broad language coverage of our offerings, including our ASR and NLU solutions, which provide recognition for over 85 languages and dialects and natural-sounding synthesized speech in over 200 voices, and support a broad range of hardware platforms and operating systems.
•Broad Distribution Channels. Our ability to address the needs of specific markets, such as financial, law enforecement, healthcare and government, and to introduce new solutions and technologies quickly and effectively is provided by our direct sales force, our extensive global network of resellers, comprising of system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors, and our e-commerce website.
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Our Healthcare segment competes against Optum, Amazon, Google, 3M, Phillips, and other smaller competitors. Our Enterprise segment competes against [24]7, Amazon, Genesys, Google, LivePerson, Salesforce, and Pindrop, among other less frequent competitors. Additionally, a number of smaller companies in voice recognition, natural language understanding, and text input offer technologies or products that are competitive with our solutions.
Current and potential competitors have established, or may establish, cooperative relationships among themselves or with other parties to increase the ability of their technologies to address the needs of our prospective customers.
Some of our current or potential competitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do.
Employees
Our success as a company is made possible by our employees. We must attract, develop, and retain exceptional talent to meet the needs of our customers and create value for our stockholders. Our human capital management strategy is therefore of critical importance to the success of our company. This strategy is built on three key pillars: (1) Inclusion and Diversity, (2) Supporting our Employees, and (3) Growing and Developing our Talent.
As of September 30, 2021, we had approximately 6,900 full-time employees, including approximately 1,000 in sales and marketing, approximately 2,800 in hosting and maintenance and support services, approximately 700 in professional services, approximately 1,700 in R&D, and approximately 700 in general and administrative. Approximately 41% of our employees are based outside of the U.S. None of our employees in the U.S. are represented by a labor union. Employees of certain foreign subsidiaries are represented by labor unions or workers’ councils.
Inclusion and Diversity
Nuance’s AI solutions transform the way we connect and interact with each other, and that starts with a culture where everyone feels welcome, heard, and valued. Our team is stronger when our many diverse perspectives are celebrated – that’s how we deliver the best solutions for our company and our customers.
We are committed to inclusion and diversity at Nuance, and our management team is focused on fulfilling this commitment. We pay close attention to our diversity metrics to ensure we are making progress toward our goals. We measure gender, ethnicity, and age diversity, and our executive team reviews and discusses these metrics regularly. Nuance is also committed to pay equity and providing equal pay for equal work, regardless of gender, race, or other personal characteristics. We conduct pay-equity reviews to ensure we remain compliant and vigilant in providing fair pay.
At Nuance, we are focused on fostering a dynamic, diverse and inclusive workplace where each individual is celebrated for being themselves. We know that hiring people with diverse backgrounds and skillsets is a key ingredient for innovation, which is why our recruitment processes are built around improving our ability to identify the best, most diverse candidate pools. We ensure gender-neutral language in job descriptions and commit to bringing a diverse slate of candidates to a diverse interview panel at all levels of the company. We are also committed to creating an environment where our employees thrive both personally and professionally and creating opportunities for ongoing learning and dialogues that support an inclusive, diverse, and equitable culture.
Supporting our Employees
The physical and mental well-being of our employees and their families is a key priority, and we continue to expand our global benefits offerings to support our employees at every stage of their lives. We have specifically focused on ways to support our employees and their families through our policies, benefits, resources, and programs. Some examples of this include a global parental leave of 12 weeks, a phase back to work program for new parents, enhanced medical, dental, and vision plans, and significant enhancements to our family leave and bereavement policies to ensure our employees are able to take the time they need to take care of themselves and their loved ones. We have a variety of tools and resources for our employees to provide as much support as possible while working in changed and challenging circumstances, including providing our global employees access to a free premium subscription to a meditation app, along with various mental health resources. We provide a membership to an online marketplace to help our US employees to find child and elder care along with subsidized back up child/elder days. We also provide student loan refinancing support. Nuance continues to provide access to free employee assistance plans ("EAP") globally, mental health sessions, work/life balance support sessions, virtual yoga and fitness classes,
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and we have hosted a variety of virtual sessions for the family such as cooking demos, mindfulness for kids, and financial wellness.
Growing and Developing our Talent
We believe our technology is only as brilliant as the people who create it. From interns to executives, we encourage and support our employees to be life-long learners. By equipping our employees with tools and resources, and fostering an environment focused on personal and professional growth, we empower them to evolve our solutions and to work towards their unique career goals.
We know our best source of development and learning is each other – and we have created a variety of programs for our employees to support their development. Our global mentoring program, Mentoring Matters, allows employees to select mentors that share similar interests or have an area of expertise they wish to learn and develop in their current and future roles at Nuance. Additionally, we host monthly development workshops and product sessions with internal leaders and subject matter experts, publish monthly career development newsletters with information and resources for employees to expand their skillsets, and encourage our employees to use our multiple third-party learning platforms.
We are also focused on ensuring our people leaders have the resources and skills they need to be effective, support their teams, and deliver on the expectations we have of our managers at Nuance. This begins with our Manager Academy program, designed for all new and existing people managers to ensure that are supported and enabled to lead their teams. Our Leadership Academy, designed for mid- to senior-level leaders, is focused on delivering curated content and workshops tailored to their individual needs. Finally, Nuance sponsors a diverse group of senior leaders across the company to participate in a Harvard-sponsored executive leadership consortium. This consortium helps organizations accelerate leadership impact and build a diverse network of executives through a bespoke curriculum of business and leadership skills that enhance self-awareness, build confidence leading teams, and broaden the command of the business.
Information About Geographic Areas
We have offices in a number of international locations including Australia, Austria, Belgium, Canada, Germany, India, Ireland, Italy, Japan, and the U.K. The responsibilities of our international operations include research and development, customer support, sales and marketing and general and administrative. Additionally, we maintain smaller sales, services and support offices throughout the world to support our international customers and to expand international revenue opportunities.
Geographic revenue classification is based on the geographic areas in which our customers are located. For fiscal years 2021, 2020 and 2019, 80%, 79% and 80% of revenue from continuing operations was generated in the U.S. and 20%, 21% and 20% was generated by our international customers, respectively.
Corporate Information and Website
We were incorporated under the laws of the State of Delaware in 1992. Our website is located at www.nuance.com and we trade under the ticker symbol NUAN. We are not including the information contained in our website as part of, or incorporating it by reference into, this annual report on Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission ("SEC").
Item 1A.Risk Factors
You should carefully consider the risks and uncertainties described below when evaluating the company and when deciding whether to invest in the company. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do not currently believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditions described below actually occurs, our business, financial condition or our results of operations could be seriously harmed. If that happens, the trading price of our common stock could decline.
Risks Related to Our Business
Our liquidity, operations, business, financial condition, results of operations and cash flows may be adversely impacted by the novel coronavirus (COVID-19).
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On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The global spread of COVID-19 has created significant market volatility, uncertainty and economic disruption. The COVID-19 pandemic may adversely impact our business, financial condition, results of operations, liquidity and cash flows. While we have not experienced significant disruptions to our ability to conduct business thus far as a result of the pandemic, we are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications.
The extent to which the coronavirus pandemic will impact our business, operations, and financial results in the future will depend on numerous evolving factors that we may not be able to accurately predict, including:
•the duration and scope of the pandemic;
•governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;
•the actions taken in response to economic disruption;
•the impact of business disruptions on our customers and partners and the resulting impact on their demand for our products and services;
•our customers’ and partners’ ability to pay for our products and services; and
•our ability to provide our products and services, including as a result of our employees working remotely and/or closures of offices and facilities.
We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. Many of our customers are hospitals and other healthcare providers that are facing capital shortages and other changes to their businesses as they focus on fighting the pandemic. As a result, in particular with respect to our healthcare customers, our net new sales may be lower than expected; our ability to recognize revenue may be negatively impacted due to implementation delays, decreased utilization of certain products such as our PowerScribe and DAX solutions, decrease in volumes where we have transaction-based revenue, or other factors; our collections may be delayed, which will negatively affect our cash flows; some customers may go out of business, and we will be unsecured creditors and may not be able to collect what we are owed; our ability to provide 24x7 worldwide support to our customers may be affected; and our employees’ productivity may be negatively impacted as a result of almost all of our workforce working from home. The pandemic and accompanying market volatility, uncertainty and economic disruption may also have the effect of heightening many of the other risks described in the “Risk Factors” set forth in this Annual Report on Form 10-K. The ultimate impact of the COVID-19 pandemic and the effects of the operational changes we have made in response cannot be accurately predicted at this time.
The markets in which we operate are highly competitive and rapidly changing and we may be unable to compete successfully.
There are a number of companies that develop or may develop products that compete in our targeted markets. The markets for our products and services are characterized by intense competition, evolving industry and regulatory standards, emerging business and distribution models, disruptive software and hardware technology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product introductions, including alternatives for certain of our products that offer limited functionality at significantly lower costs or free of charge. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospective customers. Furthermore, there has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions.
The competition in our targeted markets could adversely affect our operating results by reducing the volume of the products and solutions we license or sell or the prices we can charge. Some of our current or potential competitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do, and in certain cases may be able to include or combine their competitive products or technologies with other of their products or technologies in a manner whereby the competitive functionality is available at lower cost or free of charge within the larger offering. To the extent they do so, market acceptance and penetration of our products, and therefore our revenue and bookings, may be adversely affected. Our success depends substantially upon our ability to enhance our products and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological
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enhancements. If we are unable to develop or acquire new products and enhance functionalities or technologies to adapt to these changes our business will suffer.
Our operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.
Our revenue, bookings and operating results have fluctuated materially in the past and we expect such fluctuations to continue in the future. These fluctuations may cause our results of operations not to meet the expectations of securities analysts or investors which would likely cause the price of our stock to decline. Factors that may contribute to fluctuations in operating results include:
•volume, timing and fulfillment of customer orders and receipt of royalty reports;
•fluctuating sales by our channel partners to their customers;
•customers delaying their purchasing decisions in anticipation of new versions of our products;
•contractual counterparties failing to meet their contractual commitments to us;
•introduction of new products by us or our competitors;
•cybersecurity or data breaches;
•seasonality in purchasing patterns of our customers;
•reduction in the prices of our products in response to competition, market conditions or contractual obligations;
•returns and allowance charges in excess of accrued amounts;
•timing of significant marketing and sales promotions;
•impairment of goodwill or intangible assets;
•the pace of the transition to an on-demand and transactional revenue model;
•delayed realization of synergies resulting from our acquisitions;
•accounts receivable that are not collectible and write-offs of excess or obsolete inventory;
•increased expenditures incurred pursuing new product or market opportunities;
•higher than anticipated costs related to fixed-price contracts with our customers;
•change in costs due to regulatory or trade restrictions;
•expenses incurred in litigation matters, whether initiated by us or brought by third parties against us, and settlements or judgments we are required to pay in connection with disputes; and
•general economic trends as they affect the customer bases into which we sell.
Due to the foregoing factors, among others, our revenue, bookings and operating results are difficult to forecast. Our expense levels are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to near-term shortfalls in projected revenue. Therefore, our failure to meet revenue expectations would seriously harm our operating results, financial condition and cash flows.
A significant portion of our revenue and bookings are derived, and a significant portion of our research and development activities are based, outside the United States. Our results could be harmed by economic, political, regulatory, foreign currency fluctuation and other risks associated with these international regions.
Because we operate worldwide, our business is subject to risks associated with doing business internationally. We generate most of our international revenue and bookings in Canada and Europe, and we anticipate that revenue and bookings from international operations could increase in the future. In addition, some of our products are developed outside the United States and we have a large number of employees in India who provide transcription and development services, and we also have a large number of employees in Canada, Germany and the United Kingdom who provide professional services. We conduct a significant portion of the development of our voice recognition and natural language understanding solutions in Canada and Germany. We also have significant research and development resources in Austria, Belgium, Italy, and the United Kingdom. We are exposed to fluctuating exchange rates of foreign currencies including the Euro, British pound, Australian dollar, Canadian dollar, Japanese yen, and Indian rupee. Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including:
•adverse political and economic conditions, or changes to such conditions, in a specific region or country;
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•trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such as Canada or the European Union;
•the impact on local and global economies of the United Kingdom leaving the European Union;
•changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;
•compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;
•geopolitical turmoil, including terrorism and war;
•changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions;
•evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United States pursuant to the Foreign Investment Risk Preview Modernization Act;
•changes in applicable tax laws;
•difficulties in staffing and managing operations in multiple locations in many countries;
•longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and
•less effective protection of intellectual property outside the United States.
If we are unable to attract and retain key personnel, our business could be harmed.
To execute our business strategy, we must attract and retain highly qualified personnel. If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Although we have arrangements with some of our executive officers designed to promote retention, our employment relationships are generally at-will and we have had key employees leave in the past. We cannot assure you that one or more key employees will not leave in the future. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing software, as well as for skilled information technology, marketing, sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications. In particular, we have experienced a competitive hiring environment in the Greater Boston area, where we are headquartered. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the equity incentives they are to receive in connection with their employment. If the price of our stock declines, or experiences significant volatility, our ability to attract or retain key employees will be adversely affected. We intend to continue to hire additional highly qualified personnel, including research and development and operational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.
Cybersecurity and data privacy incidents or breaches may damage client relations and inhibit our growth.
The confidentiality and security of our information, and that of third parties, is critical to our business. Our services involve the transmission, use, and storage of our customers’ and their customers' confidential information. We were the victim of a cybercrime in 2017, and future cybersecurity or data privacy incidents could have a material adverse effect on our results of operations and financial condition. While we maintain a broad array of information security and privacy measures, policies and practices, our networks may be breached through a variety of means, resulting in someone obtaining unauthorized access to our information, to information of our customers or their customers, or to our intellectual property; disabling or degrading service; or sabotaging systems or information. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees, contractors, and vendors. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We will continue to incur significant costs to continuously enhance our information security measures to defend against the threat of cybercrime. Any cybersecurity or data privacy incident or breach may result in:
•loss of revenue resulting from the operational disruption;
•loss of revenue or increased bad debt expense due to the inability to invoice properly or to customer dissatisfaction resulting in collection issues;
•loss of revenue due to loss of customers;
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•material remediation costs to restore systems;
•material investments in new or enhanced systems in order to enhance our information security posture;
•cost of incentives offered to customers to restore confidence and maintain business relationships;
•reputational damage resulting in the failure to retain or attract customers;
•costs associated with potential litigation or governmental investigations;
•costs associated with any required notices of a data breach;
•costs associated with the potential loss of critical business data; and
•other consequences of which we are not currently aware but will discover through the remediation process.
Our business is subject to a variety of domestic and international laws, rules, policies and other obligations including data protection, anticorruption and health care reimbursement.
We must comply with, numerous, and sometimes conflicting, legal regimes on matters such as data privacy and protection, anticorruption, employment and labor relations, tax, foreign currency, anti-competition, import/export controls, trade regulations, immigration, anti-kickback laws and healthcare reimbursement laws. The global nature of our operations increases the difficulty of compliance. Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these laws in the conduct of our business could result in significant fines, criminal sanctions against us and/or our employees, prohibitions on doing business, breach of contract damages and harm to our reputation.
In particular, we are subject to a complex array of federal, state and international laws relating to the collection, use, retention, disclosure, security and transfer of personally identifiable information and personal health information, with additional laws applicable in some jurisdictions depending on the type of data collected or where the information is collected from children. In many cases, these laws apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. Many of the laws passed in this area are relatively new and their interpretation is evolving and changing. In the United States, the California Consumer Privacy Act ("CCPA"), went into effect in January 2020. The CCPA imposes privacy and data security obligations on companies and provides California consumers with certain rights as data subjects. Several other U.S. states have proposed data privacy laws that impose similar but non-identical obligations. In addition, some states have passed laws imposing increased data security and breach notification obligations on companies operating in the U.S. In the EU, the European General Data Protection Regulation (the “GDPR”), which went into effect in May 2018, imposes privacy and data security compliance obligations and significant penalties for noncompliance. The GDPR presents numerous privacy-related changes for companies operating in the EU, including rights guaranteed to data subjects, requirements for data portability for EU consumers, data breach notification requirements and significant fines for noncompliance. In GDPR enforcement matters, companies have faced fines for violations of certain provisions. Fines can reach as high as 4% of a company’s annual total revenue, potentially including the revenue of a company’s international affiliates. On July 16, 2020, the Court of Justice of the European Union issued a decision that invalidates the EU-U.S. Privacy Shield framework, a mechanism that companies had previously relied on to transfer information between the EU and U.S., on the basis that such transfer mechanism does not comply with the level of protection required under the GDPR. There is also an increase in regulation of biometric data globally, which may include voiceprints. In addition, we are subject to laws relating specifically to personal health information, including the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and HITECH Act.
Changes in these data privacy and protection laws and regulations and inconsistencies in the standards that apply to our business in different jurisdictions may impose significant compliance costs, reduce the efficiency of our operations, expose us to enforcement risks, and materially adversely affect our ability to market and sell our products and solutions. Any alleged or actual failure by us, our customers, suppliers or other parties with whom we do business to comply with federal, state or international privacy-related or data protection laws and regulations could cause our customers to lose confidence in our solutions; harm our reputation; expose us to litigation, regulatory investigations and to resulting liabilities including reimbursement of customer costs, damages penalties or fines imposed by regulatory agencies, and require us to incur significant expenses for remediation.
We are also subject to a variety of anticorruption laws in respect of our international operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the Canadian Corruption of Foreign Public Officials Act, and regulations issued by the U.S. Customs and Border Protection, the U.S. Bureau of Industry and Security, the U.S Treasury Department’s Office of Foreign Assets Control, and various other foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing
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laws might be administered or interpreted. Actual or alleged violations of these laws and regulations could lead to enforcement actions and financial penalties that could result in substantial costs.
Many of our customers are subject to various federal and state laws concerning their submission of claims for reimbursement by Medicare, Medicaid and other federal and state government-sponsored health care programs. Such laws include the federal False Claims Act (the “False Claims Act”), the federal anti-kickback statute, state false claims acts and anti-kickback statutes in most states, the federal “Stark Law” and related state laws. In particular, the False Claims Act prohibits knowingly submitting, conspiring to submit, or causing to be submitted, false claims, records, or statements to the federal government, or knowingly and improperly failing to return overpayments, in connection with reimbursement by federal government programs and can be used as a vehicle to enforce each of these other laws. Claims under federal and state false claims acts can be brought by the government or by private individuals on behalf of the government through a qui tam or “whistleblower” suit. If there is an adverse decision against us or our customers under these laws relating to use of our products or solutions, we may be required to pay damages, significant fines and/or other monetary penalties, and our ability to market and sell such products or solutions to customers may be materially adversely impacted.
Interruptions or delays in our services, including from data center hosting facilities, could impair the delivery of our services and harm our business.
Because our services are complex and incorporate a variety of third-party hardware and software, our services may have errors or defects that could result in unanticipated downtime for our customers and harm to our reputation and our business. We have from time to time, found defects in our services, and new errors in our services may be detected in the future. In addition, we currently serve our customers from data center hosting facilities we directly manage and from third party public cloud facilities. Any damage to, or failure of, the systems that serve our customers in whole or in part could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay service-level agreement penalties, cause customers to terminate their on-demand services, and adversely affect our renewal rates and our ability to attract new customers.
We may be unable to fully capture the expected value from strategic transactions.
As part of our business strategy, we have in the past acquired and divested, and expect to continue to acquire and may divest, other businesses and technologies. We also expect to from time to time pursue other strategic transactions including divestitures, joint ventures, minority stakes and strategic alliances. Our acquisitions and divestitures have required substantial integration and management efforts, and we expect future acquisitions, divestitures and other strategic transactions to require similar efforts. Successfully realizing the benefits of acquisitions, divestitures and other strategic transactions involves a number of risks, including:
•difficulty in transitioning and integrating the operations and personnel of the acquired businesses;
•difficulty in separating the operations, personnel and systems of divested businesses:
•potential negative impact on our profitability as a result of losses that may result from a divestiture, including the loss of sales and operating income or decrease in cash flows;
•retained exposure on financial guarantee leases, real estate and other contractual, employment, pension and severance obligations of divested business, and potential liabilities that may arise under law as a result of the disposition or the subsequent failure of an acquirer;
•potential disruption of our ongoing business and distraction of management;
•difficulty in incorporating acquired products and technologies into our products and technologies;
•potential difficulties in completing projects associated with in-process research and development;
•unanticipated expenses and delays in completing acquired development projects and technology integration and upgrades;
•challenges associated with managing additional, geographically remote businesses;
•impairment of relationships with partners and customers;
•assumption of unknown material liabilities of acquired companies;
•the accuracy of revenue and bookings projections of acquired companies;
•customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;
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•entering markets or types of businesses in which we have limited experience; and
•potential loss of key employees of the acquired business or loss of key employees of a divested business.
As a result of these and other risks, we may not realize the anticipated benefits from our acquisitions, divestitures, and other strategic transactions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies or disaggregate divested businesses and technologies could seriously harm our business.
Charges to earnings as a result of our acquisitions may adversely affect our operating results in the foreseeable future, which could have a material and adverse effect on the market value of our common stock.
Under accounting principles generally accepted in the United States, we record the market value of our common stock and other forms of consideration issued in connection with an acquisition as the cost of acquiring the company or business. We allocate that cost to the individual assets acquired and liabilities assumed, including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customer relationships, based on their respective fair values. We base our estimates of fair value upon assumptions believed to be reasonable, but which are inherently uncertain. After we complete an acquisition, the following factors could result in material charges and may adversely affect our operating results and cash flows:
•costs incurred to integrate the operations of businesses we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses;
•impairment of goodwill or intangible assets;
•amortization of intangible assets acquired;
•a reduction in the useful lives of intangible assets acquired;
•identification of or changes to assumed contingent liabilities, both income tax and non-income tax related, after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;
•charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce our cost structure;
•charges to our operating results arising from expenses incurred to effect the acquisition; and
•charges to our operating results due to the expensing of stock awards assumed in acquisitions.
Intangible assets are generally amortized over three to ten years. Goodwill is not subject to amortization but is subject to an impairment analysis, at least annually, which may result in an impairment charge if the carrying value exceeds its implied fair value. As of September 30, 2021, we recorded goodwill of $2,155.3 million and intangible assets of $128.3 million, net of accumulated amortization and impairment charges. In addition, purchase accounting limits our ability to recognize certain revenue that otherwise would have been recognized by the acquired company as an independent business. As a result, the combined company may delay revenue recognition or recognize less revenue than we and the acquired company would have recognized as independent companies.
Impairment of our intangible assets could result in significant charges that would adversely impact our future operating results.
We have significant intangible assets, including goodwill and other intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant intangible assets are customer relationships, patents and core technologies, technologies and trademarks. Customer relationships are amortized on an accelerated basis based upon the pattern in which the economic benefits of customer relationships are being utilized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. We assess the potential impairment of intangible assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment of such assets include the following:
•significant adjustments to our multi-year operating plans, in connection with our ongoing portfolio review;
•changes in our organization or management reporting structure that could result in additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit;
•significant under performance relative to historical or projected future operating results;
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•significant changes in the manner of or use of the acquired assets or the strategy for our overall business;
•significant negative industry or economic trends;
•significant decline in our stock price for a sustained period; and
•our market capitalization declining to below net book value.
Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact our results of operations and financial position in the reporting period identified.
We have grown, and may continue to grow, through acquisitions, which could dilute our existing stockholders and/or increase our debt levels.
In connection with past acquisitions, we have in the past issued a substantial number of shares of our common stock as transaction consideration, including contingent consideration, and also incurred significant debt to finance the cash consideration used for our acquisitions. We may continue to issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly, depending on the terms of such acquisitions. We may also incur additional debt in connection with future acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business.
Our strategy to transition to cloud-based recurring revenue may adversely affect our near-term revenue growth and results of operations.
We expect our ongoing shift from a software license model to cloud-based services revenue models to create a recurring revenue stream that is more predictable. The transition, however, creates risks related to the timing of revenue recognition. We also incur certain expenses associated with the infrastructures and selling efforts of our hosting offerings in advance of our ability to recognize the revenues associated with these offerings, which may adversely affect our near-term reported revenues, results of operations and cash flows. A decline in renewals of recurring revenue offerings in any period may not be immediately reflected in our results for that period but may result in a decline in our revenue and results of operations in future quarters.
We have a history of operating losses, and may incur losses in the future, which may require us to raise additional capital on unfavorable terms.
We had a total accumulated deficit of $298.9 million and $272.2 million as of September 30, 2021 and 2020, respectively. If we are unable to return to and sustain our profitability, the market price for our stock may decline, perhaps substantially. We cannot assure you that our revenue or bookings will grow or that we will sustain profitability in the future. If we do not achieve profitability, we may be required to raise additional capital to maintain or grow our operations. Additional capital, if available at all, may be highly dilutive to existing investors or contain other unfavorable terms, such as a high interest rate and restrictive covenants.
Tax matters may cause significant variability in our financial results.
Our businesses are subject to income taxation in the United States, as well as in many tax jurisdictions throughout the world. Tax rates in these jurisdictions may be subject to significant change. If our effective tax rate increases, our operating results and cash flow could be adversely affected. Our effective income tax rate and cash tax payments can vary significantly between periods due to a number of complex factors including:
•projected levels of taxable income;
•pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates;
•increases or decreases to valuation allowances recorded against deferred tax assets;
•tax audits conducted and settled by various tax authorities, either through administrative appeals, litigation or other dispute resolution methods;
•adjustments to income taxes upon finalization of income tax returns;
•the ability to claim foreign tax credits;
•the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; and
•changes in tax laws and their interpretations in countries in which we are subject to taxation.
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In December 2017, the United States enacted the Tax Cut and Jobs Act of 2017. We expect this to continue having a material impact on our tax financial results under United States generally accepted accounting principles. Future changes in U.S. and non-U.S. tax laws and regulations could have a material effect on our results of operations in the periods in which such laws and regulations become effective as well as in future periods. In the United States, such law changes could include new tax revenue raising provisions tied to the proposed “Build Back Better” Act which is currently under consideration in Congress. Globally, the OECD Inclusive Framework on Base Erosion and Profit shifting is advancing fundamental changes to the international corporate tax system creating new rules for the allocation of rights to tax global income and a global minimum tax.
The failure to successfully maintain the adequacy of our system of internal control over financial reporting could have a material adverse impact on our ability to report our financial results in an accurate and timely manner.
Under the Sarbanes-Oxley Act of 2002, we were required to develop and are required to maintain an effective system of disclosure controls and internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. In addition, our management is required to assess and certify the adequacy of our controls on a quarterly basis, and our independent auditors must attest and report on the effectiveness of our internal control over financial reporting on an annual basis. Any failure in the effectiveness of our system of internal control over financial reporting could have a material adverse impact on our ability to report our financial statements in an accurate and timely manner. Inaccurate and/or untimely financial statements could subject us to regulatory actions, civil or criminal penalties, stockholder litigation, or loss of customer confidence, which could result in an adverse reaction in the financial marketplace and ultimately could negatively impact our stock price due to a loss of investor confidence in the reliability of our financial statements.
Our sales to government clients subject us to risks, including early termination, audits, investigations, sanctions and penalties.
We derive a portion of our revenues and bookings from arrangements with governmental users in the U.S., the U.K. and elsewhere, contracts with the government in the U.S., the U.K. and elsewhere, as well as various state and local governments, and their respective agencies. Government contracts are generally subject to oversight, including audits and investigations which could identify violations of these agreements. Government contract violations could result in a range of consequences including, but not limited to, contract price adjustments, civil and criminal penalties, contract termination, forfeiture of profit and/or suspension of payment, and suspension or debarment from future government contracts. We could also suffer serious harm to our reputation if we were found to have violated the terms of our government contracts.
