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VERIFONE SYSTEMS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This section and other parts of this Form 10-K contain forward-looking
statements that involve risks and uncertainties. In some cases, forward-looking
statements can be identified by words such as "anticipates," "expects,"
"believes," "intends," "potential," "continues," "plans," "predicts," and
similar terms. Such forward-looking statements are based on current
expectations, estimates, and projections about our industry, and management's
beliefs and assumptions, and do not reflect the potential impact of any mergers,
acquisitions, or other business combinations or divestitures that have not been
completed. Forward-looking statements are not guarantees of future performance
and our actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such differences
include, but are not limited to, those discussed in Item 1A, Risk Factors above,
and elsewhere in this report, including our disclosures of Critical Accounting
Policies and Estimates in Item 7, our disclosures in Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, as well as in our consolidated
financial statements and related notes. The following discussion should be read
in conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Form 10-K. Unless required by law, we undertake no
obligation to update any forward-looking statements, whether as result of new
information, future events, or otherwise.
Overview
Our Business
We are a leading global provider of payment solutions that enable secure
electronic payment transactions and value-added services at the POS. We provide
payment solutions and expertise at the POS via merchant-operated,
consumer-facing, and self-service systems for, among others, the financial,
retail, hospitality, petroleum, transportation, government and healthcare
markets. Since 1981, we have designed and marketed payment solutions that
facilitate the long-term shift toward electronic payment transactions and away
from cash and checks in both developed and emerging economies worldwide. We have
one of the leading electronic payment solutions brands and are one of the
largest providers of electronic payment systems in the world.
Our customers include, among others, financial institutions, payment processors,
petroleum companies, large retailers, taxi fleets, transportation agencies,
government organizations, healthcare companies, quick service restaurants,
advertisers and media companies. We also sell to distributors, resellers, system
integrators, and ISOs who resell our products. Increasingly, we are engaging
with non-traditional industry participants such as alternative payment
companies, mobile phone operators, mobile wallet providers, coupon/offer
providers and social media networks, who desire access and integration with our
payment solutions at the POS to deliver their services and utilize sales and
shopper related data.
We believe that we benefit from a number of competitive advantages gained
through our 31-year history of success in our industry. These advantages include
our globally trusted brand name, large installed base, significant involvement
in the development of industry standards, security infrastructure, global
operating scale, customizable platforms, and investment in research and
development. Additionally, we compete primarily on the basis of the following
additional key factors: end-to-end system solutions, product certifications,
value-added applications, advanced product features, advanced communications
modularity, reliability, supply chain scale and flexibility, payment data
security, and low total cost of ownership as compared to other alternatives. We
believe that these advantages position us well to capitalize on the continuing
global shift toward electronic payment transactions.
Our industry's growth continues to be driven by the long-term shift toward
electronic payment transactions and away from cash and checks, the increasing
mobility of payment systems, a growing emphasis on contactless payments, the
emergence of payments initiated by consumers through mobile wallets, the
development of self-service payment systems, the growth of media-enabled payment
solutions, and continued focus on security to reduce fraud and identity theft.
In the U.S., we expect that our industry's growth may also be driven by the
potential shift to EMV smartcard-based payments. We believe that all these
trends will continue to drive demand for electronic payment systems in the
future.
We have experienced revenue growth in both developed and emerging countries. In
developed countries, we have experienced revenue growth driven mainly by
customers upgrading and replacing their systems, for among other reasons to
address compliance with security standards or implement new or better
functionality. We also experienced revenue growth from expansion of service
offerings. We have experienced revenue growth in emerging geographies, such as
Latin America, more specifically Brazil, and certain countries in the Middle
East and Africa, due to growing demand for electronic payment systems as a
result of improvements in their economic conditions and efforts to modernize
these economies to cashless payment systems. We expect demand to continue to
grow in the future, with particular strength in emerging economies. We continue
to devote research and development resources to address the market needs of both
emerging and developed economies.
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We operate in two business segments: North America and International. We define
North America as the U.S. and Canada, and International as all other countries
from which we derive