Risks Related to the Merger
The announcement and pendency of the Merger may result in disruptions to our business.
On April 11, 2021, we entered into the Merger Agreement with Microsoft, pursuant to which we will be acquired by Microsoft in an all-cash transaction. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger and restricts us, without Microsoft’s consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.
Further, in connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel while the Merger is pending. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger, and may depart prior to the consummation of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain key employees to the same extent that we have been able to in the past.
The proposed Merger further could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the Merger may place a significant burden on management and internal resources. It may also divert management’s time and attention from the day-to-day operation of our remaining businesses and the execution of our other
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strategic initiatives. This could adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the pending Merger is consummated.
Any of the foregoing could adversely affect our business, our financial condition and our results of operations and prospects.
The Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business, results of operations, financial condition, and the market price of our common stock.
There can be no assurance that the Merger will be completed in the expected timeframe, or at all. The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Merger, including, among others, the approval or clearance of the Merger under the antitrust and foreign investment laws of certain specified countries. There can be no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required approvals are obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or that the Merger will be completed in a timely manner or at all. Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if regulatory approval is obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Merger or otherwise have an adverse effect on us.
If the Merger is not completed within the expected timeframe or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Merger, for which we will have received little or no benefit if completion of the Merger does not occur. We may also experience negative reactions from our investors, customers, partners, suppliers, and employees. In addition, if the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515.0 million.
Stockholder litigation could prevent or delay the closing of the pending Merger or otherwise negatively impact our business, operating results and financial condition.
We may incur additional costs in connection with the defense or settlement of any future stockholder litigation in connection with the pending Merger. Such litigation may adversely affect our ability to complete the pending Merger. We could incur significant costs in connection with any such litigation, including costs associated with the indemnification of obligations to our directors.
Risks Related to Our Intellectual Property and Technology
Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significant litigation or licensing expenses or be prevented from selling our products if such claims are successful.
From time to time, we are subject to claims and legal actions alleging that we or our customers may be infringing or contributing to the infringement of the intellectual property rights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and products. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses from some or all claimants, the terms of any offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation. Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business.
Unauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.
Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products and services. We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets,
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confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy or discover aspects of our products or to obtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to our technologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can divert management efforts.
Our software products may have bugs, which could result in delayed or lost revenue and bookings, expensive correction, liability to our customers and claims against us.
Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to our customers could require expensive corrections and result in delayed or lost revenue and bookings, adverse customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.
Risks Related to our Indebtedness, Investments and Common Stock
Our debt agreements contain covenant restrictions that may limit our ability to operate our business.
Our debt agreements contain, and any of our other future debt agreements or arrangements may contain, covenant restrictions that limit our ability to operate our business, including restrictions on our ability to:
•incur additional debt or issue guarantees;
•create liens;
•make certain investments;
•enter into transactions with our affiliates;
•sell certain assets;
•repurchase capital stock or make other restricted payments;
•declare or pay dividends or make other distributions to stockholders; and
•merge or consolidate with any entity.
Our ability to comply with these limitations is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. As a result of these limitations, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. In addition, our failure to comply with our debt covenants could result in a default under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay the accelerated debt.
Our significant debt could adversely affect our financial health and prevent us from fulfilling our obligations under our credit facility and our convertible debentures.
We have a significant amount of debt. As of September 30, 2021, we had $918.0 million outstanding principal of debt, including $500.0 million of senior notes due in 2026, $25.1 million of 1.5% 2035 Convertible Debentures redeemable in November 2021, $130.3 million of 1.0% 2035 Convertible Debentures redeemable in December 2022, and $262.6 million of 1.25% 2025 Convertible Debentures redeemable in April 2025. Investors may require us to redeem these convertible debentures earlier than the dates indicated if the closing sale price of our common stock is more than 130% of the then current conversion price of the respective debentures for certain specified periods. If a holder elects to convert, we will be required to pay the principal amount in cash and any amounts payable in excess of the principal amount in cash or shares of our common stock, at
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our election. For example, during the third quarter of fiscal year 2021, holders of $118.3 million of our 1.5% 2035 Convertible Debentures exercised their rights to require us to repurchase such debentures. We also have a $300.0 million Revolving Credit Facility under which $1.9 million was committed to backing outstanding letters of credit issued and $298.1 million was available for borrowing at September 30, 2021. Our debt level could have important consequences. For example, it could:
•require us to use a large portion of our cash flow to pay principal and interest on debt, including the convertible debentures and the credit facility, which will reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development, exploit business opportunities, and undertake other business activities;
•place us at a competitive disadvantage compared to our competitors that have less debt; and
•limit, along with the financial and other restrictive covenants related to our debt, our ability to borrow additional funds, dispose of assets or pay cash dividends.
Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our payment obligations under the convertible debentures and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including the convertible debentures, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the convertible debentures and our other debt.
Current uncertainty in the global financial markets and the global economy may negatively affect the value of our investment portfolio.
Our investment portfolios, which include investments in money market funds, bank deposits and separately managed investment portfolios, are generally subject to credit, liquidity, counterparty, market and interest rate risks that may be exacerbated by a global financial crisis or by uncertainty surrounding the terms of the United Kingdom's relationship with the European Union or recent changes in tariffs and trade agreements. If the banking system or the fixed income, credit or equity markets deteriorate or remain volatile, our investment portfolio may be impacted, and the values and liquidity of our investments could be adversely affected.
The market price of our common stock has been and may continue to be subject to wide fluctuations, and this may make it difficult for our stockholders to resell the common stock when they want or at prices they find attractive.
Our stock price historically has been, and may continue to be, volatile. Various factors contribute to the volatility of our stock price, including, for example, the status of the potential Merger, quarterly variations in our financial results, new product introductions by us or our competitors and general economic and market conditions. Sales of a substantial number of shares of our common stock by our largest stockholders, or the perception that such sales could occur, could also contribute to the volatility or our stock price. While we cannot predict the individual effect that any of these factors may have on the market price of our common stock, these factors, either individually or in the aggregate, could result in significant volatility in our stock price. Moreover, companies that have experienced volatility in the market price of their stock may be subject to securities class action litigation. Any such litigation could result in substantial costs and divert management's attention and resources.
Future issuances of our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
Future issuances of substantial amounts of our common stock, whether in the public market or through private placements, including issuances in connection with acquisition activities, or the perception that such issuances could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. In connection with past acquisitions, we issued a substantial number of shares of our common stock as transaction consideration or contingent consideration. We may continue to issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly depending on the terms of such acquisitions. No prediction can be made as to the effect, if any, that future sales of shares of common stock, or the availability of shares of common stock for future sale, will have on the trading price of our common stock.
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Our business could be negatively affected by the actions of activist stockholders.
In the past, certain stockholders have publicly and privately expressed concerns with our performance and with certain governance matters. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Furthermore, any perceived uncertainties as to our future direction could result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners. In addition, we have enacted certain changes to our bylaws in the past year that may weaken our ability to prevent an unsolicited takeover.
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our corporate headquarters are located in Burlington, Massachusetts. As of September 30, 2021, we leased approximately 941,000 square feet of building space, primarily in the United States, and to a lesser extent, in the Asia-Pacific regions, Europe and Canada. Larger leased sites include properties located in Montreal, Canada and Bangalore, India. In addition, we own 130,000 square feet of building space located in Melbourne, Florida.
We also include in the total square feet leased space leased in specialized data centers in Massachusetts, Washington, Texas, Colorado, and smaller facilities around the world.
We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of our business.
Item 3.Legal Proceedings
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. We evaluate the probability of adverse outcomes and, as applicable, estimate the amount of probable losses that may result from pending matters. Probable losses that can be reasonably estimated are reflected in our consolidated financial statements. These recorded amounts are not material to our consolidated financial statements for any of the periods presented in the accompanying consolidated financial statements. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our results of operations or financial position. However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows.
Item 4.Mine Safety Disclosures
Not applicable.
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PART II
Item 5.Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol “NUAN”.
As of October 31, 2021, there were 531 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business, or to purchase common stock under our share repurchase program and do not anticipate paying any cash dividends in the foreseeable future. Furthermore, the terms of our debt agreements place restrictions on our ability to pay dividends.
Stock Performance Graph
The following performance graph compares the Company’s cumulative total return on its common stock between September 30, 2016 and September 30, 2021 to the cumulative total return of the Russell 2000, and to the S&P Information Technology indices assuming $100 was invested in the Company’s common stock and each of the indices upon the closing of trading on September 30, 2016 and assuming the reinvestment of dividends, if any. The Company has have never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
* $100 invested on September 30, 2016 in stock or index, including reinvestment of dividends, for each of the fiscal years below.
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| 9/16 | 9/17 | 9/18 | 9/19 | 9/20 | 9/21 | ||||||||||||||||||
| Nuance Communications, Inc. | 100.00 | 108.41 | 119.45 | 112.48 | 264.58 | 438.77 | |||||||||||||||||
| Russell 2000 | 100.00 | 120.74 | 139.14 | 126.77 | 127.27 | 187.94 | |||||||||||||||||
| S&P Software & Services Select | 100.00 | 119.45 | 166.04 | 171.39 | 221.20 | 334.51 | |||||||||||||||||
Issuer Purchases of Equity Securities
The following is a summary of our share repurchases for the three months ended September 30, 2021:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) | ||||||||||||||||||||||
| July 1, 2021 - July 31, 2021 | — | $ | — | — | $261.2 Million | |||||||||||||||||||||
| August 1, 2021 - August 31, 2021 | — | $ | — | — | $261.2 Million | |||||||||||||||||||||
| September 1, 2021 - September 30, 2021 | — | $ | — | — | $261.2 Million | |||||||||||||||||||||
| Total | — | — | ||||||||||||||||||||||||
__________
(1) On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. The program has no expiration date. As of September 30, 2021, approximately $261.2 million remained available for future repurchases under the program.
For the majority of restricted stock units granted to employees, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory income withholding tax requirements that we pay in cash to the applicable taxing authorities on behalf of our employees. We do not consider these transactions to be common stock repurchases.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 6.Selected Consolidated Financial Data
The following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
| Fiscal Year Ended September 30, | |||||||||||||||||||||||||||||
| (In millions, except per share amounts) | 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||
| (ASC 606) | (ASC 606) | (ASC 606) | (ASC 605) | (ASC 605) | |||||||||||||||||||||||||
Continuing Operations (a): | |||||||||||||||||||||||||||||
| Total revenues | $ | 1,362.4 | $ | 1,283.8 | $ | 1,271.2 | $ | 1,222.1 | $ | 1,129.7 | |||||||||||||||||||
| Gross profit | $ | 833.4 | $ | 762.8 | $ | 741.3 | $ | 706.8 | $ | 605.0 | |||||||||||||||||||
| Income (loss) from operations | $ | 82.7 | $ | 58.7 | $ | 42.5 | $ | (255.1) | $ | (161.3) | |||||||||||||||||||
| Provision (benefit) for income taxes | $ | 5.4 | $ | (30.9) | $ | (23.2) | $ | (100.6) | $ | (31.9) | |||||||||||||||||||
| Net loss from continuing operations | $ | (17.4) | $ | (13.0) | $ | (41.6) | $ | (284.1) | $ | (299.9) | |||||||||||||||||||
| Net Loss Per Share - continuing operations: | |||||||||||||||||||||||||||||
| Basic | $ | (0.06) | $ | (0.05) | $ | (0.15) | $ | (0.98) | $ | (1.04) | |||||||||||||||||||
| Diluted | $ | (0.06) | $ | (0.05) | $ | (0.15) | $ | (0.98) | $ | (1.04) | |||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||||||||
| Basic | 294.6 | 282.6 | 286.3 | 291.3 | 289.3 | ||||||||||||||||||||||||
| Diluted | 294.6 | 282.6 | 286.3 | 291.3 | 289.3 | ||||||||||||||||||||||||
| Financial Position: | |||||||||||||||||||||||||||||
| Cash and cash equivalents and marketable securities | $ | 209.5 | $ | 372.3 | $ | 764.8 | $ | 473.5 | $ | 874.1 | |||||||||||||||||||
| Total assets | $ | 3,386.7 | $ | 3,593.3 | $ | 5,365.8 | $ | 5,302.4 | $ | 5,931.9 | |||||||||||||||||||
| Total debt | $ | 867.9 | $ | 1,536.7 | $ | 1,936.4 | $ | 2,185.4 | $ | 2,617.4 | |||||||||||||||||||
Total deferred revenue (a) | $ | 349.1 | $ | 348.2 | $ | 325.1 | $ | 396.7 | $ | 353.5 | |||||||||||||||||||
| Total stockholders’ equity | $ | 1,634.9 | $ | 1,143.9 | $ | 2,173.2 | $ | 1,717.5 | $ | 1,931.4 | |||||||||||||||||||
Selected Data and Ratios (a): | |||||||||||||||||||||||||||||
Working capital (b) | $ | (324.8) | $ | (256.5) | $ | (567.6) | $ | 230.0 | $ | (101.9) | |||||||||||||||||||
| Depreciation of property and equipment | $ | 33.7 | $ | 30.5 | $ | 36.1 | $ | 42.5 | $ | 35.6 | |||||||||||||||||||
| Amortization of intangible assets | $ | 59.3 | $ | 65.2 | $ | 65.2 | $ | 86.5 | $ | 102.1 | |||||||||||||||||||
| Gross margin percentage | 61.2 | % | 59.4 | % | 58.3 | % | 57.8 | % | 53.6 | % | |||||||||||||||||||
__________
(a) Amounts for all periods exclude balances from discontinued operations.
(b) Our working capital is defined as total current assets less total current liabilities of continuing operations. Our working capital takes into account $373.0 million, $432.2 million, $1,142.9 million and $376.1 million of short-term debt as of September 30, 2021, 2020, 2019, and 2017, respectively.
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. The Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.
Overview
Business Overview
We are a pioneer and leader in conversational and cognitive AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii)
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the continued expansion of our core technology portfolio including automated speech recognition, natural language understanding, semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other.
•Healthcare. Our healthcare segment provides intelligent systems that support a more natural and insightful approach to clinical documentation, freeing clinicians to spend more time caring for patients and helping care teams and health organizations drive meaningful financial and clinical outcomes. Our principal solutions include Dragon Medical Cloud-based solutions, Computer-Assisted Physician Documentation, Diagnostic Imaging Solutions, Nuance® Dragon Ambient eXperience™, Clinical Documentation Improvement and Coding.
•Enterprise. Our Enterprise segment is a leading provider of AI-powered intelligent customer engagement solutions and services, which enable enterprises and contact centers to enhance and automate customer service and sales engagement. Our principal solutions include interactive voice response, intelligent engagement, digital messaging and security & biometric solutions, delivered via on-premise and/or cloud.
•Other. Our Other segment currently consists primarily of voicemail transcription services.
•Discontinued Operations. On November 17, 2020, we entered into a definitive agreement (the "Agreement") to sell our medical transcription and electronic healthcare record ("EHR") implementation businesses (the "Business"). On March 1, 2021, we completed the sale of the Business and received proceeds of approximately $29.8 million, subject to certain customary post-closing adjustments. For all periods presented, the Businesses' results of operations have been included within discontinued operations in our consolidated financial statements.
Acquisition of Nuance Communications, Inc. by Microsoft Corporation
On April 11, 2021, we entered into a Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the Merger, Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515.0 million. The consummation of the Merger remains subject to customary closing conditions, including satisfaction of certain regulatory approvals and other customary closing conditions. The Merger is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022.
For additional information related to the Merger Agreement, please refer to the definitive proxy statement previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about Nuance and the Merger.
Key Metrics
In evaluating the financial condition and operating performance of our business, management focuses on revenue, net income, gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of these financial metrics for the year ended September 30, 2021, as compared to the year ended September 30, 2020 is as follows:
•Total revenues were $1,362.4 million for the year ended September 30, 2021, as compared to $1,283.8 million for the year ended September 30, 2020;
•Net loss from continuing operations for the year ended September 30, 2021 was $17.4 million, compared to a net loss from continuing operations of $13.0 million for the year ended September 30, 2020;
•Gross margins for the year ended September 30, 2021 were 61.2%, compared to 59.4% for the year ended September 30, 2020;
•Operating margins for the year ended September 30, 2021 were 6.1%, compared to 4.6% for year ended September 30, 2020; and
•Operating cash flows from continuing operations increased by $46.6 million to $239.2 million for the year ended September 30, 2021, compared to $192.6 million for the year ended September 30, 2020.
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RESULTS OF OPERATIONS
Total Revenues
The following table shows total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Hosting and professional services | $ | 812.3 | $ | 731.2 | $ | 663.4 | 11.1 | % | 10.2 | % | |||||||||||||||||||
| Product and licensing | 299.4 | 295.9 | 339.6 | 1.2 | % | (12.9) | % | ||||||||||||||||||||||
| Maintenance and support | 250.7 | 256.7 | 268.2 | (2.3) | % | (4.3) | % | ||||||||||||||||||||||
| Total revenues | $ | 1,362.4 | $ | 1,283.8 | $ | 1,271.2 | 6.1 | % | 1.0 | % | |||||||||||||||||||
| United States | $ | 1,090.6 | $ | 1,019.8 | $ | 1,017.1 | 6.9 | % | 0.3 | % | |||||||||||||||||||
| International | 271.8 | 264.0 | 254.1 | 3.0 | % | 3.9 | % | ||||||||||||||||||||||
| Total revenues | $ | 1,362.4 | $ | 1,283.8 | $ | 1,271.2 | 6.1 | % | 1.0 | % | |||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
For fiscal year 2021, the geographic split was 80% of total revenues in the United States and 20% internationally, as compared to 79% of total revenues in the United States and 21% internationally for fiscal year 2020.
Fiscal Year 2020 compared to Fiscal Year 2019
For fiscal year 2020, the geographic split was 79% of total revenues in the United States and 21% internationally, as compared to 80% of total revenues in the United States and 20% internationally for fiscal year 2019.
Hosting and Professional Services Revenue
Hosting revenue primarily relates to delivering on-demand hosted services, such as clinical documentation solutions and automated customer care applications, over a specified term. Professional services revenue primarily consists of consulting, implementation and training services for customers. The following table shows hosting and professional services revenue, in dollars, and as a percentage of total revenues (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Hosting revenue | $ | 709.3 | $ | 610.5 | $ | 535.2 | 16.2 | % | 14.1 | % | |||||||||||||||||||
Professional services revenue | 103.0 | 120.7 | 128.2 | (14.7) | % | (5.8) | % | ||||||||||||||||||||||
| Hosting and professional services revenue | $ | 812.3 | $ | 731.2 | $ | 663.4 | 11.1 | % | 10.2 | % | |||||||||||||||||||
| As a percentage of total revenues | 59.6 | % | 57.0 | % | 52.2 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Hosting revenue for the year ended September 30, 2021 increased by $98.8 million, or 16.2%, primarily due to a $103.7 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenues, hosting revenue increased from 47.6% for fiscal year 2020 to 52.1% for fiscal year 2021.
Professional services revenue for the year ended September 30, 2021 decreased by $17.7 million, or 14.7%, primarily due to a $12.2 million decrease in Enterprise, and a $5.4 million decrease in Healthcare. Enterprise professional services revenue decreased primarily due to lower Voice Engagement professional services revenue. Healthcare professional services revenue decreased as we shift away from lower-margin professional services revenue. As a percentage of total revenues, professional services revenue decreased from 9.4% for fiscal year 2020 to 7.6% for fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Hosting revenue for the year ended September 30, 2020 increased by $75.3 million, or 14.1%, primarily due to a $95.0 million increase in Healthcare, offset in part by a $20.1 million decrease in our Other segment. Healthcare hosting revenue increased
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primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. Other hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in fiscal year 2019. As a percentage of total revenues, hosting revenue increased from 42.1% for fiscal year 2019 to 47.6% for fiscal year 2020.
Professional services revenue for the year ended September 30, 2020 decreased by $7.5 million, or 5.8%, primarily due to a $7.9 million decrease in Healthcare as of result of project deferrals during the COVID-19 pandemic. As a percentage of total revenues, professional services revenue decreased from 10.1% for fiscal year 2019 to 9.4% for fiscal year 2020.
Product and Licensing Revenue
Product and licensing revenue primarily consist of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars, and as a percentage of total revenues (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Product and licensing revenue | $ | 299.4 | $ | 295.9 | $ | 339.6 | 1.2 | % | (12.9) | % | |||||||||||||||||||
| As a percentage of total revenues | 22.0 | % | 23.0 | % | 26.7 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Product and licensing revenue for the year ended September 30, 2021 increased by $3.5 million, or 1.2%, primarily due to a $10.9 million increase in Enterprise, offset in part by a $4.4 million decrease in Healthcare. Enterprise product and licensing revenue increased primarily due to the growth in our Security & Biometrics and Voice solutions. Healthcare product and licensing revenue decreased primarily due to a non-strategic legacy term license contract, and the continued transition from term licenses to cloud-based solutions. As a percentage of total revenues, product and licensing revenue decreased from 23.0% for fiscal year 2020 to 22.0% for fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Product and licensing revenue for the year ended September 30, 2020 decreased by $43.7 million, or 12.9%, primarily due to a $46.7 million decrease in Healthcare and a $4.9 million decrease in other, offset in part by a $7.9 million increase in Enterprise. Healthcare product and licensing revenue decreased primarily due to the continued transition from term licenses to cloud-based solutions. Enterprise product and licensing revenue increased primarily due to the growth in our digital engagement solutions. Other product and licensing revenue decreased primarily due to the wind-down of Devices during fiscal year 2019. As a percentage of total revenues, product and licensing revenue decreased from 26.7% for fiscal year 2019 to 23.0% for fiscal year 2020.
Maintenance and Support Revenue
Maintenance and support revenue primarily consist of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars, and as a percentage of total revenues (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Maintenance and support revenue | $ | 250.7 | $ | 256.7 | $ | 268.2 | (2.3) | % | (4.3) | % | |||||||||||||||||||
| As a percentage of total revenues | 18.4 | % | 20.0 | % | 21.1 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Maintenance and support revenue for the year ended September 30, 2021 decreased by $6.0 million, or 2.3%, primarily due to an $8.0 million decrease in Healthcare. Healthcare maintenance and support revenue decreased primarily due to a non-strategic legacy term license contract and the continued transition from software sold with maintenance and support to cloud-based solutions. As a percentage of total revenues, maintenance and support revenue decreased from 20.0% for fiscal year 2020 to 18.4% for fiscal year 2021.
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Fiscal Year 2020 compared to Fiscal Year 2019
Maintenance and support revenue for the year ended September 30, 2020 decreased by $11.5 million, or 4.3%, primarily due to a $19.9 million decrease in Healthcare, offset in part by an $8.6 million increase in Enterprise. Healthcare maintenance and support revenue decreased primarily due to the continued transition from term licenses with maintenance and support to cloud-based solutions in Healthcare. Enterprise maintenance and support revenue increased primarily driven by the growth in digital engagement and security biometrics license transactions. As a percentage of total revenues, maintenance and support revenue decreased from 21.1% for fiscal year 2019 to 20.0% for fiscal year 2020.
COSTS AND EXPENSES
Cost of Hosting and Professional Services Revenue
Cost of hosting and professional services revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of hosting and professional services revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
Cost of hosting and professional services revenue | $ | 445.1 | $ | 401.0 | $ | 399.6 | 11.0 | % | 0.4 | % | |||||||||||||||||||
| As a percentage of hosting and professional services revenue | 54.8 | % | 54.8 | % | 60.2 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Cost of hosting and professional services revenue for the year ended September 30, 2021 increased by $44.1 million, or 11.0%, primarily related to the increase in hosting and professional services revenue in fiscal year 2021. Gross margin remained relatively flat year-over-year.
Fiscal Year 2020 compared to Fiscal Year 2019
Cost of hosting and professional services revenue for the year ended September 30, 2020 increased by $1.4 million, or 0.4%. Gross margin increased by 5.4 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive.
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Cost of product and licensing revenue | $ | 34.2 | $ | 61.2 | $ | 69.8 | (44.1) | % | (12.3) | % | |||||||||||||||||||
As a percentage of product and licensing revenue | 11.4 | % | 20.7 | % | 20.5 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Cost of product and licensing revenue for the year ended September 30, 2021 decreased by $27.0 million, or 44.1%. Gross margin increased by 9.3 percentage points year-over-year. The decrease in cost and increase in gross margin was primarily due to the corresponding costs for a legacy term license transaction in Healthcare that did not renew in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Cost of product and licensing revenue for the year ended September 30, 2020 decreased by $8.6 million, or 12.3%. The decrease in cost and increase in gross margin were primarily due to the upfront recognition of certain project costs associated with digital engagement in the third quarter of fiscal year 2019. Gross margin decreased by 0.2 percentage points.
Cost of Maintenance and Support Revenue
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Cost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table shows cost of maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
Cost of maintenance and support revenue | $ | 30.0 | $ | 31.2 | $ | 33.4 | (4.0) | % | (6.5) | % | |||||||||||||||||||
As a percentage of maintenance and support revenue | 11.9 | % | 12.2 | % | 12.4 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Cost of maintenance and support revenue for the year ended September 30, 2021 decreased by $1.3 million, or 4.0%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margin increased by 0.3 percentage points, primarily driven by the maintenance and support costs for a legacy term license transaction in Healthcare that did not renew in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Cost of maintenance and support revenue for the year ended September 30, 2020 decreased by $2.2 million, or 6.5%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margin increase by 0.2 percentage points, primarily driven by higher margin on Dragon Medical maintenance and support services in Healthcare.
Research and Development Expenses
R&D expense primarily consists of salaries, benefits, and overhead relating to engineering staff as well as third party engineering costs. The following table shows research and development expense, in dollars and as a percentage of total revenues (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Research and development expense | $ | 249.2 | $ | 219.9 | $ | 181.8 | 13.3 | % | 21.0 | % | |||||||||||||||||||
| As a percentage of total revenues | 18.3 | % | 17.1 | % | 14.3 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
R&D expense for the year ended September 30, 2021 increased by $29.3 million, or 13.3%, primarily due to higher employee headcount and our continued investment in product development and new technologies to support our long-term growth.
Fiscal Year 2020 compared to Fiscal Year 2019
R&D expense for the year ended September 30, 2020 increased by $38.1 million, or 21.0%, primarily due to higher employee headcount as we continued to invest in our core technologies to power new products and solutions.
Sales and Marketing Expense
Sales and marketing expense include salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a percentage of total revenues (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Sales and marketing expense | $ | 294.5 | $ | 270.2 | $ | 269.8 | 9.0 | % | 0.2 | % | |||||||||||||||||||
| As a percentage of total revenues | 21.6 | % | 21.0 | % | 21.2 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
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Sales and marketing expenses for the year ended September 30, 2021 increased by $24.3 million, or 9.0%, primarily due to higher traveling and entertainment expenses, as well as a higher employee headcount as we continue to invest in our sales force to support new products and solutions.
Fiscal Year 2020 compared to Fiscal Year 2019
Sales and marketing expenses for the year ended September 30, 2020 increased by $0.4 million, or 0.2%, as lower traveling and entertainment expenses during the COVID-19 pandemic were more than offset by our investment in sales force to support new products and solutions.
General and Administrative Expenses
General and administrative ("G&A") expense primarily consists of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows G&A expense, in dollars and as a percentage of total revenues (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| General and administrative expense | $ | 127.3 | $ | 155.9 | $ | 172.6 | (18.3) | % | (9.7) | % | |||||||||||||||||||
| As a percentage of total revenues | 9.3 | % | 12.1 | % | 13.6 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
General and administrative expenses decreased by $28.6 million, or 18.3%, primarily driven by a $24.0 million benefit from a legal settlement reached in the fourth quarter of fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
General and administrative expenses decreased by $16.8 million, or 9.7%, primarily driven by decreases in compensation and professional services costs due to our cost saving initiatives, and lower traveling and entertainment expenses during the COVID-19 pandemic.
Amortization of Intangible Assets
Amortization of acquired patents and technologies are included within cost of revenue and the amortization of acquired customer and contractual relationships, non-compete agreements, acquired trade names and trademarks, and other intangibles are included within Operating expenses. Customer relationships are amortized based upon the pattern in which the economic benefits of the customer relationships are expected to be realized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was recorded as follows (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Cost of revenues | $ | 19.7 | $ | 27.6 | $ | 27.2 | (28.6) | % | 1.4 | % | |||||||||||||||||||
| Operating expenses | 39.6 | 37.7 | 38.0 | 5.2 | % | (0.9) | % | ||||||||||||||||||||||
| Total amortization expense | $ | 59.3 | $ | 65.2 | $ | 65.2 | (9.1) | % | 0.1 | % | |||||||||||||||||||
| As a percentage of total revenues | 4.4 | % | 5.1 | % | 5.1 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Amortization of intangible assets expense for fiscal year 2021 decreased by $5.9 million. The decrease in cost of revenues amortization expense was primarily due to certain intangible assets becoming fully amortized in fiscal year 2021, and the increase in operating amortization expense was primarily due to acquired technology assets from a recent acquisition.
Fiscal Year 2020 compared to Fiscal Year 2019
Amortization of intangible assets expense for fiscal year 2020 decreased by $0.1 million.
Acquisition-Related Costs, Net
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Acquisition-related costs, net include costs related to business and asset acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs, earn-out payments, and other costs related to integration activities; (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies. A summary of the Acquisition-related costs, net is as follows (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Transition and integration costs | $ | 5.0 | $ | 3.8 | $ | 6.1 | 31.4 | % | (38.3) | % | |||||||||||||||||||
| Professional service fees | 0.8 | — | 1.9 | 2,878.6 | % | (98.6) | % | ||||||||||||||||||||||
| Acquisition-related adjustments | (2.1) | (0.9) | (1.5) | 136.9 | % | (43.6) | % | ||||||||||||||||||||||
| Total acquisition-related costs, net | $ | 3.7 | $ | 2.9 | $ | 6.5 | 27.2 | % | (55.0) | % | |||||||||||||||||||
| As a percentage of total revenues | 0.3 | % | 0.2 | % | 0.5 | % | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
Acquisition-related costs, net increased by $0.8 million, primarily due to certain retention bonuses being earned as part of the terms of a recent acquisition in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Acquisition-related costs, net decreased by $3.6 million, primarily due to overall reduced acquisition and integration activities as we focused on portfolio optimization and organizational simplification to drive organic growth.
Restructuring and Other Charges, Net
Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, or arise outside of the ordinary course of our business. While restructuring and other charges, net are excluded from segment profits, the table below presents the restructuring and other charges, net associated with each segment (dollars in thousands):
| Personnel | Facilities | Total Restructuring | Other Charges | Total | |||||||||||||||||||||||||
| Fiscal Year 2021 | |||||||||||||||||||||||||||||
| Healthcare | $ | 3,490 | $ | 1,939 | $ | 5,429 | $ | — | $ | 5,429 | |||||||||||||||||||
| Enterprise | 1,264 | 7,201 | 8,465 | — | 8,465 | ||||||||||||||||||||||||
| Other | — | 1,632 | 1,632 | — | 1,632 | ||||||||||||||||||||||||
| Corporate | 1,393 | 21 | 1,414 | 19,303 | 20,717 | ||||||||||||||||||||||||
| Total fiscal year 2021 | $ | 6,147 | $ | 10,793 | $ | 16,940 | $ | 19,303 | $ | 36,243 | |||||||||||||||||||
| Fiscal Year 2020 | |||||||||||||||||||||||||||||
| Healthcare | $ | 1,786 | $ | 2,819 | $ | 4,605 | $ | — | $ | 4,605 | |||||||||||||||||||
| Enterprise | 1,417 | 1,998 | 3,415 | — | 3,415 | ||||||||||||||||||||||||
| Other | — | (63) | (63) | — | (63) | ||||||||||||||||||||||||
| Corporate | 1,935 | 777 | 2,712 | 6,844 | 9,556 | ||||||||||||||||||||||||
| Total fiscal year 2020 | $ | 5,138 | $ | 5,531 | $ | 10,669 | $ | 6,844 | $ | 17,513 | |||||||||||||||||||
| Fiscal Year 2019 | |||||||||||||||||||||||||||||
| Healthcare | $ | 5,660 | $ | 191 | $ | 5,851 | $ | — | $ | 5,851 | |||||||||||||||||||
| Enterprise | 5,037 | 933 | 5,970 | — | 5,970 | ||||||||||||||||||||||||
| Other | 1,457 | 337 | 1,794 | 3,306 | 5,100 | ||||||||||||||||||||||||
| Corporate | 3,039 | 764 | 3,803 | 9,404 | 13,207 | ||||||||||||||||||||||||
| Total fiscal year 2019 | $ | 15,193 | $ | 2,225 | $ | 17,418 | $ | 12,710 | $ | 30,128 | |||||||||||||||||||
Fiscal Year 2021
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For fiscal year 2021, we recorded restructuring charges of $16.9 million, which included $6.1 million related to the termination of approximately 80 employees and $10.8 million of charges related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the geographic footprint of our offices and facilities. We expect the remaining outstanding severance of $0.4 million to be substantially paid during fiscal year 2022, and the remaining $16.9 million lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases.
Additionally, during fiscal year 2021, we recorded approximately $21.0 million of expenses related to the acquisition of Nuance by Microsoft, and $1.4 million of professional service expenses related to other corporate initiatives, offset in part by $3.1 million of insurance recoveries.
Fiscal Year 2020
For fiscal year 2020, we recorded restructuring charges of $10.7 million, which included $5.1 million related to the termination of approximately 191 employees and $5.5 million of charges related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the footprint of our offices and facilities.
Additionally, during fiscal year 2020, we recorded $5.1 million expenses related to the separation of our Automotive business, and a $2.0 million impairment charge related to a right-of-use asset due to the COVID-19 pandemic, offset in part by $0.3 million of insurance recoveries.
Fiscal Year 2019
For fiscal year 2019, we recorded restructuring charges of $17.4 million, which included $15.2 million related to the termination of approximately 305 employees and $2.2 million in charges related to the closing of certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.
Additionally, during fiscal year 2019, we recorded $9.9 million of professional services fees related to our corporate transformational efforts and $3.3 million accelerated depreciation related to our Mobile Operator Services, offset in part by $0.5 million of insurance recoveries.
Other Income (Expense), Net
Other expenses, net consists primarily of interest income, interest expense, foreign exchange gains (losses), and net gains (losses) from other non-operating activities. A summary of other income (expense), net is as follows (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
| Interest income | $ | 0.5 | $ | 4.5 | $ | 13.7 | (87.9) | % | (67.0) | % | |||||||||||||||||||
| Interest expense | (77.7) | (94.0) | (120.1) | (17.3) | % | (21.8) | % | ||||||||||||||||||||||
| Other expense, net | (17.5) | (13.1) | (0.9) | 33.4 | % | 1,407.7 | % | ||||||||||||||||||||||
| Total other expenses, net | $ | (94.7) | $ | (102.6) | $ | (107.3) | |||||||||||||||||||||||
Fiscal Year 2021 compared to Fiscal Year 2020
The decrease in interest income was primarily due to lower yields and the decreases in cash and marketable securities for the current year period.
The decrease in interest expense was due to redemptions of $521.9 million notional amounts of the 1.0% and 1.5% Convertible Debentures during the third quarter of fiscal year 2021. Additionally, holders of our 1.0% and 1.5% Convertible Debentures exercised their right to convert $226.6 million notional amount during fiscal year 2021.
The increase of other expense, net was primarily due to losses on conversions and redemptions of debt in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
The decrease in interest income was primarily due to lower yields and the decreases in cash and marketable securities for the current year period.
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The decrease in interest expense was primarily due to the repayments of $300.0 million of the 2020 Senior Notes in March 2019 and $300.0 million of the 2024 Senior Notes in October 2019, as well as the repurchases of $123.8 million notional amounts of the 1.25% and 1.5% Convertible Debentures during the second quarter of fiscal year 2020.
The increase of other expense, net was primarily due to losses on redemption and repurchases of debt in fiscal year 2020, offset
in part by higher gains on foreign currency transactions.
Provision (Benefit) for Income Taxes
The following table shows the provision (benefit) for income taxes on continuing operations and the effective income tax rate (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
Provision (benefit) for income taxes | $ | 5.4 | $ | (30.9) | $ | (23.2) | (117.5) | % | 33.1 | % | |||||||||||||||||||
| Effective income tax rate | (45.2) | % | 70.3 | % | 35.8 | % | |||||||||||||||||||||||
The effective income tax rate is based upon the income for the year, the geographic mix of our income, the composition of the income in different countries, changes relating to valuation allowances and the potential tax consequences of resolving audits or other tax contingencies.
Fiscal Year 2021 compared to Fiscal Year 2020
The effective income tax rate in fiscal year 2021 differs from the U.S. federal statutory rate of 21.0% primarily due to a change in the valuation allowance in the United States as well as the addition of uncertain tax positions partially offset by base erosion and anti-abuse planning initiatives.
Provision for income taxes increased by $36.3 million in fiscal year 2021 compared to fiscal year 2020, primarily due to a net $29.9 million deferred tax benefit from adjustments to domestic valuation allowance primarily related to the Cerence spin-off and a foreign tax benefit of $14.8 million related to fiscal year 2019 intangible property transfers offset by base erosion and anti-abuse planning initiatives.
Fiscal Year 2020 compared to Fiscal Year 2019
The effective income tax rate in fiscal year 2020 differs from the U.S. federal statutory rate of 21.0% primarily due to a net $29.9 million deferred tax benefit from adjustments to domestic valuation allowance primarily related to the Cerence spin-off, a foreign tax benefit of $14.8 million related to prior year intangible property transfers, offset in part by uncertain tax positions of $17.1 million and the base erosion and anti-abuse tax of $4.3 million.
Benefit for income taxes increased by $7.7 million in fiscal year 2020 compared to fiscal year 2019, primarily due to a $29.9 million net deferred tax benefit from adjustments to the domestic valuation allowance primarily related to the Cerence spin-off.
Valuation Allowances
As of September 30, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. We continue to believe negative evidence for the release of some or all of the allowances outweighs positive evidence after considering recent profitability trends and the disposition of the medical transcription and EHR implementation businesses. We continue to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of September 30, 2021, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.
Net (Loss) Income from Discontinued Operations
Disposition of Our Medical Transcription and EHR Implementation businesses
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On November 17, 2020, we entered into the Agreement to sell the Business to Assured Healthcare Partners and Aeries Technology Group (together, the “Buyer”). Pursuant to the Agreement, we sold and transferred, and the Buyer purchased and acquired, (a) the shares of certain subsidiaries through which we operate a portion of the Business and (b) certain assets used in or related to the Business; and the Buyer assumed certain liabilities related to such assets of the Business, subject to certain exclusions and indemnities as set forth in the Agreement.
On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post-closing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of $12.5 million, which is included within net (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.
For all periods presented, the Businesses' results of operations have been included within discontinued operations in our consolidated financial statements.
SEGMENT ANALYSIS
For further details of financial information about our operating segments, see Note 22 to the accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The following table presents certain financial information about our operating segments (dollars in millions):
| Fiscal Year 2021 | Fiscal Year 2020 | Fiscal Year 2019 | % Change 2021 vs. 2020 | % Change 2020 vs. 2019 | |||||||||||||||||||||||||
Segment Revenues (a): | |||||||||||||||||||||||||||||
| Healthcare | $ | 806.1 | $ | 720.2 | $ | 700.6 | 11.9 | % | 2.8 | % | |||||||||||||||||||
| Enterprise | 535.4 | 530.0 | 510.8 | 1.0 | % | 3.8 | % | ||||||||||||||||||||||
| Other | 20.9 | 33.9 | 61.5 | (38.3) | % | (44.9) | % | ||||||||||||||||||||||
| Total segment revenues | 1,362.4 | 1,284.1 | 1,272.8 | 6.1 | % | 0.9 | % | ||||||||||||||||||||||
| Less: acquisition related revenues adjustments | — | (0.3) | (1.5) | (100.0) | % | (80.4) | % | ||||||||||||||||||||||
| Total revenues | $ | 1,362.4 | $ | 1,283.8 | $ | 1,271.2 | 6.1 | % | 1.0 | % | |||||||||||||||||||
| Segment Profit: | |||||||||||||||||||||||||||||
| Healthcare | $ | 265.1 | $ | 229.6 | $ | 252.5 | 15.4 | % | (9.1) | % | |||||||||||||||||||
| Enterprise | 137.4 | 144.5 | 126.9 | (4.9) | % | 13.8 | % | ||||||||||||||||||||||
| Other | 11.3 | 19.7 | 19.4 | (42.5) | % | 1.5 | % | ||||||||||||||||||||||
| Total segment profit | $ | 413.7 | $ | 393.8 | $ | 398.8 | 5.1 | % | (1.3) | % | |||||||||||||||||||
| Segment Profit Margin: | |||||||||||||||||||||||||||||
| Healthcare | 32.9 | % | 31.9 | % | 36.0 | % | 1.0 | % | (4.2) | % | |||||||||||||||||||
| Enterprise | 25.7 | % | 27.3 | % | 24.8 | % | (1.6) | % | 2.4 | % | |||||||||||||||||||
| Other | 54.1 | % | 58.1 | % | 31.5 | % | (4.0) | % | 26.5 | % | |||||||||||||||||||
| Total segment profit margin | 30.4 | % | 30.7 | % | 31.3 | % | (0.3) | % | (0.7) | % | |||||||||||||||||||
__________
(a)Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.
Segment Revenues
Fiscal Year 2021 compared to Fiscal Year 2020
•Healthcare segment revenue for fiscal year 2021 increased by $85.9 million, or 11.9%, driven primarily by growth in the Dragon Medical and CAPD cloud offerings. Revenue from Dragon Medical cloud and DAX cloud-based solutions increased by $78.3 million, or 28.0%, to $358.4 million for fiscal year 2021 from $280.1 million for fiscal year 2020, primarily due to the continued market penetration and customer transition to DMO.
•Enterprise segment revenue for fiscal year 2021 increased by $5.4 million, or 1.0%, primarily due to the growth in our Security and Biometrics solutions.
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•Other segment revenue for fiscal year 2021 decreased by $13.0 million, or 38.3%, as we continue to wind down our Other segment.
Fiscal Year 2020 compared to Fiscal Year 2019
•Healthcare segment revenue for fiscal year 2020 increased by $19.7 million, or 2.8%, primarily due to the growth in Dragon Medical and DAX cloud-based solutions.
•Enterprise segment revenue for fiscal year 2020 increased by $19.2 million, or 3.8%, primarily due to the growth in digital engagement solutions.
•Other segment revenue for fiscal year 2020 decreased by $27.6 million, or 44.9%, due to the wind-down of Devices and the sale of our Mobile Operator Services business in fiscal year 2019.
Segment Profit
Fiscal Year 2021 compared to Fiscal Year 2020
•Healthcare segment profit for the year ended September 30, 2021 increased by $35.4 million, or 15.4%, primarily driven by revenue growth in the Dragon Medical, CAPD, and CDI cloud offerings. Segment profit margin increased by 1.0 percentage points to 32.9%, primarily driven by growth in our Dragon Medical cloud-based solution, which is margin accretive.
•Enterprise segment profit for the year ended September 30, 2021 decreased by $7.1 million, or 4.9%, as higher segment revenue was more than offset by higher operating expenses. Segment profit margin decreased by 1.6 percentage points to 25.7%, primarily due to higher operating expenses, which was only partially offset by higher segment revenues.
•Other segment profit for the year ended September 30, 2021 decreased by $8.4 million, or 42.5%, as we continue to wind down our Other segment. Segment profit margin decreased by 4.0 percentage points to 54.1%.
Fiscal Year 2020 compared to Fiscal Year 2019
•Healthcare segment profit for the year ended September 30, 2020 decreased by $22.9 million, or 9.1%, primarily due to higher R&D and sales and marketing expenses, offset in part by higher revenue and gross margin improvement. Gross margin increased primarily due to a favorable shift in mix to higher margin Dragon Medical cloud-based solution. The increases in R&D and sales and marketing expenses were primarily due to higher spend to support the development and launch of new products and solutions. As a result, segment profit margin decreased by 4.2 percentage points to 31.9%.
•Enterprise segment profit for the year ended September 30, 2020 increased by $17.6 million, or 13.8%, primarily due to higher segment revenue and gross margin, offset in part by higher R&D and sales expenses. Gross margin improvement was primarily driven by a favorable shift in revenue mix towards higher-margin license revenue. The increase in R&D expense was primarily due to higher spend on core technologies to support future growth. The increase in sales expense was primarily driven by higher commission costs due to higher bookings, offset in part by lower travel and entertainment expenses during the pandemic. As a result, segment profit margin increased by 2.4 percentage points to 27.3%.
•Other segment profit for the year ended September 30, 2020 increased by $0.3 million, or 1.5%, primarily driven by lower expense profile of the remaining business, offset in part by lower revenue. As a result, segment profit margin increased by 26.5 percentage points to 58.1%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We had cash and cash equivalents and marketable securities of $209.5 million as of September 30, 2021, a decrease of $162.9 million from $372.3 million as of September 30, 2020. Our working capital, defined as total current assets less total current liabilities of continuing operations, was $(324.8) million as of September 30, 2021, compared to $(256.5) million as of September 30, 2020. Our working capital included $373.0 million and $432.2 million convertible debt as of September 30, 2021 and 2020, respectively. As of September 30, 2021, we had $298.1 million available for borrowing under our revolving
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credit facility. We believe that our existing sources of liquidity are sufficient to support our operating needs, capital requirements and any debt service requirements for the next twelve months.
Cash and cash equivalents and marketable securities held by our international operations totaled $35.7 million as of September 30, 2021 and $60.9 million as of September 30, 2020. We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and our U.S. operation to be funded through its own operating cash flows, cash and marketable securities within the U.S., and if necessary, borrowing under our revolving credit facility.
Acquisition of Nuance Communications, Inc. by Microsoft Corporation
On April 11, 2021, we entered into a Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the Merger Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. The consummation of the Merger is subject to certain conditions, including the satisfaction of certain regulatory approvals and other customary closing conditions, but it is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022.
For additional information related to the Merger Agreement, please refer to the definitive proxy statement previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about Nuance and the Merger.
Disposition of Our Medical Transcription and EHR Implementation Businesses
In connection with our ongoing comprehensive portfolio and business review, on November 17, 2020, we entered into a definitive agreement to sell our medical transcription and EHR implementation businesses.
On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post- losing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of $12.5 million, which is included within Net (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.
Convertible Debentures
During the fourth quarter of fiscal year 2021, our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending September 30, 2021. As a result, the holders of our 1.25% 2025 Debentures and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between October 1, 2021 and December 31, 2021. Additionally, on November 5, 2021, we redeemed all of the outstanding 1.5% 2035 Debentures. All three convertible notes, with a total net book value of $373.0 million, were included within current liabilities as of September 30, 2021.
Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. During fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $137.4 million notional amount for $137.4 million in cash and 4.1 million shares of common stock, and holders of our 1.0% 2035 Debentures exercised their right to convert $89.2 million notional amount for $89.2 million in cash and 2.1 million shares of common stock. Additionally, during fiscal year 2021, we induced the exchange of $457.0 million notional amount of our 1.0% 2035 Debentures for $5.0 million in cash and 18.9 million shares of common stock, and $64.9 million notional amount of our 1.5% 2035 Debentures for $0.5 million in cash and 3.2 million shares of common stock. As of September 30, 2021, $130.3 million in aggregate principal amount of the 1.0% 2035 Debentures and $25.1 million in aggregate principal amount of the 1.5% 2035 Debentures remained outstanding.
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Our convertible debentures are actively traded in the open market. The 1.25% 2025 Debentures trade at a price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders of the 1.25% 2025 Debentures to early exercise their conversion rights. In the event that holders of any of our debentures presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities.
Net Cash Provided by Operating Activities
Fiscal Year 2021 compared to Fiscal Year 2020
Cash provided by operating activities for fiscal year 2021 was $247.6 million, a decrease of $6.9 million from $254.6 million cash provided by operating activities for fiscal year 2020. The net decrease was primarily due to:
•A decrease of $53.5 million in operating cash flows from discontinued operations; and
•A decrease of $30.6 million from changes in deferred revenue. Deferred revenue had a negative effect of $9.3 million on operating cash flows for fiscal year 2021, as compared to a positive effect of $21.3 million for fiscal year 2020; offset in part by,
•An increase of $33.3 million due to favorable changes in working capital, primarily related to the timing of cash collections and cash payments;
•An increase of $43.8 million due to lower non-cash charges, primarily related to the timing of deferred tax benefits.
Fiscal Year 2020 compared to Fiscal Year 2019
Cash provided by operating activities for fiscal year 2020 was $254.6 million, a decrease of $146.8 million from $401.4 million cash provided by operating activities for fiscal year 2019. The net decrease was primarily due to:
•A decrease of $95.1 million due to unfavorable changes in working capital, primarily related to the timing of cash collections and cash payments; and
•A decrease of $116.5 million in operating cash flows from discontinued operations; offset in part by,
•An increase of $42.4 million due to higher income before non-cash charges; and
•An increase of $22.3 million from changes in deferred revenue. Deferred revenue had a positive effect of $21.3 million on operating cash flows for fiscal year 2020, as compared to $1.1 million for fiscal year 2019.
Net Cash (Used in) Provided by Investing Activities
Fiscal Year 2021 compared to Fiscal Year 2020
Cash used in investing activities for fiscal year 2021 was $42.4 million, a decrease of $115.2 million from $72.7 million cash provided by operating activities in fiscal year 2020. The net decrease was primarily due to:
•A decrease of $84.8 million in net proceeds from the sale and purchase of marketable securities and other investments; and
•A decrease of $0.4 million in cash provided by other investing activities; and
•An increase of $44.4 million in payments for business and asset acquisitions; offset in part by,
•An increase of $9.7 million in net proceeds from the disposition of businesses, primarily from the sale of our medical transcription and EHR implementation businesses; and
•A decrease of $4.8 million in cash used for capital expenditures.
Fiscal Year 2020 compared to Fiscal Year 2019
Cash provided by investing activities for fiscal year 2020 was $72.7 million, a decrease of $223.3 million from $296.0 million cash provided by operating activities in fiscal year 2019. The net decrease was primarily due to:
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•Net proceeds of $406.9 million, primarily from the sale of our Imaging business during the second quarter of fiscal year 2019; and
•An increase of $17.1 million in cash used for capital expenditures; offset in part by,
•An increase of $179.7 million in net proceeds from the sale and purchase of marketable securities and other investments; and
•A decrease of $19.9 million in payments for business and asset acquisitions.
Net Cash Used in Financing Activities
Fiscal Year 2021 compared to Fiscal Year 2020
Cash used in financing activities for fiscal year 2021 was $322.7 million, a decrease of $263.5 million from $586.2 million cash used in fiscal year 2020. The net decrease was primarily due to:
•A decrease of $283.6 million in cash used for the repayment and redemption of debt; and
•A decrease of $169.2 million in share repurchases; offset in part by,
•An increase of $48.1 million related to payments for taxes related to net share settlement of equity awards; and
•An increase of $2.1 million cash used for other financing activities; and
•A net contribution of $139.1 million from Cerence in connection with the spin-off of our Automobile business during the first quarter of fiscal year 2020.
Fiscal Year 2020 compared to Fiscal Year 2019
Cash used in financing activities for fiscal year 2020 was $586.2 million, an increase of $134.2 million from $452.0 million cash used in fiscal year 2019. The net increase was primarily due to:
•An increase of $213.6 million in the repayment and redemption of debt;
•Net proceeds of $9.9 million from sale of noncontrolling interests in a subsidiary in fiscal year 2019;
•An increase of $42.3 million in share repurchases;
•An increase of $4.6 million related to payments for taxes related to net share settlement of equity awards; offset in part by,
•A net contribution of $139.1 million from Cerence in connection with the spin-off of our Automobile business during the first quarter of fiscal year 2020.
Debt
For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 10 to the accompanying consolidated financial statements. For the year ended September 30, 2021, we spent approximately $232.1 million in cash and issued 28.2 million shares of common stock for the redemption of debt:
•In May 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $118.3 million notional amount for $118.3 million in cash and 3.5 million shares of common stock.
•During the third quarter of fiscal year 2021, we induced the exchange of $457.0 million notional amount of our 1.0% 2035 Debentures for $5.0 million in cash and 18.9 million shares of common stock, and $64.9 million notional amount of 1.5% 2035 Debentures for $0.5 million in cash and 3.2 million shares of common stock.
•During the fourth quarter of fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $19.0 million notional amount for $19.0 million in cash and 0.6 million shares of common stock, and holders of our 1.0% 2035 Debentures exercised their right to convert $89.2 million notional amount for $89.2 million in cash and 2.1 million shares of common stock.
Additionally, certain debt holders have exercised their right to convert Debentures that did not settle on or prior to September 30, 2021. Holders of our 1.0% 2035 Debentures exercised their right to convert $2.3 million notional amount for $2.3 million in cash and 0.1 million shares of common stock. Additionally, holders of our 1.25% 2025 Debentures exercised
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their right to convert $1.2 million notional amount for $1.2 million in cash and 0.04 million shares of common stock. The settlements of these conversions occurred subsequent to September 30, 2021, but before the filing of this Annual Report on Form 10-K.
On September 29, 2021, we issued a notice calling for redemption all of our outstanding 1.5% 2035 Debentures, pursuant to which, the holders had the right to receive cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date of November 5th, 2021. In lieu of redemption, holders had the right to convert all or any portion of their debentures at the aforementioned conversion ratio until the close of business on November 4, 2021. Upon the conclusion of the conversion period on November 4, 2021, holders of $25.0 million notional amount exercised their right to convert. Additionally, we redeemed the remaining outstanding $0.1 million 1.5% 2035 Debentures for $0.1 million in cash. On November 5, 2021, we settled all of the outstanding 1.5% 2035 Debentures for $25.1 million in cash and 0.8 million shares of common stock. Following these redemptions and conversions, none of the 1.5% 2035 Debentures remain outstanding.
As of September 30, 2021, we were in compliance with all the debt covenants. We may from time to time, depending on market and business conditions, repurchase outstanding debt in the open market or by private negotiation. We expect to incur cash interest payments of $32.9 million during fiscal year 2022. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows.
Share Repurchases
On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors.
We did not repurchase any shares during the fiscal year ended September 30, 2021, and repurchased 9.5 million shares and 8.2 million shares for $169.2 million and $126.9 million during the fiscal years ended September 30, 2020 and 2019, respectively, under the program. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased 73.8 million shares for $1,238.8 million. The amount paid in excess of par value is recognized in additional paid in capital. Shares were retired upon repurchase. As of September 30, 2021, approximately $261.2 million remained available for future repurchases under the program.
Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Contractual Obligations
The following table outlines our contractual payment obligations for continuing operations as of September 30, 2021 (dollars in millions):
| Contractual payments Due in Fiscal Year | ||||||||||||||||||||||||||||||||
| Contractual Obligations | Total | 2022 | 2023 and 2024 | 2025 and 2026 | Thereafter | |||||||||||||||||||||||||||
Convertible debentures (1) | $ | 418.0 | $ | 418.0 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
Senior notes (2) | 500.0 | — | — | 500.0 | — | |||||||||||||||||||||||||||
Interest payable on long-term debt (3) | 168.0 | 32.9 | 63.1 | 57.9 | 14.1 | |||||||||||||||||||||||||||
Letters of credit (4) | 1.9 | 1.9 | — | — | — | |||||||||||||||||||||||||||
| Lease obligations and other liabilities: | ||||||||||||||||||||||||||||||||
Operating leases (5) | 107.6 | 22.4 | 31.0 | 24.1 | 30.1 | |||||||||||||||||||||||||||
| Operating leases under restructuring | 14.5 | 5.3 | 6.0 | 2.7 | 0.5 | |||||||||||||||||||||||||||
Purchase commitments for inventory, property and equipment (6) | 74.0 | 59.5 | 14.5 | — | — | |||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 1,284.0 | $ | 540.0 | $ | 114.6 | $ | 584.7 | $ | 44.7 | ||||||||||||||||||||||
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(1) As of September 30, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between October 1, 2021 and December 31, 2021. As a result, these convertible debentures were treated as if they were due in fiscal year 2022.
(2)The repayment schedule reflects the outstanding principal amount of our 5.625% senior notes due 2026 as of September 30, 2021.
(3)Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of September 30, 2021, the stated interest rate of each debt instrument and the assumed redemption dates discussed above.
(4)Letters of credit are in place primarily to secure future operating lease payments.
(5)Obligations include contractual lease commitments related to facilities that have subsequently been subleased. As of September 30, 2021, we have subleased certain facilities with total sublease income of $10.8 million through fiscal year 2027.
(6)These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customer backlog. We entered into an agreement with Microsoft in October of 2019 for their Azure cloud computing service with a minimum commitment of $175.0 million. This contract is expected to be in effect through fiscal year 2024.
As of September 30, 2021, $60.1 million of the unrecognized tax benefits, if recognized, would impact our effective income tax rate. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes of $1.7 million, $1.1 million, and $0.4 million during fiscal years 2021, 2020, and 2019, respectively. We recorded interest and penalties of $3.5 million and $1.7 million as of September 30, 2021 and 2020, respectively.
Contingent Liabilities and Commitments
Certain acquisition payments to selling stockholders were contingent upon the achievement of predetermined performance targets over a period of time after the acquisition. Such contingent payments were recorded at estimated fair values upon the acquisition and re-measured in subsequent reporting periods. As of September 30, 2021, we do not have any requirements to pay any selling stockholders based upon the achievement of any specified performance goals. In addition, certain deferred compensation payments to selling stockholders contingent upon their continued employment after the acquisition were recorded as compensation expense over the requisite service period. Additionally, as of September 30, 2021, the remaining deferred payment obligations of $15.0 million to certain former stockholders, which are contingent upon their continued employment, will be recognized ratably as compensation expense over the remaining requisite service periods.
Microsoft Acquisition Contingent Consideration
On April 11, 2021, we entered into a Merger Agreement with Microsoft, subject to the terms of which Microsoft has agreed to acquire Nuance. The consummation of the Merger remains subject to customary closing conditions including satisfaction of certain regulatory approvals. The Merger is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022. As part of the transaction, Nuance expects to incur liabilities of approximately $114.0 million that are contingent on the deal consummation. These liabilities include banker fees, legal fees, and certain retention bonuses.
Financial Instruments
We use financial instruments to manage our foreign exchange risk. We operate our business in countries throughout the world and transact business in various foreign currencies. Our foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency of our operations. We have a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effect of certain foreign currency exposures. Our program is designed so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Generally, we enter into such contracts for less than 90 days and have no cash requirements until maturity. As of September 30, 2021 and 2020, we had outstanding contracts with a total notional value of $52.5 million and $40.7 million, respectively.
Defined Benefit Plans
We sponsor certain defined benefit plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our defined benefit pension income was $0.2 million, $0.4 million, and $0.5 million for fiscal years 2021, 2020, and 2019, respectively. The aggregate projected benefit obligation as of September 30, 2021 and September 30, 2020 was $34.9 million and $35.4 million, respectively. The aggregate net liability of our defined benefit plans as of September 30, 2021 and September 30, 2020 was $10.1 million and $13.2 million, respectively.
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Off-Balance Sheet Arrangements
Through September 30, 2021, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition; allowance for doubtful accounts and sales returns; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations, including contingent consideration; accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes and related valuation allowances; and loss contingencies. Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and results of operations and require our most difficult and subjective judgments.
Revenue Recognition
We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) maintenance and support ("M&S"), (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectibility of the consideration is probable.
The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
We recognize revenue after applying the following five steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
•determination of the transaction price, including the constraint on variable consideration;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, performance obligations are satisfied.
We allocate the transaction price of the arrangement based on the relative estimated standalone selling price ("SSP") of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:
•the pricing of standalone sales (in the instances where available);
•the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
•contractually stated prices for deliverables that are intended to be sold on a standalone basis; and
•other pricing factors, such as the geographical region in which the products are sold, and expected discounts based on the customer size and type.
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We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a reduction to revenue and accounts receivable. Other forms of contingent revenue or variable consideration are infrequent.
Revenue is recognized when control of these products and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.
Certain products are sold through distributors or resellers. Certain distributors and resellers have been granted right of return and selling incentives which are accounted for as variable consideration when estimating the amount of revenue to be recognized. Returns and credits are estimated at the contract inception and updated at the end of each reporting period as additional information becomes available. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate the variable consideration associated with this group of customers.
Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.
Shipping and handling activities are not considered a contract performance obligation. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue.
Performance Obligations
Hosting
Hosting services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Our hosting contract terms generally range from one to five years.
As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our hosting services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, which is typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).
Subscription basis revenue represents a single promise to stand-ready to provide access to our hosting services. Revenue is recognized over time on a ratable basis over the hosting contract term, which generally ranges from one to five years.
Software Licenses
On-premise software licenses sold with non-distinct professional services to customize and/or integrate the underlying software are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Revenue from distinct on-premise software licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software is made available to the customer and control is transferred.
Revenue from software licenses sold on a royalty basis, where the license of intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).
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Maintenance and Support
Our M&S contracts generally include telephone support and the right to receive unspecified upgrades and updates on a when-and-if available basis. M&S revenue is recognized over time on a ratable basis over the contract period because we transfer control evenly by providing a stand-ready service.
Professional Services
Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Hardware
Hardware revenue is recognized at the point in time when control is transferred to the customer, which is typically upon delivery.
Significant Judgments
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services.
Judgments are required to determine the SSP for each distinct performance obligation. When SSP is directly observable, we estimate SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining SSP. Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.
From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Generally, we control a promised good or service before transferring that good or service to the customer and act as the principal to the transaction. Determining whether we control the good or service before it is transferred to the customer may require judgment.
Goodwill Impairment Analysis
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but rather the carrying amounts of these assets are assessed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Goodwill is tested for impairment annually on July 1, the first day of the fourth quarter of the fiscal year. In fiscal year 2017, we elected to early adopt ASU 2017-04, “Simplifying the Test for Goodwill Impairment” for its annual goodwill impairment test. ASU 2017-04 removes Step 2 of the goodwill impairment test requiring a hypothetical purchase price allocation. Goodwill impairment, if any, is determined by comparing the reporting unit's fair value to its carrying value. An impairment loss is recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. There was no goodwill impairment for fiscal year 2021 and 2020.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by segment management for performance assessment and resource allocation. Components of similar economic characteristics are aggregated into one reporting unit for the purpose of
42
goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically for recent acquisitions or any changes in segment reporting structure.
Corporate assets and liabilities are allocated to each reporting unit based on the reporting unit’s revenue, total operating expenses or operating income as a percentage of the consolidated amounts. Corporate debt and other financial liabilities that are not directly attributable to the reporting unit's operations and would not be transferred to hypothetical purchasers of the reporting units are excluded from a reporting unit's carrying amount.
We evaluated goodwill for impairment using a qualitative analysis and determined goodwill was not impaired. As part of that analysis we assessed goodwill using an entity valuation, which was derived based on the attribution of the agreed-upon purchase price for the announced Microsoft acquisition of Nuance. We use key financial metrics to allocate the purchase price to each reporting unit.
Intangible Assets and long-lived Asset groups
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific asset or asset group may not be recoverable. We assess the recoverability of long-lived assets with definite lives at the asset group level. Asset groups are determined based upon the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the asset group is also a reporting unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the recoverability test, we compare the total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the carrying value of the asset group exceeds the undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairment loss represents the excess of the asset or asset group’s carrying value over its estimated fair value, which is generally determined based upon the present value of estimated future pre-tax cash flows that a market participant would expect from use and disposition of the long-lived asset or asset group.
Income Taxes
Deferred Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. As the income tax returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current period reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the appropriate state and foreign income tax rates to use, the potential utilization of operating loss carry-forwards and valuation allowances required, if any, for tax assets that may not be realizable in the future. Tax laws and tax rates vary substantially in these jurisdictions, and are subject to change given the political and economic climate. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effect to determine both our current and deferred tax provisions.
Any significant fluctuation in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future to change. Such changes could lead to either increases or decreases in our effective tax rate.
We have historically estimated the future tax consequence of certain items, including bad debts, inventory valuation, and accruals that cannot be deducted for income tax purposes until such expenses are paid or the related assets are disposed. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. The income tax estimates used have not resulted in material adjustments to income tax expense in subsequent periods when the estimates are adjusted to the actual filed tax return amounts.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue tax for the repatriation of such foreign earnings.
Valuation Allowance
We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need
43
for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, existed it would be difficult for it to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.
As of September 30, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. We continue to believe negative evidence regarding the deferred tax assets outweighs positive evidence after considering recent profitability trends and the disposition of the medical transcription and EHR implementation businesses. We continue to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of September 30, 2021, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.
Uncertain Tax Positions
We operate in multiple jurisdictions through wholly-owned subsidiaries and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications related to legal entity restructuring, credits, intercompany transfer and acquisition or divestiture. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized.
RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note 2 to the accompanying consolidated financial statements for a description of recently adopted accounting standards.
ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
See Note 2 to the accompanying consolidated financial statements for a description of certain issued accounting standards that have not been adopted and may impact our financial statements in future reporting periods.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.
Exchange Rate Sensitivity
We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.
Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Canadian dollar, and Indian rupee.
44
Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As of September 30, 2021, we had not designated any contracts as fair value or cash flow hedges. The contracts generally have a maturity of less than 90 days. As of September 30, 2021, the notional contract amount of outstanding foreign currency exchange contracts was $52.5 million.
Interest Rate Sensitivity
We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities.
As of September 30, 2021, we held approximately $209.5 million of cash and cash equivalents and marketable securities consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would increase by approximately $2.1 million per annum, based on the September 30, 2021 reported balances of our investment accounts.
Convertible Debentures
The fair values of our convertible debentures are dependent on the price and volatility of our common stock as well as movements in interest rates. The fair market values of these debentures will generally increase as the market price of our common stock increases and will decrease as the market price of our common stock decreases. The fair market values of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect the fair market values of these debentures, but do not impact our financial position, results of operations or cash flows due to the fixed nature of the debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may provide the holders of these debentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement.
The following table summarizes the fair value and conversion value of our convertible debentures, and the estimated increase in fair value and conversion value with a hypothetical 10% increase in the stock price of $55.04 as of September 30, 2021 (dollars in millions):
| September 30, 2021 | |||||||||||||||||||||||
| Fair value | Conversion value | Increase to fair value | Increase to conversion value | ||||||||||||||||||||
| 1.5% 2035 Debentures | $66.9 | $67.1 | $6.7 | $6.7 | |||||||||||||||||||
| 1.0% 2035 Debentures | $296.7 | $297.3 | $30.2 | $29.7 | |||||||||||||||||||
| 1.25 % 2025 Debentures | $738.2 | $734.3 | $72.5 | $73.4 | |||||||||||||||||||
Item 8.
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Item 8.Financial Statements and Supplementary Data
Nuance Communications, Inc. Consolidated Financial Statements
NUANCE COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Nuance Communications, Inc.
Burlington, Massachusetts
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Nuance Communications, Inc. (the “Company”) as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated November 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Determination of Distinct Performance Obligations in Customer Revenue Contracts
As described in Note 3 to the consolidated financial statements, the Company recorded total revenues of $1.36 billion for the year ended September 30, 2021. The Company derives revenue from the following sources: (i) hosting services, (ii) software licenses, including royalties, (iii) M&S, (iv) professional services, and (v) sale of hardware. The Company enters into contracts with its customers, which frequently contain multiple performance obligations. The Company accounts for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
We identified the determination of distinct performance obligations as a critical audit matter. Significant judgment can be required to determine the performance obligations in a contract and whether they are distinct. Auditing these aspects involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.
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The primary procedures we performed to address this critical audit matter included:
•Evaluating the design and testing operating effectiveness of certain controls relating to management’s identification and assessment of distinct performance obligations in contracts with customers.
•Evaluating management’s accounting policies and practices including the reasonableness of management’s judgments and assumptions relating to the evaluation of performance obligations and whether they are distinct or non-distinct.
•Testing a sample of revenue contracts and underlying order documents to evaluate management’s identification of distinct performance obligations in revenue contracts.
Uncertain Tax Positions
As described in Note 21 to the Company’s consolidated financial statements, the Company’s total uncertain tax positions (“UTPs”) for the fiscal year ended September 30, 2021 were $60.1 million. The Company operates in multiple jurisdictions through its wholly-owned subsidiaries and its global structure is complex. The Company’s tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes the Company may owe may differ from the amounts recognized.
We identified the assessment of uncertain tax positions as a critical audit matter. The Company’s tax provision processes related to the UTPs involved significant management judgment in the assessment of the potential tax implications related to legal entity restructuring, credits, intercompany transfers and acquisition or divestiture activities. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of auditor judgment required in evaluating the Company’s interpretation of, and compliance with global tax laws across its multiple subsidiaries, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the design and testing the operating effectiveness of controls relating to management’s assessment of: (i) completeness and accuracy of the identified uncertain tax positions, (ii) evaluation of the technical merits of positions, and (iii) reasonableness of assumptions used in the determinations.
•Evaluating management’s judgments and assessing the reasonableness of assumptions used in determining the units of account, recognition, measurement, and technical merits of UTPs.
•Assessing management’s application of new and updated regulatory and legislative guidance in various jurisdictions and evaluating implications on the Company’s UTPs due to changes in legal structure of certain subsidiaries.
•Utilizing personnel with specialized skill and knowledge in tax to assist in evaluating technical merits, reasonableness of management’s judgments and assumptions used in UTP calculations and the overall reasonableness of conclusions reached.
| /s/ BDO USA, LLP | |||||
| BDO USA, LLP | |||||
BDO USA, LLP
Boston, MA
November 18, 2021
We have served as the Company's auditor since 2004.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Nuance Communications, Inc.
Burlington, Massachusetts
Opinion on Internal Control over Financial Reporting
We have audited Nuance Communications, Inc.’s (the “Company’s”) internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and our report dated November 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ BDO USA, LLP | |||||
| BDO USA, LLP | |||||
BDO USA, LLP
Boston, MA
November 18, 2021
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands, except per share amounts) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Hosting and professional services | $ | 812,314 | $ | 731,195 | $ | 663,378 | |||||||||||
| Product and licensing | 299,368 | 295,908 | 339,640 | ||||||||||||||
| Maintenance and support | 250,697 | 256,689 | 268,231 | ||||||||||||||
| Total revenues | 1,362,379 | 1,283,792 | 1,271,249 | ||||||||||||||
| Cost of revenues: | |||||||||||||||||
| Hosting and professional services | 445,148 | 401,003 | 399,598 | ||||||||||||||
| Product and licensing | 34,189 | 61,209 | 69,777 | ||||||||||||||
| Maintenance and support | 29,958 | 31,215 | 33,374 | ||||||||||||||
| Amortization of intangible assets | 19,696 | 27,577 | 27,184 | ||||||||||||||
| Total cost of revenues | 528,991 | 521,004 | 529,933 | ||||||||||||||
| Gross profit | 833,388 | 762,788 | 741,316 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 249,200 | 219,917 | 181,784 | ||||||||||||||
| Sales and marketing | 294,538 | 270,229 | 269,801 | ||||||||||||||
| General and administrative | 127,318 | 155,880 | 172,635 | ||||||||||||||
| Amortization of intangible assets | 39,636 | 37,664 | 37,987 | ||||||||||||||
| Acquisition-related costs, net | 3,734 | 2,935 | 6,524 | ||||||||||||||
| Restructuring and other charges, net | 36,243 | 17,513 | 30,128 | ||||||||||||||
| Total operating expenses | 750,669 | 704,138 | 698,859 | ||||||||||||||
| Income from operations | 82,719 | 58,650 | 42,457 | ||||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest income | 547 | 4,527 | 13,705 | ||||||||||||||
| Interest expense | (77,733) | (93,968) | (120,095) | ||||||||||||||
| Other expense, net | (17,497) | (13,117) | (870) | ||||||||||||||
| Loss before income taxes | (11,964) | (43,908) | (64,803) | ||||||||||||||
| Provision (benefit) for income taxes | 5,408 | (30,868) | (23,198) | ||||||||||||||
| Net loss from continuing operations | (17,372) | (13,040) | (41,605) | ||||||||||||||
| Net (loss) income from discontinued operations | (9,354) | 34,436 | 255,415 | ||||||||||||||
| Net (loss) income | $ | (26,726) | $ | 21,396 | $ | 213,810 | |||||||||||
| Net (loss) income per common share - basic: | |||||||||||||||||
| Continuing operations | $ | (0.06) | $ | (0.05) | $ | (0.15) | |||||||||||
| Discontinued operations | (0.03) | 0.13 | 0.90 | ||||||||||||||
| Total net (loss) income per basic common share | $ | (0.09) | $ | 0.08 | $ | 0.75 | |||||||||||
| Net (loss) income per common share - diluted: | |||||||||||||||||
| Continuing operations | $ | (0.06) | $ | (0.05) | $ | (0.15) | |||||||||||
| Discontinued operations | (0.03) | 0.13 | 0.90 | ||||||||||||||
| Total net (loss) income per diluted common share | $ | (0.09) | $ | 0.08 | $ | 0.75 | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 294,589 | 282,644 | 286,347 | ||||||||||||||
| Diluted | 294,589 | 282,644 | 286,347 | ||||||||||||||
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Net (loss) income | $ | (26,726) | $ | 21,396 | $ | 213,810 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustment | 10,848 | 2,167 | (11,993) | ||||||||||||||
| Cerence Spin-off | — | 12,331 | — | ||||||||||||||
| Reclassification of currency translation differences into earnings as a result of business disposition | — | — | 5,605 | ||||||||||||||
| Pension adjustments | 2,479 | 423 | (3,768) | ||||||||||||||
| Unrealized (loss) gain on marketable securities | (58) | (66) | 246 | ||||||||||||||
| Total other comprehensive income (loss), net | 13,269 | 14,855 | (9,910) | ||||||||||||||
| Comprehensive (loss) income | $ | (13,457) | $ | 36,251 | $ | 203,900 | |||||||||||
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | September 30, 2020 | ||||||||||
| (In thousands, except per share amounts) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 187,307 | $ | 301,233 | |||||||
| Marketable securities | 22,168 | 71,114 | |||||||||
Accounts receivable, less allowances for doubtful accounts of $10,073 and $8,649 | 162,292 | 175,583 | |||||||||
| Prepaid expenses and other current assets | 231,778 | 152,563 | |||||||||
| Current assets, discontinued operations | — | 35,492 | |||||||||
| Total current assets | 603,545 | 735,985 | |||||||||
| Land, buildings and equipment, net | 146,660 | 137,299 | |||||||||
| Goodwill | 2,155,270 | 2,120,495 | |||||||||
| Intangible assets, net | 128,331 | 167,270 | |||||||||
| Right-of-use assets | 82,666 | 104,839 | |||||||||
| Deferred tax assets | 45,927 | 47,818 | |||||||||
| Other assets | 224,254 | 200,596 | |||||||||
| Long-term assets, discontinued operations | — | 79,030 | |||||||||
| Total assets | $ | 3,386,653 | $ | 3,593,332 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 372,999 | $ | 432,209 | |||||||
| Contingent and deferred acquisition payments | 2,148 | 4,224 | |||||||||
| Accounts payable | 90,120 | 71,833 | |||||||||
| Accrued expenses and other current liabilities | 222,340 | 199,254 | |||||||||
| Deferred revenue | 240,742 | 249,484 | |||||||||
| Current liabilities, discontinued operations | — | 29,138 | |||||||||
| Total current liabilities | 928,349 | 986,142 | |||||||||
| Long-term debt | 494,925 | 1,104,464 | |||||||||
| Deferred revenue, net of current portion | 108,317 | 98,696 | |||||||||
| Deferred tax liabilities | 12,019 | 70,116 | |||||||||
| Operating lease liabilities | 85,290 | 103,996 | |||||||||
| Other liabilities | 77,781 | 64,597 | |||||||||
| Long-term liabilities, discontinued operations | — | 21,388 | |||||||||
| Total liabilities | 1,706,681 | 2,449,399 | |||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| Mezzanine Equity | 45,038 | — | |||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.001 par value per share; 560,000 shares authorized; 319,402 and 286,703 shares issued and 315,651 and 282,952 shares outstanding, respectively | 319 | 287 | |||||||||
| Additional paid-in capital | 2,054,994 | 1,550,568 | |||||||||
Treasury stock, at cost (3,751 shares) | (16,788) | (16,788) | |||||||||
| Accumulated other comprehensive loss | (104,649) | (117,918) | |||||||||
| Accumulated deficit | (298,942) | (272,216) | |||||||||
| Total stockholders’ equity | 1,634,934 | 1,143,933 | |||||||||
| Total liabilities and stockholders’ equity | $ | 3,386,653 | $ | 3,593,332 | |||||||
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2018 | 291,504 | $ | 291 | $ | 2,597,693 | (3,751) | $ | (16,788) | $ | (122,863) | $ | (740,837) | $ | — | $ | 1,717,496 | |||||||||||||||||||||||||||||||||||||
| Accumulated adjustment related to the adoption of ASC 606 | — | — | — | — | — | — | 233,415 | — | 233,415 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 8,981 | 9 | 16,588 | — | — | — | — | — | 16,597 | ||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding | (2,645) | (2) | (42,552) | — | — | — | — | — | (42,554) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 161,371 | — | — | — | — | — | 161,371 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (8,160) | (8) | (126,930) | — | — | — | — | — | (126,938) | ||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | — | — | (8,281) | — | — | — | — | 18,144 | 9,863 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 213,810 | — | 213,810 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (9,910) | — | — | (9,910) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 289,680 | 290 | 2,597,889 | (3,751) | (16,788) | (132,773) | (293,612) | 18,144 | 2,173,150 | ||||||||||||||||||||||||||||||||||||||||||||
| Cerence Spin-off | — | — | (922,567) | — | — | 12,331 | — | (18,144) | (928,380) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 9,387 | 9 | 14,831 | — | — | — | — | — | 14,840 | ||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding | (2,907) | (3) | (56,457) | — | — | — | — | — | (56,460) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 132,201 | — | — | — | — | — | 132,201 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (9,457) | (9) | (169,208) | — | — | — | — | — | (169,217) | ||||||||||||||||||||||||||||||||||||||||||||
Repurchases of convertible notes (a) | — | — | (46,121) | — | — | — | — | — | (46,121) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 21,396 | — | 21,396 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 2,524 | — | — | 2,524 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 286,703 | 287 | 1,550,568 | (3,751) | (16,788) | (117,918) | (272,216) | — | 1,143,933 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 6,696 | 7 | 17,061 | — | — | — | — | — | 17,068 | ||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding | (2,246) | (2) | (101,963) | — | — | — | — | — | (101,965) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 140,340 | — | — | — | — | — | 140,340 | ||||||||||||||||||||||||||||||||||||||||||||
| Equity portion of convertible debt puttable | — | — | (45,038) | — | — | — | — | — | (45,038) | ||||||||||||||||||||||||||||||||||||||||||||
Redemption of Convertible Notes (a) | 28,249 | 27 | 494,026 | — | — | — | — | — | 494,053 | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (26,726) | — | (26,726) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 13,269 | — | — | 13,269 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 319,402 | $ | 319 | $ | 2,054,994 | (3,751) | $ | (16,788) | $ | (104,649) | $ | (298,942) | $ | — | $ | 1,634,934 | |||||||||||||||||||||||||||||||||||||
(a) According to ASC 470-20, cash consideration paid to repurchase and retire our convertible notes was first allocated to debt component based on the actual fair value on the trading date, and the remaining consideration was allocated to additional paid-in capital.
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net loss from continuing operations | $ | (17,372) | $ | (13,040) | $ | (41,605) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 33,708 | 30,538 | 36,082 | ||||||||||||||
| Amortization | 59,332 | 65,241 | 65,171 | ||||||||||||||
| Stock-based compensation | 143,376 | 129,618 | 115,463 | ||||||||||||||
| Non-cash interest expense | 37,997 | 49,440 | 49,488 | ||||||||||||||
| Deferred tax benefit | (2,911) | (47,892) | (40,616) | ||||||||||||||
| Loss on extinguishment of debt | 19,261 | 18,656 | 910 | ||||||||||||||
| Other | 6,709 | 3,697 | 8,951 | ||||||||||||||
| Changes in operating assets and liabilities, excluding effects of acquisitions: | |||||||||||||||||
| Accounts receivable | (12,114) | 32,536 | 4,765 | ||||||||||||||
| Prepaid expenses and other assets | (39,101) | (8,853) | (18,495) | ||||||||||||||
| Accounts payable | 20,558 | (7,169) | 11,928 | ||||||||||||||
| Accrued expenses and other liabilities | (949) | (81,454) | 31,936 | ||||||||||||||
| Deferred revenue | (9,317) | 21,293 | (1,052) | ||||||||||||||
| Net cash provided by operating activities - continuing operations | 239,177 | 192,611 | 222,926 | ||||||||||||||
| Net cash provided by operating activities - discontinued operations | 8,462 | 61,953 | 178,431 | ||||||||||||||
| Net cash provided by operating activities | 247,639 | 254,564 | 401,357 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | (56,514) | (61,297) | (44,185) | ||||||||||||||
| Proceeds from dispositions of businesses, net of transaction fees | 9,885 | 150 | 407,043 | ||||||||||||||
| Purchases of marketable securities and other investments | (78,485) | (180,005) | (349,125) | ||||||||||||||
| Proceeds from sales and maturities of marketable securities and other investments | 127,378 | 313,734 | 303,171 | ||||||||||||||
| Payments for business and asset acquisitions, net of cash acquired | (45,425) | (1,000) | (20,873) | ||||||||||||||
| Other | 732 | 1,147 | — | ||||||||||||||
| Net cash (used in) provided by investing activities | (42,429) | 72,729 | 296,031 | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Repurchase and redemption of debt | (230,076) | (513,642) | (300,000) | ||||||||||||||
| Net distribution from Cerence upon the spin-off | — | 139,090 | — | ||||||||||||||
| Payments for repurchase of common stock | — | (169,217) | (126,938) | ||||||||||||||
| Proceeds from issuance of common stock from employee stock plans | 17,068 | 14,840 | 16,597 | ||||||||||||||
| Proceeds from the revolving credit facility | — | 230,000 | — | ||||||||||||||
| Repayment of the revolving credit facility | — | (230,000) | — | ||||||||||||||
| Payments for taxes related to net share settlement of equity awards | (104,368) | (54,056) | (49,428) | ||||||||||||||
| Proceeds from sale of noncontrolling interests in a subsidiary | — | — | 9,863 | ||||||||||||||
| Other financing activities | (5,364) | (3,222) | (2,131) | ||||||||||||||
| Net cash used in financing activities | (322,740) | (586,207) | (452,037) | ||||||||||||||
| Effects of exchange rate changes on cash and cash equivalents | 3,604 | (814) | (353) | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (113,926) | (259,728) | 244,998 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 301,233 | 560,961 | 315,963 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 187,307 | $ | 301,233 | $ | 560,961 | |||||||||||
See accompanying notes.
54
1.Organization and Presentation
Nuance Communications, Inc. ("We", "Nuance", or the "Company") is a pioneer and leader in conversational and cognitive AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We have three reportable segments as of September 30, 2021: Healthcare, Enterprise, and Other. See Note 22 for a description of each of these segments.
On April 11, 2021, we entered into the Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the Merger, Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. The consummation of the Merger is subject to certain conditions, including the satisfaction of certain regulatory approvals and other customary closing conditions, but it is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022.
For additional information related to the Merger Agreement, please refer to the definitive proxy statement previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about Nuance and the Merger.
As more fully described in Note 10, during the fourth quarter of fiscal year 2021, our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending September 30, 2021. As a result, the holders of our 1.25% 2025 Debentures and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between October 1, 2021 and December 31, 2021. Additionally, on November 5, 2021, we redeemed all of the outstanding 1.5% 2035 Debentures. All three convertible notes, with a total net book value of $373.0 million, was included within current liabilities as of September 30, 2021.
Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. During fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $137.4 million notional amount for $137.4 million in cash and 4.1 million shares of common stock, and holders of our 1.0% 2035 Debentures exercised their right to convert $89.2 million notional amount for $89.2 million in cash and 2.1 million shares of common stock. Additionally, during fiscal year 2021, we induced the exchange of $457.0 million notional amount of our 1.0% 2035 Debentures for $5.0 million in cash and 18.9 million shares of common stock, and $64.9 million notional amount of 1.5% 2035 Debentures for $0.5 million in cash and 3.2 million shares of common stock. As of September 30, 2021, $130.3 million in aggregate principal amount of the 1.0% 2035 Debentures and $25.1 million in aggregate principal amount of the 1.5% 2035 Debentures remained outstanding.
Our convertible debentures are actively traded in the open market. The 1.25% 2025 Debentures trade at a price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders of the 1.25% 2025 Debentures to early exercise their conversion rights. In the event that holders of any of our debentures presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities.
2. Summary of Significant Accounting Policies
Use of Estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which requires management to make estimates and assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the footnotes thereto. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, assumptions and judgments. Significant estimates inherent to the preparation of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
financial statements include: revenue recognition; the allowances for doubtful accounts and sales returns; contract assets; internally developed software; goodwill and intangible assets; business combinations, including contingent consideration; and income taxes, including valuation allowance and uncertain tax positions. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.
Basis of Consolidation
The consolidated financial statements include the accounts Nuance and our subsidiaries. Intercompany transactions and balances have been eliminated.
Business Combinations
We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition. The purchase price allocation process requires us to use significant estimates and assumptions, which include:
•estimated fair values of intangible assets;
•estimated fair values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations (classified as deferred revenue);
•estimated fair values of stock awards assumed from the acquiree that are included in the purchase price;
•estimated fair value of required payments under contingent consideration provisions;
•estimated income tax assets and liabilities assumed from the acquiree; and
•estimated fair value of pre-acquisition contingencies assumed from the acquiree.
The fair value of any contingent consideration is established at the acquisition date and included in the total purchase price. The contingent consideration is then adjusted to fair value, with any measurement-period adjustment recorded against goodwill. Adjustments identified subsequent to the measurement period are recorded within Acquisition-related costs, net.
While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which is generally one year from the acquisition date, any adjustment to the assets acquired and liabilities assumed is recorded against goodwill in the period in which the amount is determined. Any adjustment identified subsequent to the measurement period is included in operating results in the period in which the amount is determined.
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but rather the carrying amounts of these assets are assessed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Goodwill is tested for impairment annually on July 1, the first day of the fourth quarter of the fiscal year. Goodwill impairment, if any, is determined by comparing the reporting unit's fair value to its carrying value. An impairment loss is recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. There was no goodwill impairment for fiscal year 2021.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by segment management for performance assessment and resource allocation. Components of similar economic characteristics are aggregated into one reporting unit for the purpose of goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically for recent acquisitions or any changes in segment reporting structure.
Corporate assets and liabilities are allocated to each reporting unit based on the reporting unit’ revenue, total operating expenses or operating income as a percentage of the consolidated amounts. Corporate debt and other financial liabilities that are not
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
directly attributable to the reporting unit's operations and would not be transferred to hypothetical purchasers of the reporting units are excluded from a reporting unit's carrying amount.
We evaluated goodwill for impairment using a qualitative analysis and determined goodwill was not impaired. As part of that analysis we assessed goodwill using an entity valuation, which was derived based on the attribution of the agreed-upon purchase price for the announced Microsoft acquisition of Nuance. We use key financial metrics to allocate the purchase price to each reporting unit.
Long-Lived Assets with Definite Lives
Our long-lived assets consist principally of technology, customer relationships, internally developed software, land, and building and equipment. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other definite-lived assets are amortized over their estimated economic lives using the straight-line method. The remaining useful lives of long-lived assets are re-assessed periodically for any events and circumstances that may change the future cash flows expected to be generated from the long-lived asset or asset group.
Internally developed software consists of capitalized costs incurred during the application development stage, which include costs related design of the software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage and post-implementation stage are expensed as incurred. Internally developed software is amortized over the estimated useful life, commencing on the date when the asset is ready for its intended use. Land, building and equipment are stated at cost and depreciated over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the related lease term or the estimated useful life. Depreciation is computed using the straight-line method. Repair and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of sold or retired assets are removed from the accounts and any gain or loss is included in the results of operations for the period.
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific asset or asset group may not be recoverable. We assess the recoverability of long-lived assets with definite lives at the asset group level. Asset groups are determined based upon the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the asset group is also a reporting unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the recoverability test, we compare the total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the carrying value of the asset group exceeds the undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairment loss represents the excess of the asset or asset group’s carrying value over its estimated fair value, which is generally determined based upon the present value of estimated future pre-tax cash flows that a market participant would expect from use and disposition of the long-lived asset or asset group. There was no intangible asset impairment for fiscal year 2021.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, including money market funds and time deposits with original maturities of 90 days or less.
Marketable Securities
Marketable securities consist of time deposits and high-quality corporate debt instruments with stated maturities of more than 90 days. Investments are classified as available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss, net of tax.
Accounts Receivable Allowances
Allowances for Doubtful Accounts. We record allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The allowance is based upon the credit worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.
Allowances for Sales Returns. We reduce transaction price for estimated returns and other allowances that represent variable considerations based on historical experience and other relevant factors. The receivables are written off against the allowance in the period the return is received.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the years ended September 30, 2021, 2020 and 2019, the activity related to accounts receivable allowances was as follows (dollars in thousands):
| Allowance for Doubtful Accounts | Allowance for Sales Returns | ||||||||||
| Balance at September 30, 2018 | $ | 6,662 | $ | 3,232 | |||||||
| Bad debt provision | 2,372 | — | |||||||||
| Write-offs, net of recoveries | (1,732) | — | |||||||||
| Revenue adjustments, net | — | 164 | |||||||||
| Balance at September 30, 2019 | 7,302 | 3,396 | |||||||||
| Bad debt provisions | 2,115 | — | |||||||||
| Write-offs, net of recoveries | (768) | — | |||||||||
| Revenue adjustments, net | — | (466) | |||||||||
| Balance at September 30, 2020 | 8,649 | 2,930 | |||||||||
| Bad debt provisions | 2,853 | — | |||||||||
| Write-offs, net of recoveries | (1,429) | — | |||||||||
| Revenue adjustments, net | — | (1,446) | |||||||||
| Balance at September 30, 2021 | $ | 10,073 | $ | 1,484 | |||||||
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include expenses that have been paid for in advance of services being received, inventory, sales tax receivable, contract assets, deferred contract costs, and other miscellaneous assets. For a detailed description of our contract assets and deferred contract costs, see Note 3 within the accompanying consolidated financial statements. Additionally, as of September 30, 2021 a receivable related to an offensive litigation settlement of approximately $24.0 million was included in other current assets.
Software Development Costs
We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented.
Software development costs also include costs to develop software to be used solely to meet internal needs and cloud-based applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed, and the software will be used to perform the function intended. As of September 30, 2021 and 2020, the net book value of capitalized internal-use software costs was $81.5 million and $54.1 million, respectively, which are included within Land, buildings and equipment, net.
Acquisition-Related Costs, Net
Acquisition-related costs, net include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities; (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies.
The components of acquisition-related costs, net were as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Transition and integration costs | $ | 4,963 | $ | 3,778 | $ | 6,125 | |||||||||||
| Professional service fees | 834 | 28 | 1,942 | ||||||||||||||
| Acquisition-related adjustments | (2,063) | (871) | (1,543) | ||||||||||||||
| Total | $ | 3,734 | $ | 2,935 | $ | 6,524 | |||||||||||
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising Costs
Advertising costs are expensed as incurred and recorded within sales and marketing expenses. The advertising costs capitalized as of September 30, 2021 and 2020 are de minimis. We incurred advertising costs of $16.3 million, $16.2 million and $16.9 million for fiscal years 2021, 2020 and 2019, respectively.
Convertible Debt
We bifurcate the debt and equity (the contingently convertible feature) components of our convertible debt instruments in a manner that reflects our nonconvertible debt borrowing rate at the time of issuance. The equity components of our convertible debt instruments are recorded within stockholders’ equity with an allocated issuance premium or discount. The debt issuance premium or discount is amortized to interest expense in our consolidated statement of operations using the effective interest method over the expected term of the convertible debt.
We assess the short-term and long-term classification of our convertible debt on each balance sheet date. The carrying amount of the convertible debt is reclassified to current liabilities if a contingent event has occurred that makes the debt obligation puttable. The corresponding equity component classified from additional paid-in capital to mezzanine equity when the holders have the contractual rights to redeem or convert.
Income Taxes
We account for income taxes using the asset and liability method, under which we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We measure current and deferred tax assets and liabilities based on provisions of enacted tax law. We evaluate the realization of our deferred tax assets based on all available evidence and establish a valuation allowance to reduce deferred tax assets when it is more likely than not that they will not be realized.
We recognize the financial statement effects of a tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination. The tax benefits of the position recognized in the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. In addition, we recognize interest and penalties related to unrecognized tax benefits as a component of the income tax provision.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, reflected in the consolidated statements of stockholders’ equity, consisted of the following (dollars in thousands):
| September 30, 2021 | September 30, 2020 | ||||||||||
| Foreign currency translation adjustment | $ | (99,262) | $ | (110,110) | |||||||
| Net unrealized losses on post-retirement benefits | (5,394) | (7,873) | |||||||||
| Unrealized gain on marketable securities | 7 | 65 | |||||||||
| Accumulated other comprehensive loss | $ | (104,649) | $ | (117,918) | |||||||
No income tax provisions or benefits are recorded for foreign currency translation adjustment as the undistributed earnings in our foreign subsidiaries are expected to be indefinitely reinvested.
Concentration of Risk
Financial instruments that are potentially subject to significant concentrations of credit risk principally consist of cash, cash equivalents, marketable securities and trade accounts receivable. We place our cash and cash equivalents and marketable securities with financial institutions with high credit ratings. As part of our cash and investment management processes, we perform periodic evaluations of the credit standing of the financial institutions with whom we maintain deposits, and have not recorded any credit losses to-date. For trade accounts receivable, we perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed appropriate. No customer accounted for more than 10% of our net accounts receivable balance at September 30, 2021 and 2020 or 10% of our revenue for fiscal years 2021, 2020 or 2019.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Currency Translation
The functional currency of a foreign subsidiary is generally the local currency. We translate the financial statements of foreign subsidiaries to U.S. dollars using month-end exchange rates for assets and liabilities, and average rates for the reporting period for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive loss as a component of stockholders’ equity. We record net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to the functional currency within in other expense, net. Foreign currency transaction gains for fiscal years 2021, 2020 and 2019 were $0.2 million, $1.3 million and $1.1 million, respectively.
Financial Instruments and Hedging Activities
We use forward currency exchange contracts to manage our exposure to fluctuations in foreign currency for certain transactions. In order for instruments to be designated as hedges, specific criteria must be met, including (i) formal documentation must exist for both the hedging relationship and our risk management objectives and strategies for undertaking the hedging activities, (ii) at the inception and on an ongoing basis, the hedging relationship is expected to be highly effective in offsetting changes in fair value attributed to the hedged risk during the period that the hedge is designated, and (iii) an assessment of effectiveness is required whenever financial statements or earnings are reported.
The effective portion of changes in the fair values of contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive loss until the hedged item effects earnings. Once the underlying forecasted transaction is realized, the changes of fair vales of instruments designated as hedges reclassified from accumulated other comprehensive loss to the statement of operations, in the appropriate income statement line items. Any ineffective portion of the instruments designated as cash flow hedges is recognized in current earnings. We report cash flows arising from derivative financial instruments designated as fair value or cash flow hedges consistent with the classification of the cash flows from the underlying hedged items that these derivatives are hedging.
No forward exchange contracts are designated as hedges for fiscal years 2021, 2020, or 2019. Changes in the fair values of the forward currency exchange contracts are recorded within other expense, net. Cash flows related to investments and settlements of forward currency exchange contracts are included within cash flows from investing activities.
Stock-Based Compensation
Stock-based compensation primarily consists of restricted stock units with service, and market or performance conditions. Equity awards are measured at the fair market value of the underlying stock at the grant date. We recognize stock compensation expense ratably over the requisite service period and account for forfeitures based on our estimates. Shares are issued on the vesting dates net of the applicable statutory tax withholding to be paid by us on behalf of our employees. As a result, fewer shares are issued than the number of awards outstanding. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital. We record any income tax effect related to stock-based awards through the consolidated statements of operations. Excess tax benefits are recognized as deferred tax assets upon settlement and are subject to regular review for valuation allowance.
Net (Loss) Income Per Share
Basic net income or loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income or loss per share is computed using the weighted-average number of common shares, giving effect to potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of stock options, restricted stock units, contingently issuable shares under earn-out agreements, and potential issuance of stock upon conversion of our convertible debentures, as more fully described in Note 10. In the event of conversion, we are required to settle the principal amount of the convertible debentures, with any accrued and unpaid interest in cash, and may settle the conversion spread in either cash or common stock at our election. Therefore, only the shares of common stock potentially issuable upon conversion are included within the diluted common shares for the reporting period, during which our average stock price exceeds the conversion price.
Recently Adopted Accounting Standards
Internal-Use Software
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation
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Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which became effective for us during the first quarter of fiscal year 2021. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the hosting arrangement is ready for its intended use. The guidance is applied retrospectively to each period presented. The implementation did not have a material impact on our consolidated financial statements.
Current Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which became effective for us during the first quarter of fiscal year 2021. The guidance requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financial assets using a forward-looking approach, taking into consideration historical experience, current conditions, and supportable forecasts that impact collectibility. The implementation did not have a material impact on our consolidated financial statements.
Issued Accounting Standards Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.
Convertible Notes
In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The new guidance eliminates two of the three models in Accounting Standards Codification (ASC) 470-202 that require separating embedded conversion features from convertible instruments. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-153 will be accounted for separately. For contracts in an entity’s own equity, the new guidance eliminates some of the requirements in ASC 815-404 for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The guidance will be effective for annual periods beginning after 15 December 2021, and interim periods therein. Early adoption is permitted for all entities for fiscal periods beginning after 15 December 2020, including interim periods within the same fiscal year. Entities are allowed to adopt the guidance using either the modified or full retrospective approach. We are currently assessing the provisions of the guidance but do not expect the implementation to have a material impact on our consolidated financial statement.
3. Revenue Recognition
We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) M&S, (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of the consideration is probable.
The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct--that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
We recognize revenue after applying the following five steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
•determination of the transaction price, including the constraint on variable consideration;
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•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, performance obligations are satisfied.
We allocate the transaction price of the arrangement based on the relative estimated SSP of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:
•the pricing of standalone sales (in the instances where available);
•the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
•contractually stated prices for deliverables that are intended to be sold on a standalone basis; and
•other pricing factors, such as the geographical region in which the products are sold, and expected discounts based on the customer size and type.
We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASC 606"), which we estimate based on historical return experience and other relevant factors and record a reduction to revenue and accounts receivable. Other forms of contingent revenue or variable consideration are infrequent.
Revenue is recognized when control of these products and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of financing to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.
Certain products are sold through distributors or resellers. Certain distributors and resellers have been granted right of return and selling incentives which are accounted for as variable consideration when estimating the amount of revenue to be recognized. Returns and credits are estimated at the contract inception and updated at the end of each reporting period as additional information becomes available. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate the variable consideration associated with this group of customers.
Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.
Shipping and handling activities are not considered a contract performance obligation. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue.
Performance Obligations
Hosting
Hosting services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Our hosting contract terms generally range from to five years.
As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our hosting services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, which is typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).
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Subscription-based revenue represents a single promise to stand-ready to provide access to our hosting services. Revenue is recognized over time on a ratable basis over the hosting contract term, which generally ranges from to five years.
Software Licenses
On-premise software licenses sold with non-distinct professional services to customize and/or integrate the underlying software are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Revenue from distinct on-premise software licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software is made available to the customer and control is transferred.
Revenue from software licenses sold on a royalty basis, where the license of intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).
Maintenance and Support
Our M&S contracts generally include telephone support and the right to receive unspecified upgrades and updates on a when-and-if available basis. M&S revenue is recognized over time on a ratable basis over the contract period because we transfer control evenly by providing a stand-ready service.
Professional Services
Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Hardware
Hardware revenue is recognized at the point in time when control is transferred to the customer, which is typically upon delivery.
Significant Judgments
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services.
Judgments are required to determine the SSP for each distinct performance obligation. When SSP is directly observable, we estimate SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining SSP. Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP for such performance obligations, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.
From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Generally, we control a promised good or service before transferring that good or service to the customer and act as the principal to the transaction. Determining whether we control the good or service before it is transferred to the customer may require judgment.
Disaggregated Revenue
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We disaggregate revenue from contracts with customers by the reportable segment, products, and services provided. The following presentation depicts the timing, risks, and uncertainty of our revenue streams, which is also in line with how we manage our businesses, assess performance, and determine management compensation. Our disaggregated revenue from continuing operations is as follows (dollars in thousands):
| For the Year Ended September 30, 2021 | |||||||||||||||||||||||
| Hosting and professional services | Product and licensing | Maintenance and support | Total | ||||||||||||||||||||
| Healthcare | $ | 481,234 | $ | 196,591 | $ | 128,257 | $ | 806,082 | |||||||||||||||
| Enterprise | 312,175 | 100,825 | 122,383 | 535,383 | |||||||||||||||||||
| Other | 18,905 | 1,952 | 57 | 20,914 | |||||||||||||||||||
| Total revenues | $ | 812,314 | $ | 299,368 | $ | 250,697 | $ | 1,362,379 | |||||||||||||||
| For the Year Ended September 30, 2020 | |||||||||||||||||||||||
| Hosting and professional services | Product and licensing | Maintenance and support | Total | ||||||||||||||||||||
| Healthcare | $ | 382,938 | $ | 200,988 | $ | 136,299 | $ | 720,225 | |||||||||||||||
| Enterprise | 319,347 | 89,950 | 120,380 | 529,677 | |||||||||||||||||||
| Other | 28,910 | 4,970 | 10 | 33,890 | |||||||||||||||||||
| Total revenues | $ | 731,195 | $ | 295,908 | $ | 256,689 | $ | 1,283,792 | |||||||||||||||
Hardware revenue comprised approximately $27.1 million of total product and licensing revenue for fiscal year 2021 and $28.0 million for fiscal year 2020.
Contract Acquisition Costs
We are required to capitalize certain contract acquisition costs under ASC 606. The capitalized costs primarily relate to paid commissions and other direct, incremental costs to acquire customer contracts. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where the expected period of benefit is one year or less. Sales commissions paid on renewal maintenance and support are not commensurate with sales commissions paid on the initial maintenance and support contract. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit, which we have estimated to be between and five years. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and our ability to retain customers including canceled contracts. Contract acquisition costs are classified as current or noncurrent assets based on when the expense will be recognized. The current and noncurrent portions of contract acquisition costs are included in Prepaid expenses and other current assets, and Other assets, respectively. As of September 30, 2021, we had $40.5 million of current contract acquisition costs and $86.1 million of noncurrent contract acquisition costs. As of September 30, 2020, we had $20.9 million of current contract acquisition costs and $51.6 million of noncurrent contract acquisition costs. Commission expense is primarily included in Sales and marketing expense on the consolidated statements of operations. We also had amortization expense of $20.8 million and $16.5 million related to contract acquisition costs for the year ended September 30, 2021 and 2020. There was no impairment related to commission costs capitalized.
Capitalized Contract Costs
We capitalize incremental costs incurred to fulfill our contracts that (1) relate directly to the contract, (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (3) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to standup, customize, and develop applications for each customer. These costs are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. The contract costs are expensed to cost of revenue as we satisfy our stand-ready obligation over the contract term, which we estimate to be between and five years. The contract term estimation was determined based on an average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers including canceled contracts. We classify capitalized contract costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of capitalized contract fulfillment costs are included in Prepaid expenses and other current assets, and Other assets, respectively. At September 30, 2021, we had $21.3 million of short-term contract costs included with Prepaid expenses and other current assets and $35.3 million of long-term
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costs included within Other assets. As of September 30, 2020, we had $18.0 million of short-term contract costs included with Prepaid expenses and other current assets and $30.7 million of long-term costs included within Other assets.
Trade Accounts Receivable and Contract Balances
We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in Accounts receivable, net in our consolidated balance sheets at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. The current and noncurrent portions of contract assets are included in Prepaid expenses and other current assets, and Other assets. As of September 30, 2021, we had $72.6 million of current contract assets and $88.9 million of noncurrent contract assets. As of September 30, 2020, we had $48.7 million of current contract assets and $107.4 million of noncurrent contract assets. The table below shows significant changes in contract assets of continuing operations (dollars in thousands):
| Contract assets | |||||
| Balance September 30, 2020 | $ | 156,142 | |||
| Revenues recognized but not billed | 391,002 | ||||
| Amounts reclassified to accounts receivable | (385,632) | ||||
| Balance September 30, 2021 | $ | 161,512 | |||
Our contract liabilities, or Deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify Deferred revenue as current or noncurrent based on when we expect to recognize the revenues. The table below shows significant changes in Deferred revenue of continuing operations (dollars in thousands):
| Deferred revenue | |||||
| Balance September 30, 2020 | $ | 348,180 | |||
| Amounts bill but not recognized | 768,827 | ||||
| Revenue recognized | (767,948) | ||||
| Balance September 30, 2021 | $ | 349,059 | |||
Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at September 30, 2021 (dollars in thousands):
| Within One Year | Two to Four Years | Greater than Four Years | Total | ||||||||||||||||||||
| Total revenue | $ | 722,360 | $ | 961,396 | $ | 47,773 | $ | 1,731,529 | |||||||||||||||
The table above includes fixed backlogs and does not include variable backlog derived from contingent usage-based activities, such as royalties and usage-based hosting revenue.
4. Disposition of Businesses
Disposition of Our Medical Transcription and EHR Go-live Businesses
On November 17, 2020, we entered into the Agreement to sell the Business, comprised of our medical transcription and EHR implementation businesses to the Buyer. Pursuant to the Agreement, we sold and transferred, and the Buyer purchased and acquired, (a) the shares of certain subsidiaries through which we operate a portion of the Business and (b) certain assets used in
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or related to the Business; and the Buyer assumed certain liabilities related to such assets of the Business, subject to certain exclusions and indemnities as set forth in the Agreement.
On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post-closing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of $12.5 million, which is included within net (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.
For all periods presented, the Businesses' results of operations have been included within discontinued operations in our consolidated financial statements.
Spin-off of Automotive
On October 1, 2019, we completed the spin-off of our Automotive business as an independent public company, Cerence, and a pro rata and tax-free distribution to our stockholders of all of the outstanding shares of Cerence owned by Nuance on October 1, 2019.
In connection with the spin-off, on September 30, 2019, we sold 1.8% of our equity interest in Cerence to a non-affiliated third party for a total cash consideration of $9.8 million. The difference between the consideration received and the carrying amount of the non-controlling interest was recognized in additional paid-in capital, which was subsequently derecognized as part of the spin-off transaction. For all periods presented, the results of operations, balance sheets and cash flows of our former Automotive business have been included within discontinued operations.
Sale of Imaging
On February 1, 2019, we completed the sale of our Imaging business and received approximately $404.0 million in cash, after estimated transaction expenses. As a result, we recorded a gain of approximately $102.4 million, which has been included within Net income from discontinued operations. For all periods presented, the results of operations, balance sheets and cash flows of our former Imaging business have been included within discontinued operations.
The historical results of operations of Automotive have been included within discontinued operations in our consolidated financial statements.
The following table summarizes the results of the discontinued operations (dollars in thousands):
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| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Major line items constituting net (loss) income of discontinued operations: | |||||||||||||||||
| Revenue | $ | 81,071 | $ | 195,107 | $ | 619,273 | |||||||||||
| Cost of revenue | 54,834 | 117,935 | 266,932 | ||||||||||||||
| Research and development | 2,535 | 6,317 | 101,659 | ||||||||||||||
| Sales and marketing | 1,964 | 3,095 | 62,135 | ||||||||||||||
| General and administrative | 66 | 473 | 4,370 | ||||||||||||||
| Amortization of intangible assets | 4,073 | 13,233 | 33,962 | ||||||||||||||
| Acquisition-related costs, net | — | (51) | 1,999 | ||||||||||||||
| Restructuring and other charges, net | 9,774 | 7,553 | 63,588 | ||||||||||||||
| Other | — | — | (332) | ||||||||||||||
| Income from discontinued operations before income taxes | 7,825 | 46,552 | 84,960 | ||||||||||||||
| Provision (benefit) for income taxes | 4,635 | 12,116 | (68,084) | ||||||||||||||
| (Loss) gain on disposition | (12,544) | — | 102,371 | ||||||||||||||
| Net (loss) income from discontinued operations | $ | (9,354) | $ | 34,436 | $ | 255,415 | |||||||||||
| Supplemental information: | |||||||||||||||||
| Depreciation | 1,802 | 7,234 | 19,539 | ||||||||||||||
| Amortization | 4,073 | 13,466 | 44,961 | ||||||||||||||
| Stock compensation | 1,436 | 3,676 | 32,852 | ||||||||||||||
| Capital expenditures | 57 | 1,369 | 7,509 | ||||||||||||||
The following table summarizes the assets and liabilities of our Medical Transcription and EHR Implementation Businesses included within discontinued operations. (dollars in thousands):
| September 30, 2020 | |||||
| Major classes of assets of discontinued operations: | |||||
| Accounts receivable, net | $ | 24,993 | |||
| Prepaid expenses and other current assets | 10,499 | ||||
| Land, building and equipment, net | 6,129 | ||||
| Goodwill | 13,217 | ||||
| Intangible assets, net | 46,214 | ||||
| Right-of-use assets | 5,437 | ||||
| Other noncurrent assets | 8,033 | ||||
| Total assets | $ | 114,522 | |||
| Major classes of liabilities of discontinued operations: | |||||
| Accounts payable | $ | 3,289 | |||
| Accrued expenses and other current liabilities | 14,010 | ||||
| Deferred revenue | 17,452 | ||||
| Operating lease liabilities | 3,625 | ||||
| Other noncurrent liabilities | 12,150 | ||||
| Total liabilities | $ | 50,526 | |||
Other Dispositions
In connection with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses, which are part of our Other segment, during the fourth quarter of fiscal year 2018. In May 2019, we completed the sale of our Mobile Operator Services business in Brazil, and in July 2019, we completed the sale of our Mobile Operator Services business in India. The sale prices and any gain or loss were immaterial to our consolidated financial statements.
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5. Business Acquisitions
As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our products and service offerings.
Fiscal Year 2021 Acquisitions
In fiscal year 2021, we completed an acquisition in our Healthcare segment for total cash consideration of $45.2 million. As a result, we recognized goodwill of $27.2 million and intangible assets of $19.8 million related to technology with a useful life of 5.0 years. The results of operations of the acquired entity have been included within our consolidated statement of operations from the acquisition date. The acquisition was not material to our consolidated financial statements.
Fiscal Year 2019 Acquisitions
In fiscal year 2019, we completed one acquisition in our Healthcare segment for a total consideration of $19.7 million, including $17.8 million in cash, $1.5 million estimated fair value for future contingent payments, and $0.3 million related to the carrying value of existing warrants. As a result, we recognized goodwill of $8.8 million and other intangible assets of $10.5 million related to technology with a useful life of 5.0 years. The results of operations of the acquired entity has been included within our consolidated results of operations from the acquisition date. The acquisition was not material to our consolidated financial statements
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for our reportable segments for fiscal years 2021 and 2020 were as follows (dollars in thousands):
| Healthcare | Enterprise | Other | Total | ||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 1,421,955 | $ | 679,903 | $ | 12,849 | $ | 2,114,707 | |||||||||||||||
| Purchase accounting adjustments | (31) | — | — | (31) | |||||||||||||||||||
| Effect of foreign currency translation | 3,035 | 2,697 | 87 | 5,819 | |||||||||||||||||||
| Balance as of September 30, 2020 | 1,424,959 | 682,600 | 12,936 | 2,120,495 | |||||||||||||||||||
| Acquisitions | 27,206 | — | — | 27,206 | |||||||||||||||||||
| Effect of foreign currency translation | 1,671 | 5,563 | 335 | 7,569 | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | 1,453,836 | $ | 688,163 | $ | 13,271 | $ | 2,155,270 | |||||||||||||||
Intangible assets consist of the following as of September 30, 2021 and 2020 (dollars in thousands):
| September 30, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Life (Years) | ||||||||||||||||||||
| Customer relationships | $ | 387,275 | $ | (309,704) | $ | 77,571 | 3.7 | ||||||||||||||||
| Technology and patents | 223,827 | (173,067) | 50,760 | 2.9 | |||||||||||||||||||
| Trade names, trademarks, and other | 5,107 | (5,107) | — | — | |||||||||||||||||||
| Total | $ | 616,209 | $ | (487,878) | $ | 128,331 | |||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Life (Years) | ||||||||||||||||||||
| Customer relationships | $ | 386,112 | $ | (269,901) | $ | 116,211 | 4.3 | ||||||||||||||||
| Technology and patents | 203,883 | (153,358) | 50,525 | 3.1 | |||||||||||||||||||
| Trade names, trademarks, and other | 5,107 | (4,573) | 534 | 0.9 | |||||||||||||||||||
| Total | $ | 595,102 | $ | (427,832) | $ | 167,270 | |||||||||||||||||
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Amortization expense for acquired technology and patents is included in the cost of revenue in the accompanying statements of operations and was $19.7 million, $27.6 million and $27.2 million in fiscal years 2021, 2020 and 2019, respectively. Amortization expense for customer relationships, trade names, trademarks, and other, and non-competition agreements is included in operating expenses and was $39.6 million, $37.7 million and $38.0 million in fiscal years 2021, 2020 and 2019, respectively.
Estimated amortization expense for each of the five succeeding years as of September 30, 2021, is as follows (dollars in thousands):
| Year Ending September 30, | Cost of Revenue | Other Operating Expenses | Total | |||||||||||||||||
| 2022 | $ | 20,261 | $ | 27,064 | $ | 47,325 | ||||||||||||||
| 2023 | 16,304 | 21,875 | 38,179 | |||||||||||||||||
| 2024 | 8,904 | 11,348 | 20,252 | |||||||||||||||||
| 2025 | 3,968 | 10,048 | 14,016 | |||||||||||||||||
| 2026 | 1,323 | 7,236 | 8,559 | |||||||||||||||||
| Thereafter | — | — | — | |||||||||||||||||
| Total | $ | 50,760 | $ | 77,571 | $ | 128,331 | ||||||||||||||
7. Accounts Receivable, Net
Accounts receivable, net consisted of the following (dollars in thousands):
| September 30, 2021 | September 30, 2020 | ||||||||||
| Accounts receivable, gross | $ | 173,849 | $ | 187,162 | |||||||
| Less: allowance for doubtful accounts | (10,073) | (8,649) | |||||||||
| Less: allowance for sales returns | (1,484) | (2,930) | |||||||||
| Accounts receivable, net | $ | 162,292 | $ | 175,583 | |||||||
8. Land, Buildings and Equipment, Net
Land, building and equipment, net consisted of the following (dollars in thousands):
| Useful Life (In Years) | September 30, 2021 | September 30, 2020 | |||||||||||||||
| Land | — | $ | 2,400 | $ | 2,400 | ||||||||||||
| Building | 30 | 6,732 | 6,741 | ||||||||||||||
| Machinery and equipment | 3-5 | 114,878 | 138,553 | ||||||||||||||
| Computers, software and equipment | 3-5 | 154,719 | 139,405 | ||||||||||||||
| Leasehold improvements | 2-15 | 33,434 | 31,088 | ||||||||||||||
| Furniture and fixtures | 5-7 | 11,020 | 11,021 | ||||||||||||||
| Construction in progress | — | 50,580 | 41,694 | ||||||||||||||
| Total land, building and equipment | 373,763 | 370,902 | |||||||||||||||
| Less: accumulated depreciation | (227,103) | (233,603) | |||||||||||||||
| Total land, building and equipment, net | $ | 146,660 | $ | 137,299 | |||||||||||||
Depreciation expense for fiscal years 2021, 2020 and 2019 was $33.7 million, $30.5 million and $36.1 million, respectively, which included amortization expense of $5.0 million, $4.8 million and $2.7 million, respectively, for internally developed software costs.
9. Accrued Expenses and Other Current Liabilities
consisted of the following (dollars in thousands):
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| September 30, 2021 | September 30, 2020 | ||||||||||
| Compensation | $ | 133,194 | $ | 110,827 | |||||||
| Accrued interest payable | 9,038 | 13,484 | |||||||||
| Cost of revenue related liabilities | 24,976 | 25,434 | |||||||||
| Consulting and professional fees | 18,130 | 10,589 | |||||||||
| Sales and marketing incentives | 1,294 | 2,021 | |||||||||
| Sales and other taxes payable | 8,016 | 6,339 | |||||||||
| Operating lease obligations | 24,522 | 26,284 | |||||||||
| Other | 3,170 | 4,276 | |||||||||
| Total | $ | 222,340 | $ | 199,254 | |||||||
10. Debt
At September 30, 2021 and 2020, we had the following borrowing obligations (dollars in thousands):
| September 30, 2021 | September 30, 2020 | ||||||||||
5.625% Senior Notes due 2026, net of deferred issuance costs of $3.2 million and $3.9 million, respectively. Effective interest rate 5.625%. | $ | 496,764 | $ | 496,148 | |||||||
1.000% Convertible Debentures due 2035, net of unamortized discount of $7.0 million and $64.8 million, respectively, and deferred issuance costs of $0.3 million and $2.9 million, respectively. Effective interest rate 5.622%. | 122,948 | 608,767 | |||||||||
1.250% Convertible Debentures due 2025, net of unamortized discount of $36.1 million and $45.2 million, respectively, and deferred issuance costs of $1.5 million and $1.9 million, respectively. Effective interest rate 5.578%. | 225,067 | 215,582 | |||||||||
1.500% Convertible Debentures due 2035, net of unamortized discount of $0.1 million and $10.4 million, respectively, and deferred issuance costs of $0.3 million as of September 30, 2020. Effective interest rate 5.394%. | 24,984 | 216,627 | |||||||||
| Deferred issuance costs related to our Revolving Credit Facility | (1,839) | (451) | |||||||||
| Total debt | 867,924 | 1,536,673 | |||||||||
Less: current portion(a) | (372,999) | (432,209) | |||||||||
| Total long-term debt | $ | 494,925 | $ | 1,104,464 | |||||||
__________
(a) As of September 30, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between October 1, 2021 and December 31, 2021. As a result, the net carrying amounts of the convertible debentures were included in current liabilities as of September 30, 2021.
The following table summarizes the maturities of our borrowing obligations as of September 30, 2021 (dollars in thousands):
| Fiscal Year | Convertible Debentures (1) | Senior Notes | Total | |||||||||||||||||
| 2022 | $ | 418,037 | $ | — | $ | 418,037 | ||||||||||||||
| 2023 | — | — | — | |||||||||||||||||
| 2024 | — | — | — | |||||||||||||||||
| 2025 | — | — | — | |||||||||||||||||
| 2026 | — | 500,000 | 500,000 | |||||||||||||||||
| Thereafter | — | — | — | |||||||||||||||||
| Total before unamortized discount | 418,037 | 500,000 | 918,037 | |||||||||||||||||
| Less: unamortized discount and issuance costs | (45,038) | (5,075) | (50,113) | |||||||||||||||||
| Total debt | $ | 372,999 | $ | 494,925 | $ | 867,924 | ||||||||||||||
__________
(1)As more fully described below, as of September 30, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between October 1, 2021 and December 31, 2021. As a result, these convertible debentures were treated as if they were due in fiscal year 2021.
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5.625% Senior Notes due 2026
In December 2016, we issued $500.0 million aggregate principal amount of 5.625% Senior Notes due on December 15, 2026 (the "2026 Senior Notes") in a private placement. The proceeds from the 2026 Senior Notes were approximately $495.0 million, net of issuance costs, and we used the proceeds to repurchase a portion of our then outstanding 5.375% Senior Notes due in 2020. The 2026 Senior Notes bear interest at 5.625% per year, payable in cash semi-annually in arrears.
The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries ("Subsidiary Guarantors"). The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2026 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2026 Senior Notes.
At any time before December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at a redemption price equal to 100% of the aggregate principal amount of the 2026 Senior Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or after December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before December 15, 2021, we may redeem up to 35% of the aggregate outstanding principal amount of the 2026 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price equal to 105.625% of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than 120 days after the closing of the related equity offering, and at least 50% of the original aggregate principal amount of the 2026 Senior Notes remains outstanding immediately thereafter.
Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the 2026 Senior Notes at a price equal to 100% in the case of an asset sale, or 101% in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date. As discussed previously, the pending Microsoft transaction is expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022. The finalization of this transaction will represent a change in control.
1.0% Convertible Debentures due 2035
In December 2015, we issued $676.5 million in aggregate principal amount of 1.0% Senior Convertible Debentures due in 2035 (the “1.0% 2035 Debentures”) in a private placement. Total proceeds were $663.8 million, net of issuance costs, and we used a portion to repurchase $38.3 million in aggregate principal on our 2.75% Senior Convertible Debentures due in 2031 (the "2.75% 2031 Debentures") and to repay the aggregate principal balance of $472.5 million on our term loan under the amended and restated credit agreement. The 1.0% 2035 Debentures bear interest at 1.0% per year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on December 15, 2022, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.0% 2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 1.0% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.0% 2035 Debentures mature on December 15, 2035, subject to the right of the holders to require us to redeem the 1.0% 2035 Debentures on December 15, 2022, 2027, or 2032. The 1.0% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.0% 2035 Debentures. The 1.0% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 1.0% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $495.4 million to long-term debt, and $181.1 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through December 2022.
If converted, the principal amount of the 1.0% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. The conversion of the 1.0% 2035
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Debentures will be based upon a conversion ratio of 41.4576 common shares per $1,000 principal amount, subject to adjustments. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to June 15, 2035, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.0% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.0% 2035 Debentures; or (iv) at the option of the holder at any time on or after June 15, 2035. Additionally, we may redeem the 1.0% 2035 Debentures, in whole or in part, on or after December 20, 2022 for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.0% 2035 Debentures held by such holder on December 15, 2022, December 15, 2027, or December 15, 2032 at par plus accrued and unpaid interest. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.0% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest.
During the third quarter of fiscal year 2021, we induced the exchange of $457.0 million notional amount of our 1.0% 2035 Debentures for $5.0 million in cash and 18.9 million shares of common stock, of which we allocated $435.1 million to debt and $567.1 million to equity. Also, in connection with the redemptions, we wrote off $32.4 million of unamortized discount and $1.4 million of unamortized costs. As a result, we recorded a $15.0 million loss associated with the redemptions, of which $3.1 million represents the inducement expense and $1.9 million represents the interest earned at the time of settlement, based upon the guidance in ASC 470-20. Additionally, as part of these redemptions we transferred non-cash consideration in the form of shares of common stock valued at $1,002.2 million.
Additionally, during the fourth quarter of fiscal year 2021, holders of our 1.0% 2035 Debentures exercised their right to convert $89.2 million notional amount for $89.2 million in cash and 2.1 million shares of common stock, of which we allocated $85.4 million to debt and $117.6 million to equity. Also, in connection with the conversions, we wrote off $5.6 million of unamortized discount and $0.3 million of unamortized costs. As a result, we recorded a $2.1 million loss associated with the conversions. Additionally, as part of these conversions we transferred non-cash consideration in the form of shares of common stock valued at $113.8 million. Following the conversions and redemptions, $130.3 million in aggregate principal amount of the 1.0% 2035 Debentures remained outstanding as of September 30, 2021.
The 1.0% 2035 Debentures were convertible as of September 30, 2021, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending September 30, 2021. As a result, the holders of our 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between October 1, 2021 and December 31, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning January 1, 2021 through September 30, 2021.
As of September 30, 2021, holders have exercised their right to convert $2.3 million notional amount of our 1.0% 2035 Debentures for $2.3 million in cash and 0.1 million shares of common stock. The settlement of this conversion occurred subsequent to September 30, 2021, but before the filing of this Annual Report on Form 10-K. The net carrying amount of the 1.0% 2035 Debentures was included within the current portion of long-term debt, and $7.3 million has been reclassified from permanent equity to mezzanine equity. As of September 30, 2021, the if-converted value of the 1.0% 2035 Debentures exceeded its principal amount by $167.0 million.
1.25% Convertible Debentures due 2025
In March 2017, we issued $350.0 million in aggregate principal amount of 1.25% Senior Convertible Debentures due in 2025 (the “1.25% 2025 Debentures”) in a private placement. The proceeds were approximately $343.6 million, net of issuance costs. We used a portion of the proceeds to repurchase 5.8 million shares of our common stock for $99.1 million and $17.8 million in aggregate principal on our 2.75% 2031 Debentures. The 1.25% 2025 Debentures bear interest at 1.25% per year, payable in cash semi-annually in arrears, beginning on October 1, 2017. The 1.25% 2025 Debentures mature on April 1, 2025. The 1.25% 2025 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually
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subordinated to the 1.25% 2025 Debentures. The 1.25% 2025 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 1.25% 2025 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $252.1 million to long-term debt, and $97.9 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through April 1, 2025.
If converted, the principal amount of the 1.25% 2025 Debentures is payable in cash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. The conversion of the 1.25% 2025 Debentures will be based upon a conversion ratio of 50.7957 common shares per $1,000 principal amount, subject to adjustments. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to October 1, 2024, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) at any time on or after October 1, 2024, (iii) during the five consecutive business-day period immediately following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.25% 2025 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; or (iv) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.25% 2025 Debentures. We may not redeem the 1.25% 2025 Debentures prior to the maturity date. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.25% 2025 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.25% 2025 Debentures to be purchased plus any accrued and unpaid interest.
During the second quarter of fiscal year 2020, we repurchased $87.3 million notional amount of our 1.25% 2025 Debentures for $112.3 million, of which we allocated $72.8 million to debt and $39.5 million to equity based upon ASC 470-20. Also, in connection with the repurchases, we wrote off $16.7 million unamortized discount and $0.7 million unamortized costs. As a result, we recorded a $2.8 million loss associated with the repurchases. Additionally, holders of our 1.25% 2025 Debentures exercised their right to convert an immaterial notional amount during the fourth quarter of fiscal year 2021. Following the repurchases, $262.6 million in aggregate principal amount of the 1.25% 2025 Debentures remain outstanding.
The 1.25% 2025 Debentures were convertible as of September 30, 2021, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending September 30, 2021. As a result, the holders of our 1.25% 2025 Debentures have the right to convert all or any portion of their debentures between October 1, 2021 and December 31, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning October 1, 2020 through September 30, 2021.
As of September 30, 2021, holders have exercised their right to convert $1.2 million notional amount of our 1.25% 2025 Debentures for $1.2 million in cash and 0.04 million shares of common stock. The settlement of this conversion occurred subsequent to September 30, 2021, but before the filing of this Annual Report on Form 10-K. There were no material redemptions settled in fiscal year 2021. As of September 30, 2021, the net carrying amount of the 1.25% 2025 Debentures was included within the current portion of long-term debt, and $37.6 million has been reclassified from permanent equity to mezzanine equity. As of September 30, 2021, the if-converted value of the 1.25% 2025 Debentures exceeded its principal amount by $471.6 million.
1.50% Convertible Debentures due 2035
In June 2015, we issued $263.9 million in aggregate principal amount of 1.5% Senior Convertible Debentures due in 2035 in exchange for $256.2 million in aggregate principal amount of our 2.75% 2031 Debentures. Total proceeds, net of issuance costs, were $253.2 million. The 1.5% 2035 Debentures were issued at 97.09% of the principal amount, which resulted in a discount of $7.7 million. The 1.5% 2035 Debentures bear interest at 1.5% per year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on November 1, 2021, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.5% 2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 1.5% 2035 Debentures, in which case, contingent
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interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.5% 2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 1.5% 2035 Debentures on November 1, 2021, 2026, or 2031. The 1.5% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.5% 2035 Debentures. The 1.5% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 1.5% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. At issuance, we allocated $208.6 million to long-term debt, and $55.3 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through November 2021.
If converted, the principal amount of the 1.5% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will be paid in cash or shares of our common stock, at our election. The conversion of the 1.5% 2035 Debentures will be based upon a conversion ratio of 48.5216 common shares per $1,000 principal amount, subject to adjustments. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscal quarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.5% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.5% 2035 Debentures; or (iv) at the option of the holder at any time on or after May 1, 2035. Additionally, we may redeem the 1.5% 2035 Debentures, in whole or in part, on or after November 5, 2021 for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.5% 2035 Debentures held by such holder on November 1, 2021, November 1, 2026, or November 1, 2031 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described in the indenture for the 1.5% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest.
During the second quarter of fiscal year 2020, we repurchased $36.5 million notional amount of 1.5% 2035 Debentures for $41.3 million, of which we allocated $34.7 million to debt and $6.6 million to equity based upon ASC 470-20. Also, in connection with the repurchases, we wrote off $2.5 million unamortized discount and $0.1 million unamortized costs. As a result, we recorded a $0.8 million loss associated with the repurchases. Following the repurchases, $227.4 million in aggregate principal amount of the 1.5% 2035 Debentures remain outstanding.
During the third quarter of fiscal year 2021, we induced the exchange of $64.9 million notional amount of 1.5% 2035 Debentures for $0.5 million in cash and 3.2 million shares of common stock, of which we allocated $64.2 million to debt and $102.5 million to equity. Also, in connection with the redemptions, we wrote off $1.4 million of unamortized discount. As a result, we recorded a $1.1 million loss associated with the redemptions, of which $0.4 million represents the inducement expense and $0.1 million represents the interest earned at the time of settlement, based upon the guidance in ASC 470-20. Additionally, as part of these redemptions we transferred non-cash consideration in the form of shares of common stock valued at $166.7 million.
Further, during the third quarter of fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $118.3 million notional amount for $118.3 million in cash and 3.5 million shares of common stock, of which we allocated $117.1 million to debt and $193.3 million to equity. Also, in connection with the conversions, we wrote off $2.1 million of unamortized discount and $0.1 million of unamortized costs. As a result, we recorded a $1.0 million loss associated with the conversions. Additionally, as part of these conversions we transferred non-cash consideration in the form of shares of common stock valued at $192.1 million.
During the fourth quarter of fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $19.0 million notional amount for $19.0 million in cash and 0.6 million shares of common stock, of which we allocated $18.9 million to debt and $31.8 million to equity. Also, in connection with the conversions, we wrote off $0.3 million of unamortized discount. As a result, we recorded a $0.1 million loss associated with the conversions. Additionally, as part of
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these conversions we transferred non-cash consideration in the form of shares of common stock valued at $31.6 million. Following the conversions and redemptions, $25.1 million in aggregate principal amount of the 1.5% 2035 Debentures remained outstanding as of September 30, 2021.
The 1.5% 2035 Debentures were convertible as of September 30, 2021, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending September 30, 2021. As a result, the holders of our 1.5% 2035 Debentures had the right to convert all or any portion of their debentures between October 1, 2021 and December 31, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning October 1, 2020 through September 30, 2021. As of September 30, 2021, the net carrying amount of the 1.5% 2035 Debentures was included within the current portion of long-term debt, and $0.1 million has been reclassified from permanent equity to mezzanine equity. The if-converted value of the 1.5% 2035 Debentures exceeded its principal amount by $42.0 million as of September 30, 2021.
On September 29, 2021, we issued a notice calling for redemption all of our outstanding 1.5% 2035 Debentures, pursuant to which, the holders had the right to receive cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date of November 5th, 2021. In lieu of redemption, holders had the right to convert all or any portion of their debentures at the aforementioned conversion ratio until the close of business on November 4, 2021. Upon the conclusion of the conversion period on November 4, 2021, holders of $25.0 million notional amount exercised their right to convert. Additionally, we redeemed the remaining outstanding $0.1 million 1.5% 2035 Debentures for $0.1 million in cash. On November 5, 2021, we settled all of the outstanding 1.5% 2035 Debentures for $25.1 million in cash and 0.8 million shares of common stock. Following these redemptions and conversions, none of the 1.5% 2035 Debentures remain outstanding.
Revolving Credit Facility
On July 31, 2020, we amended our revolving credit agreement (the "Amended Revolving Credit Agreement") to, among other things, extend the expiration from April 15, 2021 to April 15, 2022. The Amended Revolving Credit Agreement provided for aggregate borrowing commitments of $300.0 million (the "Revolving Credit Facility"), including the revolving facility loans, the swingline loans and issuance of letters of credit. The borrowing outstanding under the Revolving Credit Facility bore interest at either (i) LIBOR plus an applicable margin of 1.50% or 1.75%, or (ii) the alternative base rate plus an applicable margin of 0.50% or 0.75%. The Revolving Credit Facility was secured by substantially all our assets. The Amended Revolving Credit Agreement contained customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. At any time that there were any outstanding borrowings (excluding up to $25,000,000 of issued and undrawn Letters of Credit) under the Revolving Credit Facility, we were required to maintain a Consolidated Senior Secured Leverage Ratio (as defined in the Amended Revolving Credit Agreement) not exceeding 4.00 to 1.00.
On February 4, 2021, we entered into a new revolving credit agreement (the "New Revolving Credit Agreement"), which replaced the existing Amended Revolving Credit Agreement. The New Revolving Credit Agreement expires February 4, 2026, and has an aggregate borrowing commitment of $300.0 million, including revolving loans and letters of credit (the "New Revolving Credit Facility"). The New Revolving Credit Facility bears interest at either (i) LIBOR plus an applicable margin of 1.50% or 1.75%, or (ii) the alternative base rate plus an applicable margin of 0.50% or 0.75%. The New Revolving Credit Facility is secured by substantially all our assets and substantially all assets of certain of our domestic subsidiaries that guarantee our obligations under the New Revolving Credit Agreement. The New Revolving Credit Agreement contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. Among other things, we are required to maintain a Consolidated Senior Secured Leverage Ratio (as defined in the New Revolving Credit Agreement) not exceeding 4.00 to 1.00. We were in compliance with all the debt covenants as of September 30, 2021.
As of September 30, 2021, after taking into account the outstanding letters of credit of $1.9 million, we had $298.1 million available for borrowing under the New Revolving Credit Facility.
11. Financial Instruments and Hedging Activities
Derivatives not Designated as Hedges
Forward Currency Contracts
We have operations in a number of international locations, including certain developing markets where currency exchange rates can be volatile. We utilize foreign currency forward contracts to mitigate the risks associated with changes in foreign currency
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exchange rates so that our exposure to foreign currencies will be mitigated or offset by the gains or losses on the foreign currency forward contracts. Generally, we enter into such contracts for less than 90 days and have no cash requirements until maturity. As of September 30, 2021 and 2020, we had outstanding contracts with a total notional value of $52.5 million and $40.7 million, respectively.
We did not designate any forward contracts as hedging instruments for fiscal years 2021, 2020 and 2019. Therefore, changes in fair value of foreign currency forward contracts were recognized within other expense, net in our consolidated statements of operations. The cash flows related to the settlement of forward contracts not designated as hedging instruments are included in cash flows from investing activities within our consolidated statement of cash flows.
A summary of our derivative instruments is as follows (dollars in thousands):
| Fair Value | ||||||||||||||||||||
| Derivatives Not Designated as Hedges: | Balance Sheet Classification | September 30, 2021 | September 30, 2020 | |||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other current assets | $ | 112 | $ | 109 | |||||||||||||||
| Foreign currency forward contracts | Accrued expenses and other current liabilities | $ | (49) | $ | (92) | |||||||||||||||
A summary of income related to foreign currency forward contracts for the year ended September 30, 2021 is as follows (dollars in thousands):
| Income Statement Classification Income Recognized | Year Ended September 30, | |||||||||||||||||||||||||
| Derivatives Not Designated as Hedges: | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Foreign currency forward contracts | Other income, net | $ | 337 | $ | 379 | $ | 1,816 | |||||||||||||||||||
12. Fair Value Measures
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs that are significant to the fair value measurement as of the measurement date as follows:
•Level 1: Quoted prices for identical assets or liabilities in active markets.
•Level 2: Observable inputs other than those described as Level 1.
•Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2021 and 2020 consisted of (dollars in thousands):
| September 30, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Money market funds (a) | $ | 113,186 | $ | — | $ | — | $ | 113,186 | |||||||||||||||
Time deposits(b) | — | 13,889 | — | 13,889 | |||||||||||||||||||
Commercial paper, $18,633 at cost(b) | — | 18,668 | — | 18,668 | |||||||||||||||||||
Foreign currency exchange contracts(b) | — | 112 | — | 112 | |||||||||||||||||||
| Total assets at fair value | $ | 113,186 | $ | 32,669 | $ | — | $ | 145,855 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Foreign currency exchange contracts(b) | $ | — | $ | (49) | $ | — | $ | (49) | |||||||||||||||
| Total liabilities at fair value | $ | — | $ | (49) | $ | — | $ | (49) | |||||||||||||||
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| September 30, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Money market funds(a) | $ | 182,645 | $ | — | $ | — | $ | 182,645 | |||||||||||||||
Time deposits(b) | — | 95,180 | — | 95,180 | |||||||||||||||||||
Commercial paper, $33,265 at cost(b) | — | 33,290 | — | 33,290 | |||||||||||||||||||
Corporate notes and bonds, $15,460 at cost(b) | — | 15,480 | — | 15,480 | |||||||||||||||||||
Foreign currency exchange contracts(b) | — | 109 | — | 109 | |||||||||||||||||||
| Total assets at fair value | $ | 182,645 | $ | 144,059 | $ | — | $ | 326,704 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Foreign currency exchange contracts(b) | $ | — | $ | (92) | $ | — | $ | (92) | |||||||||||||||
Contingent acquisition payments(c) | — | — | (1,796) | (1,796) | |||||||||||||||||||
| Total liabilities at fair value | $ | — | $ | (92) | $ | (1,796) | $ | (1,888) | |||||||||||||||
__________
(a)Money market funds and time deposits with original maturity of 90 days or less are included within cash and cash equivalents in the consolidated balance sheets and are valued at quoted market prices in active markets.
(b) Time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are recorded at fair market values, which are determined based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. These instruments are included with Cash and Cash Equivalents and Marketable Securities within our consolidated balance sheets. Time deposits are generally for terms of one year or less. Commercial paper and corporate notes and bonds generally mature within three years and had a weighted average maturity of 0.21 years as of September 30, 2021 and 0.31 years as of September 30, 2020.
(c) The fair values of our contingent consideration arrangements were determined using either the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow method.
The estimated fair value of our long-term debt approximated $1,620.3 million (face value $918.0 million) as of September 30, 2021 and $2,355.5 million (face value $1,666.5 million) as of September 30, 2020, based on Level 2 measurements. The fair value of each borrowing was estimated using the average of the bid and ask trading quotes at the end of the reporting periods. There was no balance outstanding under our revolving credit agreement as of September 30, 2020 and 2021.
Additionally, contingent acquisition payments are recorded at fair values upon the acquisition and are remeasured in subsequent reporting periods with the changes in fair values recorded within acquisition-related costs, net. Such payments are contingent upon the achievement of specified performance targets and are valued using the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow model (Level 3 measurement).
The following table provides a summary of changes in fair value of our Level 3 financial instruments for the years ended September 30, 2021 and 2020 (dollars in thousands):
| Amount | |||||
| Balance as of September 30, 2019 | $ | 2,550 | |||
| Payments and foreign currency translation | (4) | ||||
| Adjustments to fair value included in acquisition-related costs, net | (750) | ||||
| Balance as of September 30, 2020 | 1,796 | ||||
| Payments and foreign currency translation | (53) | ||||
| Adjustments to fair value included in acquisition-related costs, net | (1,743) | ||||
| Balance as of September 30, 2021 | $ | — | |||
As of September 30, 2021, we do not have any required payments based upon any specified performance targets being achieved.
13. Restructuring and Other Charges, Net
Restructuring and other charges, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business. Restructuring expenses consist of employee severance costs, charges for the closure of idle facilities and other contract termination costs. Other charges include litigation
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contingency reserves, costs related to the transition agreement of our former CEO, asset impairment charges, insurance recoveries and gains or losses on the sale or disposition of certain non-strategic assets or product lines.
The components of restructuring and other charges, net are as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Personnel | $ | 6,147 | $ | 5,138 | $ | 15,193 | |||||||||||
| Facilities | 10,793 | 5,531 | 2,225 | ||||||||||||||
| Total restructuring charges | 16,940 | 10,669 | 17,418 | ||||||||||||||
| Other charges | 19,303 | 6,844 | 12,710 | ||||||||||||||
| Total restructuring and other charges, net | $ | 36,243 | $ | 17,513 | $ | 30,128 | |||||||||||
The following table represents the roll forward of restructuring liabilities for fiscal years 2021, 2020 and 2019 (dollars in thousands):
| Personnel | Facilities | Total | |||||||||||||||
| Balance at September 30, 2018 | $ | 7,119 | $ | 6,463 | $ | 13,582 | |||||||||||
| Restructuring charges, net | 15,193 | 2,225 | 17,418 | ||||||||||||||
| Non-cash adjustment | — | (102) | (102) | ||||||||||||||
| Cash payments | (18,725) | (4,963) | (23,688) | ||||||||||||||
| Balance at September 30, 2019 | 3,587 | 3,623 | 7,210 | ||||||||||||||
ASC 842 implementation (a) | — | 11,674 | 11,674 | ||||||||||||||
| Restructuring charges, net | 5,138 | 5,531 | 10,669 | ||||||||||||||
| Non-cash adjustment | — | 1,052 | 1,052 | ||||||||||||||
| Cash payments | (7,482) | (6,364) | (13,846) | ||||||||||||||
| Balance at September 30, 2020 | 1,243 | 15,516 | 16,759 | ||||||||||||||
| Restructuring charges, net | 6,147 | 10,793 | 16,940 | ||||||||||||||
| Non-cash adjustment | (839) | (3,655) | (4,494) | ||||||||||||||
| Cash payments | (6,107) | (5,708) | (11,815) | ||||||||||||||
| Balance at September 30, 2021 | $ | 444 | $ | 16,946 | $ | 17,390 | |||||||||||
__________
(a) The amount represents a reclassification of estimated sublease income from restructuring accrual to reduce the costs of right-of-use assets upon the adoption of ASC 842 on October 1, 2019.
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The table below presents the Restructuring and other charges, net associated with each segment, but excluded from calculation of each segment's profit (dollars in thousands):
| Personnel | Facilities | Total Restructuring | Other Charges | Total | |||||||||||||||||||||||||
| Fiscal Year 2021 | |||||||||||||||||||||||||||||
| Healthcare | $ | 3,490 | $ | 1,939 | $ | 5,429 | $ | — | $ | 5,429 | |||||||||||||||||||
| Enterprise | 1,264 | 7,201 | 8,465 | — | 8,465 | ||||||||||||||||||||||||
| Other | — | 1,632 | 1,632 | — | 1,632 | ||||||||||||||||||||||||
| Corporate | 1,393 | 21 | 1,414 | 19,303 | 20,717 | ||||||||||||||||||||||||
| Total fiscal year 2021 | $ | 6,147 | $ | 10,793 | $ | 16,940 | $ | 19,303 | $ | 36,243 | |||||||||||||||||||
| Fiscal Year 2020 | |||||||||||||||||||||||||||||
| Healthcare | $ | 1,786 | $ | 2,819 | $ | 4,605 | $ | — | $ | 4,605 | |||||||||||||||||||
| Enterprise | 1,417 | 1,998 | 3,415 | — | 3,415 | ||||||||||||||||||||||||
| Other | — | (63) | (63) | — | (63) | ||||||||||||||||||||||||
| Corporate | 1,935 | 777 | 2,712 | 6,844 | 9,556 | ||||||||||||||||||||||||
| Total fiscal year 2020 | $ | 5,138 | $ | 5,531 | $ | 10,669 | $ | 6,844 | $ | 17,513 | |||||||||||||||||||
| Fiscal Year 2019 | |||||||||||||||||||||||||||||
| Healthcare | $ | 5,660 | $ | 191 | $ | 5,851 | $ | — | $ | 5,851 | |||||||||||||||||||
| Enterprise | 5,037 | 933 | 5,970 | — | 5,970 | ||||||||||||||||||||||||
| Other | 1,457 | 337 | 1,794 | 3,306 | 5,100 | ||||||||||||||||||||||||
| Corporate | 3,039 | 764 | 3,803 | 9,404 | 13,207 | ||||||||||||||||||||||||
| Total fiscal year 2019 | $ | 15,193 | $ | 2,225 | $ | 17,418 | $ | 12,710 | $ | 30,128 | |||||||||||||||||||
Fiscal Year 2021
For fiscal year 2021, we recorded restructuring charges of $16.9 million, which included $6.1 million related to the termination of approximately 80 employees and $10.8 million of charges related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the geographic footprint of our offices and facilities. We expect the remaining outstanding severance of $0.4 million to be substantially paid during fiscal year 2022, and the remaining $16.9 million lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases.
Additionally, during fiscal year 2021, we recorded approximately $21.0 million of expenses related to the acquisition of Nuance by Microsoft, and $1.4 million of professional service expenses related to other corporate initiatives, offset in part by $3.1 million of insurance recoveries.
Fiscal Year 2020
For fiscal year 2020, we recorded restructuring charges of $10.7 million, which included $5.1 million related to the termination of approximately 191 employees and $5.5 million charge related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the footprint of our offices and facilities.
Additionally, during fiscal year 2020, we recorded $5.1 million expenses related to the separation of our Automotive business, and a $2.0 million impairment charge related to a right-of-use asset due to the COVID-19 pandemic, offset in part by $0.3 million of insurance recoveries.
Fiscal Year 2019
For fiscal year 2019, we recorded restructuring charges of $17.4 million, which included $15.2 million related to the termination of approximately 305 employees and $2.2 million in charges related to the closing of certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.
Additionally, during fiscal year 2019, we recorded $9.9 million of professional services fees related to our corporate
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transformational efforts and $3.3 million accelerated depreciation related to our Mobile Operator Services, offset in part by $0.5 million of insurance recoveries.
14. Supplemental Cash Flow Information
Cash paid for Interest and Income Taxes
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Interest paid | $ | 44,182 | $ | 50,346 | $ | 72,630 | |||||||||||
| Income taxes paid | $ | 12,193 | $ | 31,732 | $ | 17,474 | |||||||||||
15. Stockholders' Equity
Share Repurchases
On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors.
We did not repurchase any shares during the fiscal year ended September 30, 2021, and repurchased 9.5 million shares and 8.2 million shares for $169.2 million and $126.9 million during the fiscal years ended September 30, 2020 and 2019, respectively, under the program. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased 73.8 million shares for $1,238.8 million. The amount paid in excess of par value is recognized in additional paid in capital. Shares were retired upon repurchase. As of September 30, 2021, approximately $261.2 million remained available for future repurchases under the program.
Preferred Stock
We are authorized to issue up to 40,000,000 shares of preferred stock, par value $0.001 per share. The undesignated shares of preferred stock will have rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors upon issuance of the preferred stock. There were no outstanding shares of preferred stock as of September 30, 2021 or September 30, 2020.
Series A Preferred Stock
We have designated 1,000,000 shares as Series A Preferred Stock, par value $0.001 per share. The Series A Preferred Stock is entitled to receive dividends equal to the greater of $1.00 and 1,000 times the aggregate per share amount of all dividends declared on our Common Stock. Holders of each share of the Series A Preferred Stock are entitled to 1,000 votes on all matters submitted to a vote of the stockholders of the Company and shall vote as one class. The Series A Preferred Stock is not redeemable and has the right to certain liquidation preferences over our Common Stock. The Series A Preferred Stock ranks junior to all other series of the Preferred Stock as to the payment of dividends and the distribution of assets. There were no outstanding shares of preferred stock as of September 30, 2021 or September 30, 2020.
Series B Preferred Stock
We have designated 15,000,000 shares as Series B Preferred Stock, par value $0.001 per share. The Series B Preferred Stock is convertible into shares of common stock on a one-for-one basis and has a liquidation preference of $1.30 per share plus all declared but unpaid dividends. The holders of Series B Preferred Stock are entitled to non-cumulative dividends at the rate of $0.05 per annum per share, payable when, and if, declared by the Board of Directors. To date, no dividends have been declared by the Board of Directors. Holders of Series B Preferred Stock have no voting rights, except those rights provided under Delaware law. There were no outstanding shares of preferred stock as of September 30, 2021 or September 30, 2020.
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16. Net (Loss) Income Per Share
The following table sets forth the computation for basic and diluted net (loss) income per share (in thousands, except per share amounts):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net loss from continuing operations | $ | (17,372) | $ | (13,040) | $ | (41,605) | |||||||||||
| Net (loss) income from discontinued operations | (9,354) | 34,436 | 255,415 | ||||||||||||||
| Net (loss) income | $ | (26,726) | $ | 21,396 | $ | 213,810 | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted average common shares outstanding — Basic | 294,589 | 282,644 | 286,347 | ||||||||||||||
| Weighted average common shares outstanding — Diluted | 294,589 | 282,644 | 286,347 | ||||||||||||||
| Net (loss) income per common share - basic: | |||||||||||||||||
| Continuing operations | $ | (0.06) | $ | (0.05) | $ | (0.15) | |||||||||||
| Discontinued operations | (0.03) | 0.13 | 0.90 | ||||||||||||||
| Total net (loss) income per basic common share | $ | (0.09) | $ | 0.08 | $ | 0.75 | |||||||||||
| Net (loss) income per common share - diluted: | |||||||||||||||||
| Continuing operations | $ | (0.06) | $ | (0.05) | $ | (0.15) | |||||||||||
| Discontinued operations | (0.03) | 0.13 | 0.90 | ||||||||||||||
| Total net (loss) income per diluted common share | $ | (0.09) | $ | 0.08 | $ | 0.75 | |||||||||||
Anti-dilutive equity instruments excluded from the calculation | 219 | 453 | 1,047 | ||||||||||||||
Contingently issuable awards excluded from the calculation (a) | 113 | 9 | 1,786 | ||||||||||||||
_________
(a) Certain performance-based awards were excluded from the determination of dilutive net (loss) income per share as the conditions were not met at the end of the reporting period.
17. Stock-Based Compensation
On January 22, 2020, our stockholders adopted our 2020 Stock Plan (the "2020 Stock Plan") and as such date, we no longer grant awards under our amended and restated 2000 Stock Plan (the "2000 Stock Plan"). Outstanding awards under our 2000 Stock Plan that are forfeited or returned to the company for satisfaction of taxes, are transferred to the 2020 Stock Plan and may be used for future issuance. The 2020 Stock Plan (i) grants the Company's compensation committee the discretionary authority over the plan; (ii) makes employees, directors, consultants, and advisors of the Company and its subsidiaries eligible to receive awards; (iii) sets the number of shares of common stock that may be issued in satisfaction of awards to be 9,000,000 shares, plus the number of shares available for issuance under the 2000 Stock Plan; and (iv) identifies the annual limits on shares granted to each individual and the types of awards permissible.
As of September 30, 2021, we had 11.6 million shares available for future grants under the 2020 Stock Plan. We recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within equity upon issuance.
The amounts included in the consolidated statements of operations related to stock-based compensation are as follows (dollars in thousands):
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| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cost of professional services and hosting | $ | 27,024 | $ | 22,687 | $ | 24,021 | |||||||||||
| Cost of product and licensing | 411 | 509 | 855 | ||||||||||||||
| Cost of maintenance and support | 1,517 | 1,657 | 1,314 | ||||||||||||||
| Research and development | 36,983 | 33,877 | 21,365 | ||||||||||||||
| Sales and marketing | 36,742 | 31,842 | 30,371 | ||||||||||||||
| General and administrative | 40,699 | 39,046 | 37,537 | ||||||||||||||
| Total | $ | 143,376 | $ | 129,618 | $ | 115,463 | |||||||||||
Modifications of Equity Awards
In connection with the spin-off of our Automotive business (the "Distribution") on October 1, 2019, under the provisions of our Amended and Restated 2000 Stock Plan and our Amended and Restated Directors Stock Plan, we adjusted our then outstanding equity awards in accordance with the terms of the Employee Matters Agreement that Nuance entered into in connection with the Distribution. Effective upon the Distribution, Nuance stock options, Nuance restricted stock units ("RSUs"), and Nuance performance-based restricted stock units ("PSUs") held by employees and other service providers continuing with Nuance following the Distribution, were adjusted based on a conversion ratio of 1.16667 to 1, as outlined in the Employee Matters Agreement. Effective upon the Distribution, RSUs held by employees continuing with Cerence following the Distribution that were scheduled to vest on or before November 30, 2019 vested in full as of immediately prior to the Distribution, PSUs held by such employees that were eligible to vest based on Nuance's relative total shareholder return ("TSR") as of November 6, 2019 were cancelled in exchange for a cash payment based on the portion of the PSUs that were then earned, and all other RSUs and PSUs held by such employees were forfeited for no consideration upon their termination of employment with Nuance. As of the Distribution (or an applicable employee's later transfer date), all employees continuing with Cerence following the Distribution ceased to be eligible to participate in Nuance's Employee Stock Purchase Plan ("ESPP"). As of September 30, 2021, the employees participating in our ESPP were all Nuance employees. There were no changes to the plan terms of any of the foregoing plans except as described above. The incremental expense as a result of these modification was immaterial to the consolidated financial statements.
Stock Options
We have share-based award plans under which employees, officers and directors may be granted stock options to purchase our common stock, generally at the fair market value of the grant date. Our plans do not allow for options to be granted at below fair market value, nor can they be re-priced at any time. Options granted under our plans generally become exercisable over a period of to four years and have a maximum term of ten years. We have also assumed options and option plans in connection with certain of our acquisitions. These stock options are governed by the plans and agreements that they were originally issued under but are now exercisable for shares of our common stock.
The table below summarizes activities related to stock options for the years ended September 30, 2021, 2020 and 2019:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value(a) | ||||||||||||||||||||
| Outstanding at September 30, 2018 | 19,144 | $ | 17.31 | ||||||||||||||||||||
| Exercised | (3,314) | $ | 7.22 | ||||||||||||||||||||
| Expired | (4,528) | $ | 17.89 | ||||||||||||||||||||
| Outstanding at September 30, 2019 | 11,302 | $ | 20.04 | ||||||||||||||||||||
| Exercised | (3,830) | $ | 17.18 | ||||||||||||||||||||
Equitable Adjustment - Cerence Spin-off (b) | 1,883 | $ | — | ||||||||||||||||||||
| Outstanding at September 30, 2020 | 9,355 | $ | 17.18 | ||||||||||||||||||||
| Outstanding at September 30, 2021 | 9,355 | $ | 17.18 | 0.6 years | $ | 0.4 | million | ||||||||||||||||
| Exercisable at September 30, 2021 | 9,355 | $ | 17.18 | 0.6 years | $ | 0.4 | million | ||||||||||||||||
| Exercisable at September 30, 2020 | 9,355 | ||||||||||||||||||||||
| Exercisable at September 30, 2019 | 11,302 | ||||||||||||||||||||||
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__________
(a)The aggregate intrinsic value represents any excess of the closing price of our common stock as of September 30, 2021 ($55.04) over the exercise price of the underlying options.
(b)Effective with the Distribution on October 1, 2019, outstanding equity awards were equitably adjusted by a conversion ratio of 1.16667 per one Nuance share then held.
The aggregate intrinsic values of stock options exercised during the fiscal year ended September 30, 2021, 2020, and 2019 were de minimis.
Restricted Stock Units and Performance Stock Units
We are authorized to issue equity incentive awards in the form of RSUs and PSUs. Unvested awards may not be sold, transferred or assigned. Both RSUs and PSUs are service-based awards and generally vested over a three-year period. The fair value of the RSUs is measured based upon the market price of the underlying common stock as of the grant date. PSUs are aligned to specified performance targets, such as TSR relative to our peers, or specified performance metrics. PSUs generally cliff vest at the end of a three-year period, which is contingent upon the achievement of such performance targets as well as the employee's continued employment. The fair value of PSUs aligned to the returns of our common stock, or TSRs, is determined using a Monte Carlo simulation model. The fair value of PSUs aligned to specified performance metrics is determined based upon our best estimate of the probability of achieving these goals. The fair value of an award at the grant date is amortized to expense over the requisite service period using the straight-line method, net of an assumed forfeiture rate assumption. In the event that the employees’ employment with us terminates, or in the case of awards with only performance goals, if those goals are not met, any unvested shares are forfeited and reverted to us.
In order to satisfy our employees’ withholding tax liability as a result of the vesting of RSU and PSUs, we have historically repurchased shares upon the employees’ vesting. We repurchased 2.2 million shares for $102.0 million in fiscal year 2021, 2.9 million shares for $56.5 million in fiscal year 2020, and 2.6 million shares for $42.6 million in fiscal year 2019.
RSUs and PSUs are not included in issued and outstanding common stock until the shares are vested and released. The table below summarizes activity relating to Restricted Units:
| Number of Shares Underlying Performance Stock Units | Number of Shares Underlying Restricted Stock Units Awards | ||||||||||
| Outstanding at September 30, 2018 | 3,039,568 | 6,872,087 | |||||||||
| Granted | 1,342,836 | 9,500,077 | |||||||||
| Earned/released | (1,405,485) | (6,383,908) | |||||||||
Modification(a) | (296,759) | 296,759 | |||||||||
| Forfeited | (688,835) | (1,286,071) | |||||||||
| Outstanding at September 30, 2019 | 1,991,325 | 8,998,944 | |||||||||
| Granted | 1,067,900 | 6,401,949 | |||||||||
| Earned/released | (303,198) | (8,106,783) | |||||||||
| Forfeited | (438,981) | (1,452,467) | |||||||||
Equitable Adjustment - Cerence Spin-off (b) | 303,074 | 1,316,006 | |||||||||
| Outstanding at September 30, 2020 | 2,620,120 | 7,157,649 | |||||||||
| Granted | 1,048,943 | 2,907,849 | |||||||||
| Earned/released | (1,067,802) | (5,085,375) | |||||||||
| Forfeited | (137,340) | (324,298) | |||||||||
| Outstanding at September 30, 2021 | 2,463,921 | 4,655,825 | |||||||||
Weighted average remaining recognition period of outstanding Restricted Units | 1.0 year | 1.5 years | |||||||||
Unrecognized stock-based compensation expense of outstanding Restricted Units | $25.9 million | $99.9 million | |||||||||
Aggregate intrinsic value of outstanding Restricted Units(c) | $135.6 million | $256.3 million | |||||||||
__________
(a) 296,759 shares of performance-based awards were modified to time-based awards with only service conditions in December 2018.
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(b) Effective with the Distribution on October 1, 2019, outstanding equity awards were equitably adjusted by a conversion ratio of 1.16667 per one Nuance share then held.
(c) The aggregate intrinsic value represents any excess of the closing price of our common stock as of September 30, 2021 ($55.04) over the exercise price of the underlying restricted units.
A summary of the weighted-average grant-date fair value of RSUs and PSUs granted, and the aggregate intrinsic value of Restricted Units vested for each fiscal year is as follows:
| Year ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Weighted-average grant-date fair value per share | $ | 41.92 | $ | 19.51 | $ | 16.52 | |||||||||||
| Total intrinsic value of shares vested (in millions) | $ | 280.6 | $ | 164.1 | $ | 125.2 | |||||||||||
PSUs outstanding as of September 30, 2021 include performance goals based on TSR relative to a peer index and a revenue growth metric (for awards granted in November 2020) during the performance period. The awards actually earned will be up to two-hundred percent of the target number of the PSUs. Compensation expense related to PSUs aligned to the TSR is recorded on a straight-line basis over the performance period of the award. The grant date fair value for PSUs aligned to TSR is determined using a Monte Carlo simulation model. Below is a summary of key assumptions of the valuation:
| Year ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Dividend yield | 0.0 | % | 0.0 | % | |||||||
| Expected volatility | 34.95 | % | 27.73% - 28.24% | ||||||||
| Risk-free interest rate | 0.21 | % | 1.40% - 1.62% | ||||||||
| Expected term (in years) | 3.00 | 2.72 - 3.00 | |||||||||
1995 Employee Stock Purchase Plan
The ESPP, as amended and restated on January 27, 2015, authorizes the issuance of a maximum of 20,000,000 shares of common stock in semi-annual offerings to employees at a price equal to the lower of 85% of the closing price on the applicable offering commencement date or 85% of the closing price on the applicable offering termination date. Stock-based compensation expense for the employee stock purchase plan is recognized for the fair value benefit accorded to participating employees. The plan was suspended as of August 16, 2021 per the terms of the Microsoft merger agreement. At September 30, 2021, we have reserved 3.0 million shares for future issuance. A summary of the weighted-average grant-date fair value, shares issued, and total stock-based compensation expense recognized related to the ESPP are as follows:
| Year ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Weighted-average grant-date fair value per share | $ | 12.71 | $ | 6.90 | $ | 3.76 | |||||||||||
| Total shares issued (in millions) | 0.5 | 1.0 | 1.2 | ||||||||||||||
| Total stock-based compensation expense (in millions) | $ | 4.9 | $ | 4.2 | $ | 4.5 | |||||||||||
The fair value of the purchase rights granted under the ESPP was estimated on the date of grant using the Black-Scholes option-pricing model that uses the following weighted-average assumptions, which were derived in a manner similar to those discussed above relative to stock options:
| Year ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||
| Expected volatility | 39.3 | % | 39.8 | % | 27.8 | % | |||||||||||
| Risk-free interest rate | 0.1 | % | 0.9 | % | 2.2 | % | |||||||||||
| Expected term (in years) | 0.5 | 0.5 | 0.5 | ||||||||||||||
18. Commitments and Contingencies
Litigation and Other Claims
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Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in accordance with ASC 450 "Contingencies". If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes, and the estimates are based only on the information available at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. As of September 30, 2021 and 2020, accrued losses were not material to our consolidated financial statements, and we do not expect any pending matter to have a material impact on our consolidated financial statements.
Guarantees and Other
We include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases, our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered.
We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to these obligations, which fully cover the six-year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.
Contingencies
The Company is subject to contingencies which arise through the ordinary course of business. All material liabilities of which management were aware are properly reflected in the financial statements as of September 30, 2021 and September 30, 2020.
Microsoft Acquisition Contingencies
On April 11, 2021, we entered into a Merger Agreement with Microsoft, subject to the terms of which Microsoft has agreed to acquire Nuance. The consummation of the Merger remains subject to customary closing conditions including satisfaction of certain regulatory approvals. The Merger is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022. As part of the transaction, Nuance expects to incur liabilities of approximately $114.0 million that are contingent on the deal consummation. These liabilities include banker fees, legal fees, and certain retention bonuses.
19. Operating Leases
We have various operating leases for office space, data centers, office equipment and automobiles around the world with lease terms expiring between 2022 and 2030.
We determine if an arrangement is a lease at inception. The current portion of our operating lease liabilities is included in accrued expenses and other current liabilities and the long-term portion is included in operating lease liabilities.
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental
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borrowing rate. Due to the interest rate implicit in most of our leases not being readily determinable, our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.
Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities. Payments under our lease arrangements are primarily fixed. Variable rents, if any, are expensed as incurred.
As of September 30, 2021, our operating leases had a weighted average remaining lease term of 4.4 years and a weighted average discount rate of 3.8%.
Future lease payments under operating leases as of September 30, 2021 were as follows (dollars in thousands):
| Fiscal Year | Operating Leases | Operating leases under restructuring | Total | |||||||||||||||||
| 2022 | $ | 22,358 | $ | 5,305 | $ | 27,663 | ||||||||||||||
| 2023 | 16,642 | 3,768 | 20,410 | |||||||||||||||||
| 2024 | 14,370 | 2,271 | 16,641 | |||||||||||||||||
| 2025 | 12,722 | 1,346 | 14,068 | |||||||||||||||||
| 2026 | 11,334 | 1,379 | 12,713 | |||||||||||||||||
| Thereafter | 30,112 | 463 | 30,575 | |||||||||||||||||
| Total | $ | 107,538 | $ | 14,532 | $ | 122,070 | ||||||||||||||
As of September 30, 2021, we have subleased certain office space that is included in the above table to third parties. As of September 30, 2021, the aggregate sublease income to be recognized during the remaining lease terms is $10.8 million, with approximately an average of $1.9 million annually for each of the next five fiscal years and approximately $1.1 million thereafter.
Our operating lease costs were approximately $27.0 million and $31.0 million for the years ended September 30, 2021 and 2020, respectively. Operating lease payments included within operating cash flows were $30.9 million and $30.1 million for the year ended September 30, 2021 and 2020, respectively.
20. Pension and Other Post-Retirement Benefits
Defined Contribution Plans
We have established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers substantially all of our U.S. employees who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. Effective on January 1, 2020, we now match 100% of the first 3% of employee contributions of eligible salaries, and 50% of the next 2% of employee contributions of eligible salaries for a total maximum match of 4%. Additionally, any employer's contributions made after January 1, 2020 will now be vested immediately, and employer contributions made before this date will continue to be vested on the prior schedule. Our contributions to the 401(k) Plan that covers substantially all of our U.S. employees who meet the minimum requirements totaled $13.7 million, $12.0 million and $7.3 million for fiscal years 2021, 2020 and 2019, respectively. We make contributions to various other plans in certain of our foreign operations; total contributions to these plans are not material.
Defined Benefit Plans
We sponsor certain defined benefit plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our defined benefit pension income was $0.2 million, $0.4 million, and $0.5 million for fiscal years 2021, 2020, and 2019, respectively. The aggregate projected benefit obligation as of September 30, 2021 and September 30, 2020 was $34.9 million and $35.4 million, respectively. The aggregate net liability of our defined benefit plans as of September 30, 2021 and September 30, 2020 was $10.1 million and $13.2 million, respectively.
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21. Income Taxes
Recent Tax Legislation
On March 27, 2020, the CARES Act was enacted, which provided a technical correction to a provision in the Tax Cuts and Jobs Act ("TCJA") related to the characterization of federal net operating losses ("NOLs") generated during fiscal year 2018. Under the TCJA, NOLs generated in fiscal years that straddled December 31, 2017 were designated as indefinite-lived NOLs. The CARES Act amended this legislation to designate these NOLs as definite-lived NOLs. This recharacterization resulted in an increase of $6.5 million in deferred tax assets related to our definite lived NOLs, thus requiring additional valuation allowance of the same amount.
Provision (Benefit) for Income Taxes
The components of loss before income taxes are as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Domestic | $ | (36,734) | $ | (69,701) | $ | (65,397) | |||||||||||
| Foreign | 24,770 | 25,793 | 594 | ||||||||||||||
| Loss before income taxes | $ | (11,964) | $ | (43,908) | $ | (64,803) | |||||||||||
The components of the provision (benefit) for income taxes are as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | (807) | $ | 4,197 | $ | 2,745 | |||||||||||
| State | 1,739 | 149 | (939) | ||||||||||||||
| Foreign | 7,387 | 12,678 | 15,612 | ||||||||||||||
| Total current | 8,319 | 17,024 | 17,418 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (4,253) | (24,926) | (20,189) | ||||||||||||||
| State | 746 | (13,977) | 1,151 | ||||||||||||||
| Foreign | 596 | (8,989) | (21,578) | ||||||||||||||
| Total deferred | (2,911) | (47,892) | (40,616) | ||||||||||||||
| Provision (benefit) for income taxes | $ | 5,408 | $ | (30,868) | $ | (23,198) | |||||||||||
| Effective income tax rate | (45.2) | % | 70.3 | % | 35.8 | % | |||||||||||
The provision (benefit) for income taxes differed from the amount computed by applying the federal statutory rate to our loss before income taxes as follows (dollars in thousands):
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| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Federal tax benefit at statutory rate | $ | (2,512) | $ | (9,259) | $ | (13,608) | |||||||||||
| State tax provision (benefit), net of federal benefit | 1,831 | (10,808) | 167 | ||||||||||||||
| Foreign tax rate and other foreign related tax items | 927 | (3,285) | 2,755 | ||||||||||||||
| Stock-based compensation | (14,519) | (3,830) | 3,368 | ||||||||||||||
| Non-deductible expenditures | 4,148 | 479 | 2,689 | ||||||||||||||
| Executive compensation | 5,049 | 6,445 | 1,662 | ||||||||||||||
| Change in U.S. and foreign valuation allowance | 126,917 | (27,050) | 176,624 | ||||||||||||||
| Capital (losses) gains | (95,858) | 10,443 | (180,133) | ||||||||||||||
| Intangible property transfers | — | (14,800) | (24,691) | ||||||||||||||
| Uncertain tax positions | 4,006 | 17,051 | 3,232 | ||||||||||||||
| Base erosion and anti-abuse tax | (807) | 4,297 | 2,880 | ||||||||||||||
| Tax (credits) benefits | (18,857) | (9,989) | 722 | ||||||||||||||
| Foreign dividend | — | 12,806 | 1,026 | ||||||||||||||
| Debt repurchases | (5,050) | (3,442) | — | ||||||||||||||
| Other | 133 | 74 | 109 | ||||||||||||||
Provision (benefit) for income taxes | $ | 5,408 | $ | (30,868) | $ | (23,198) | |||||||||||
The effective income tax rate is based upon the income for the year, the geographic mix of our income, the composition of the income in different countries, changes relating to valuation allowances and the potential tax consequences of resolving audits or other tax contingencies.
The effective income tax rate in fiscal year 2021 differs from the U.S. federal statutory rate of 21.0% primarily due to a change in the valuation allowance in the United States as well as the addition of uncertain tax positions partially offset by base erosion and anti-abuse planning initiatives.
The effective income tax rate in fiscal year 2020 differs from the U.S. federal statutory rate of 21.0% primarily due to a net $29.9 million deferred tax benefit from adjustments to domestic valuation allowance primarily related to the Cerence spin-off, a foreign tax benefit of $14.8 million related to prior year intangible property transfers, partially offset by uncertain tax positions and the base erosion and anti-abuse tax.
The effective income tax rate in fiscal year 2019 differs from the U.S. federal statutory rate of 21.0% primarily due to a net tax benefit related to intangible property transfers, partially offset by the base erosion and anti-abuse tax and uncertain tax positions. As part of the restructuring for the spin-off of our Automotive business, we recognized an $857.8 million gross U.S. capital loss with a potential tax benefit of $180.1 million. We believe that it is not more likely than not that the tax benefit from the U.S. capital loss will be realized. As a result, we recorded a full valuation allowance against the capital loss.
As of September 30, 2021, foreign earnings of approximately $478.9 million have been retained by foreign subsidiaries for reinvestment. No provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries as these earnings have been indefinitely invested or expected to be remitted substantially free of additional tax. Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable because of the complexity of laws and regulations, varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriations.
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Deferred tax assets (liabilities) consist of the following as of September 30, 2021 and 2020 (dollars in thousands):
| September 30, 2021 | September 30, 2020 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforwards | $ | 104,780 | $ | 121,375 | |||||||
| Capital loss carryforwards | 265,338 | 169,480 | |||||||||
| Federal and state credit carryforwards | 61,226 | 44,181 | |||||||||
| Accrued expenses and other reserves | 19,434 | 19,703 | |||||||||
| Deferred compensation | 22,090 | 20,088 | |||||||||
| Lease liabilities | 19,680 | 23,874 | |||||||||
| Other | 52,969 | 18,697 | |||||||||
| Total deferred tax assets | 545,517 | 417,398 | |||||||||
| Valuation allowance for deferred tax assets | (416,758) | (230,322) | |||||||||
| Net deferred tax assets | 128,759 | 187,076 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation | (26,166) | (20,781) | |||||||||
| Convertible debt | (25,176) | (86,667) | |||||||||
| Acquired intangibles | (3,290) | (56,794) | |||||||||
| Difference in timing of revenue related items | (27,044) | (26,787) | |||||||||
| Right-of-Use assets | (13,175) | (18,345) | |||||||||
| Net deferred tax assets (liabilities) | $ | 33,908 | $ | (22,298) | |||||||
| Reported as: | |||||||||||
Long-term deferred tax assets | $ | 45,927 | $ | 47,818 | |||||||
| Long-term deferred tax liabilities | (12,019) | (70,116) | |||||||||
| Net deferred tax assets (liabilities) | $ | 33,908 | $ | (22,298) | |||||||
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. During fiscal year 2021, the valuation allowance for deferred tax assets increased by $186.4 million. This increase primarily relates to the valuation allowance for deferred taxes related to the capital loss on disposition of the medical transcription and EHR implementation businesses and the redemption of convertible debt. As of September 30, 2021, we have $382.4 million and $34.3 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2020, we had $198.9 million and $31.4 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively.
Valuation Allowances
As of September 30, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. We continue to believe negative evidence for the release of some or all of the allowances outweighs positive evidence after considering recent profitability trends and the disposition of the medical transcription and EHR implementation businesses. We continue to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of September 30, 2021, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.
At September 30, 2021 and 2020, we had U.S. federal net operating loss carryforwards of $283.1 million and $370.5 million, respectively. At September 30, 2021 and 2020, we had state net operating loss carryforwards of $177.4 million and $196.0 million, respectively. Certain net operating loss and credit carryforwards are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state tax provisions. As of September 30, 2021 and 2020, we had foreign net operating loss carryforwards of $152.2 million and $154.8 million, respectively. These carryforwards will expire at various dates beginning in 2021 and extending up to an unlimited period.
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As of September 30, 2021 and 2020, we had federal research and development carryforwards and foreign tax credit carryforwards of $73.6 million and $56.6 million, respectively. As of September 30, 2021 and 2020, we had state research and development credit and investment tax credit carryforwards of $12.9 million and $13.1 million, respectively. As of September 30, 2021 and 2020, we had foreign investment tax credit carryforwards of $12.7 million and $8.4 million, respectively.
Uncertain Tax Positions
We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we could record adjustments to the amounts for federal, foreign, and state tax-related liabilities in the future as we revise estimates or as we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.
The aggregate changes in the balance of our gross unrecognized tax provisions (benefits) were as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance at the beginning of the year | $ | 55,167 | $ | 18,772 | |||||||
Increases related to tax positions from prior fiscal years | 5,413 | 38,006 | |||||||||
| Increases for tax positions taken during current period | 3,871 | 6,793 | |||||||||
| Decreases for tax settlements and lapse in statutes | (4,463) | (8,817) | |||||||||
| Cumulative translation adjustments | 153 | 413 | |||||||||
| Balance at the end of the year | $ | 60,141 | $ | 55,167 | |||||||
As of September 30, 2021, $60.1 million of the unrecognized tax benefits, if recognized, would impact our effective income tax rate. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes of $1.7 million, $1.1 million, and $0.4 million during fiscal years 2021, 2020, and 2019, respectively. We recorded interest and penalties of $3.5 million and $1.7 million as of September 30, 2021 and 2020, respectively.
On October 8, 2021, we received an interim decision from the Administrative Court of the Canton of Zurich in Switzerland (the “Swiss Appeals Court”) regarding our appeal of certain proposed income tax adjustments related to a 2011 IP transfer and business restructuring by a Swiss subsidiary. Although the Swiss Appeals Court upheld a tax assessment related to the IP transfer, it remanded our case to a lower court in Switzerland for further factual development and consideration of other issues. We currently believe it is reasonably possible that the case could be resolved in the next 12 months. We disagree with the tax authorities' position and intend to vigorously defend our position in the lower court proceedings. If we prevail, there would be no incremental financial exposure; however, if the position of the Swiss tax authorities is ultimately upheld on all matters, we could be required to pay up to $60 million, the majority of which could affect our earnings.
We are subject to U.S. federal income tax, various state and local taxes, and international income taxes in numerous jurisdictions. The federal tax returns for 2000 through 2017 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. Additionally, the federal tax returns for 2018 through 2021 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.
22. Segment and Geographic Information
Our Chief Operating Decision Maker ("CODM") regularly reviews segment revenues and segment profits for performance evaluation and resources allocation. Segment revenues include certain acquisition-related adjustments for revenues that would otherwise have been recognized without the acquisition. Segment profits reflect controllable costs directly related to each segment and the allocation of certain corporate expenses such as, corporate sales and marketing expenses and research and development project costs that benefit multiple segments. Certain items such as stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, other expenses, net and certain unallocated corporate expenses are excluded from segment profits, which allow for more meaningful comparisons to the financial results of the historical operations for performance evaluation and resources allocation by our CODM.
•The Healthcare segment is primarily engaged in providing clinical speech and clinical language understanding solutions that improve the clinical documentation process, from capturing the complete patient record to improving clinical documentation and quality measures for reimbursement.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
•The Enterprise segment is primarily engaged in using speech, NLU, and AI to provide automated customer solutions and services for voice, mobile, web and messaging channels.
•The Other segment consists primarily of voicemail transcription services.
We do not track our assets by segment. Consequently, it is not practical to show assets or depreciation by segment. The following table presents segment results along with a reconciliation of segment profits to loss before income taxes (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Segment revenues: | |||||||||||||||||
| Healthcare | $ | 806,082 | $ | 720,225 | $ | 700,571 | |||||||||||
| Enterprise | 535,383 | 529,978 | 510,753 | ||||||||||||||
| Other | 20,914 | 33,890 | 61,461 | ||||||||||||||
| Total segment revenues | 1,362,379 | 1,284,093 | 1,272,785 | ||||||||||||||
Less: Acquisition related revenue adjustments (a) | — | (301) | (1,536) | ||||||||||||||
| Total consolidated revenue | 1,362,379 | 1,283,792 | 1,271,249 | ||||||||||||||
| Segment profit: | |||||||||||||||||
| Healthcare | 265,063 | 229,618 | 252,549 | ||||||||||||||
| Enterprise | 137,363 | 144,465 | 126,900 | ||||||||||||||
| Other | 11,312 | 19,675 | 19,385 | ||||||||||||||
| Total segment profit | 413,738 | 393,758 | 398,834 | ||||||||||||||
| Corporate expenses and other, net | (88,334) | (119,500) | (137,555) | ||||||||||||||
| Acquisition-related revenues and costs of revenues adjustment | — | (301) | (1,536) | ||||||||||||||
| Stock-based compensation | (143,376) | (129,618) | (115,463) | ||||||||||||||
| Amortization of intangible assets | (59,332) | (65,241) | (65,171) | ||||||||||||||
| Acquisition-related costs, net | (3,734) | (2,935) | (6,524) | ||||||||||||||
| Restructuring and other charges, net | (36,243) | (17,513) | (30,128) | ||||||||||||||
| Other expenses, net | (94,683) | (102,558) | (107,260) | ||||||||||||||
| Loss before income taxes | $ | (11,964) | $ | (43,908) | $ | (64,803) | |||||||||||
__________
(a)Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.
No country outside of the United States provided greater than 10% of our total revenue. Revenue, classified by the major geographic areas in which our customers are located, was as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | 1,090,599 | $ | 1,019,802 | $ | 1,017,106 | |||||||||||
| International | 271,780 | 263,990 | 254,143 | ||||||||||||||
| Total | $ | 1,362,379 | $ | 1,283,792 | $ | 1,271,249 | |||||||||||
No country outside of the United States held greater than 10% of our long-lived or total assets. Our long-lived assets from continuing operations, including intangible assets and goodwill, were located as follows (dollars in thousands):
| September 30, 2021 | September 30, 2020 | ||||||||||
| United States | $ | 2,258,165 | $ | 2,182,515 | |||||||
| International | 524,943 | 595,802 | |||||||||
| Total | $ | 2,783,108 | $ | 2,778,317 | |||||||
23. COVID-19 Pandemic
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The novel coronavirus ("COVID-19") pandemic has disrupted economic markets, and the future economic impact, duration and spread of COVID-19 is still uncertain at this time. The COVID-19 pandemic adversely affected our results of operations and liquidity for fiscal year 2020, and may continue to adversely impact our business, results of operations, cash flows and financial condition. While we have not experienced significant disruptions to our ability to conduct business thus far as a result of the pandemic, we are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications.
The full extent to which the coronavirus pandemic will impact our business, operations, and financial results in the future will depend on numerous evolving factors and may not be accurately predicted at this time.
24. Subsequent Event
On September 29, 2021, we issued a notice calling for redemption all of our outstanding 1.5% 2035 Debentures, pursuant to which, the holders had the right to receive cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date of November 5th, 2021. In lieu of redemption, holders had the right to convert all or any portion of their debentures at the aforementioned conversion ratio until the close of business on November 4, 2021. Upon the conclusion of the conversion period on November 4, 2021, holders of $25.0 million notional amount exercised their right to convert. Additionally, we redeemed the remaining outstanding $0.1 million 1.5% 2035 Debentures for $0.1 million in cash. On November 5, 2021, we settled all of the outstanding 1.5% 2035 Debentures for $25.1 million in cash and 0.8 million shares of common stock. Following these redemptions and conversions, none of the 1.5% 2035 Debentures remain outstanding.
25. Quarterly Data (Unaudited)
The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all recurring adjustments necessary for a fair statement of such information (dollars in thousands, except per share amounts):
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | |||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||
| Total revenue | $ | 345,753 | $ | 346,977 | $ | 336,582 | $ | 333,067 | $ | 1,362,379 | |||||||||||||||||||
| Gross profit | $ | 213,975 | $ | 220,338 | $ | 206,654 | $ | 192,421 | $ | 833,388 | |||||||||||||||||||
| Net income (loss) from continuing operations | $ | 6,954 | $ | 12,734 | $ | (26,267) | $ | (10,793) | $ | (17,372) | |||||||||||||||||||
| Net income (loss) per share - continuing operations: | |||||||||||||||||||||||||||||
| Basic | $ | 0.02 | $ | 0.04 | $ | (0.09) | $ | (0.03) | $ | (0.06) | |||||||||||||||||||
| Diluted | $ | 0.02 | $ | 0.04 | $ | (0.09) | $ | (0.03) | $ | (0.06) | |||||||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||||||||
| Basic | 283,818 | 285,284 | 294,388 | 314,658 | 294,589 | ||||||||||||||||||||||||
| Diluted | 314,210 | 320,112 | 294,388 | 314,658 | 294,589 | ||||||||||||||||||||||||
| First Quarter | Second Quarter(a) | Third Quarter | Fourth Quarter | Fiscal Year | |||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Total revenue | $ | 361,509 | $ | 315,924 | $ | 298,620 | $ | 307,739 | $ | 1,283,792 | |||||||||||||||||||
| Gross profit | $ | 211,803 | $ | 191,867 | $ | 178,320 | $ | 180,798 | $ | 762,788 | |||||||||||||||||||
| Net income (loss) from continuing operations | $ | 43,624 | $ | (26,483) | $ | 2,261 | $ | (32,442) | $ | (13,040) | |||||||||||||||||||
| Net income (loss) per share - continuing operations: | |||||||||||||||||||||||||||||
| Basic | $ | 0.15 | $ | (0.09) | $ | 0.01 | $ | (0.11) | $ | (0.05) | |||||||||||||||||||
| Diluted | $ | 0.15 | $ | (0.09) | $ | 0.01 | $ | (0.11) | $ | (0.05) | |||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||||||||
| Basic | 284,130 | 282,576 | 281,281 | 282,556 | 282,644 | ||||||||||||||||||||||||
| Diluted | 289,453 | 282,576 | 287,852 | 282,556 | 282,644 | ||||||||||||||||||||||||
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
_________
(a)On March 27, 2020, the CARES Act was enacted, which provided a technical correction to a provision in the TCJA related to the characterization of federal net operating losses ("NOLs") generated during fiscal year 2018. Under the TCJA, NOLs generated in fiscal years that straddled December 31, 2017 were designated as indefinite-lived NOLs. The CARES Act amended this legislation to designate these NOLs as definite-lived NOLs. This recharacterization resulted in an increase of $6.5 million in deferred tax assets related to our definite lived NOLs, thus requiring additional valuation allowance of the same amount. This adjustment was identified during the fiscal third quarter ending June 30, 2020.
We determined that these amounts are not material to our previously issued consolidated financial statements for the three months ended March 31, 2020. The amounts for the second quarter of fiscal year 2020 above have been adjusted to reflect this adjustment.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures. Our disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed and summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.
Management Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and,
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2021, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on the results of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of September 30, 2021, our internal control over financial reporting was effective.
The attestation report concerning the effectiveness of our internal control over financial reporting as of September 30, 2021 issued by BDO USA, LLP, an independent registered public accounting firm, appears in Item 8 of this Annual Report on Form 10-K.
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Changes in Internal Controls Over Financial Reporting
There have been no material changes in our internal controls over financial reporting during the fourth quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.Other Information
None
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive Proxy Statement for our next Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), within 120 days of the end of the fiscal year covered by this report, and certain information to be included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “Election of Directors” in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled “Executive Compensation, Management and Other Information” in our Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.
Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees effective on November 25, 2019. Our Code of Business Conduct and Ethics, as well as any amendments thereto, can be found at our website: www.nuance.com. We will provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics. Such a request should be made in writing and addressed to Investor Relations, Nuance Communications, Inc., 1 Wayside Road, Burlington, MA 01803.
To date, there have been no waivers under our Code of Business Conduct and Ethics. We will post any waivers, if and when granted, of our Code of Business Conduct and Ethics on our website at www.nuance.com.
Item 11. Executive Compensation
The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the section titled “Executive Compensation, Management and Other Information” in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
It is the policy of the Board that all transactions required to be reported pursuant to Item 404 of Regulation S-K be subject to approval by the Audit Committee of the Board. In furtherance of relevant Nasdaq rules and our commitment to corporate governance, the charter of the Audit Committee provides that the Audit Committee shall review and approve any proposed related party transactions including, transactions required to be reported pursuant to Item 404 of Regulation S-K for potential conflict of interest situations. The Audit Committee reviews the material facts of all transactions that require the committee’s approval and either approves or disapproves of the transaction. In determining whether to approve a transaction, the Audit Committee will take into account, among other factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances.
The additional information required by this item regarding certain relationships and related party transactions is incorporated by reference to the information set forth in the sections titled “Transactions with Related Persons” and “Corporate Governance-Board Independence” in our Proxy Statement.
94
Item 14. Principal Accountant Fees and Services
The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)The following documents are filed as a part of this Report:
(i)Financial Statements — See Index to Financial Statements in Item 8 of this Report.
(ii)Financial Statement Schedules — All schedules have been omitted as the requested information is inapplicable or the information is presented in the financial statements or related notes included as part of this Report.
(iii)Exhibits — See Item 15(b) of this Report below.
(b)Exhibits.
EXHIBIT INDEX
| Filed Herewith | ||||||||||||||||||||||||||||||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Index # | Exhibit Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||||||||
| 2.1 | 8-K | 000-27038 | 2.1 | 4/13/2021 | ||||||||||||||||||||||||||||||||||
| 3.1 | 10-Q | 000-27038 | 3.2 | 5/11/2001 | ||||||||||||||||||||||||||||||||||
| 3.2 | 10-Q | 000-27038 | 3.1 | 8/9/2004 | ||||||||||||||||||||||||||||||||||
| 3.3 | 8-K | 000-27038 | 3.1 | 10/19/2005 | ||||||||||||||||||||||||||||||||||
| 3.4 | S-3 | 333-142182 | 3.3 | 4/18/2007 | ||||||||||||||||||||||||||||||||||
| 3.5 | 8-K | 0-27038 | 3.2 | 8/20/2013 | ||||||||||||||||||||||||||||||||||
| 3.6 | 10-K | 001-36056 | 3.4 | 11/7/2019 | ||||||||||||||||||||||||||||||||||
| 3.7 | 8-K | 000-27038 | 3.1 | 4/13/2021 | ||||||||||||||||||||||||||||||||||
| 4.1 | 10-K | 0-27038 | 4.1 | 11/26/2019 | ||||||||||||||||||||||||||||||||||
| 4.2 | 8-K | 001-36056 | 4.1 | 6/22/2015 | ||||||||||||||||||||||||||||||||||
| 4.3 | 8-K | 001-36056 | 4.1 | 12/7/2015 | ||||||||||||||||||||||||||||||||||
| 4.4 | 8-K | 001-36056 | 4.1 | 12/22/2016 | ||||||||||||||||||||||||||||||||||
| 4.5 | 8-K | 001-36056 | 4.1 | 3/17/2017 | ||||||||||||||||||||||||||||||||||
| 4.6 | X | |||||||||||||||||||||||||||||||||||||
| 10.1 | 10-Q | 001-36056 | 10.1 | 5/9/2019 | ||||||||||||||||||||||||||||||||||
| 10.2 | Nuance Communications, Inc. 2020 Stock Plan.* | 8-K | 001-36056 | 10.1 | 1/22/2020 | |||||||||||||||||||||||||||||||||
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| Filed Herewith | ||||||||||||||||||||||||||||||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| 10.3 | X | |||||||||||||||||||||||||||||||||||||
| 10.4 | 10-Q | 001-36056 | 10.2 | 2/7/2020 | ||||||||||||||||||||||||||||||||||
| 10.5 | 10-Q | 001-36056 | 10.3 | 8/9/2018 | ||||||||||||||||||||||||||||||||||
| 10.6 | 10-K | 001-36056 | 10.9 | 11/22/2016 | ||||||||||||||||||||||||||||||||||
| 10.7 | 10-Q | 001-36056 | 10.2 | 8/9/2018 | ||||||||||||||||||||||||||||||||||
| 10.8 | 10-K | 001-36056 | 10.8 | 11/19/2020 | ||||||||||||||||||||||||||||||||||
| 10.9 | 8-K | 001-36056 | 10.1 | 2/8/2021 | ||||||||||||||||||||||||||||||||||
| 10.10 | 10-K | 001-36056 | 10.16 | 11/20/2018 | ||||||||||||||||||||||||||||||||||
| 10.11 | 8-K | 001-36056 | 10.1 | 3/22/2018 | ||||||||||||||||||||||||||||||||||
| 10.12 | 10-K | 001-36056 | 10.16 | 11/19/2020 | ||||||||||||||||||||||||||||||||||
| 10.13 | 8-K | 001-36056 | 10.1 | 7/2/2021 | ||||||||||||||||||||||||||||||||||
| 21.1 | X | |||||||||||||||||||||||||||||||||||||
| 23.1 | X | |||||||||||||||||||||||||||||||||||||
| 24.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 101 | The following materials from Nuance Communications, Inc.’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive (Loss) Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements. | X | ||||||||||||||||||||||||||||||||||||
| 104 | The cover page of the Annual Report on Form 10-K for the fiscal year ended September 30, 2021 formatted in Inline XBRL (included in Exhibit 101) | |||||||||||||||||||||||||||||||||||||
| * | Denotes management compensation plan or arrangement | |||||||
97
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Burlington, Commonwealth of Massachusetts, on November 18, 2021.
| NUANCE COMMUNICATIONS, INC. | ||||||||
| By: | /s/ Mark Benjamin | |||||||
Mark Benjamin | ||||||||
| Chief Executive Officer | ||||||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Mark Benjamin and Daniel D. Tempesta, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, and hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
| /s/ Mark Benjamin | ||||||||
| Date: 11/18/2021 | Mark Benjamin, Chief Executive Officer (Principal Executive Officer) | |||||||
| /s/ Daniel D. Tempesta | ||||||||
| Date: 11/18/2021 | Daniel D. Tempesta Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||
| /s/ Arthur Giterman | ||||||||
| Date: 11/18/2021 | Arthur Giterman Senior Vice President, Chief Accounting Officer and Corporate Controller (Principal Accounting Officer) | |||||||
| /s/ Daniel J. Brennan | ||||||||
| Date: 11/18/2021 | Daniel J. Brennan, Director | |||||||
| /s/ Lloyd A. Carney | ||||||||
| Date: 11/18/2021 | Lloyd A. Carney, Chairman of the Board | |||||||
| /s/ Thomas D. Ebling | ||||||||
| Date: 11/18/2021 | Thomas D. Ebling, Director | |||||||
| /s/ Robert J. Finnocchio | ||||||||
| Date: 11/18/2021 | Robert J. Finocchio, Jr., Director | |||||||
| /s/ Laura S. Kaiser | ||||||||
| Date: 11/18/2021 | Laura S. Kaiser, Director | |||||||
| /s/ Michal Katz | ||||||||
| Date: 11/18/2021 | Michal Katz, Director | |||||||
| /s/ Mark R. Laret | ||||||||
| Date: 11/18/2021 | Mark R. Laret, Director | |||||||
| /s/ Sanjay N. Vaswani | ||||||||
| Date: 11/18/2021 | Sanjay N. Vaswani, Director | |||||||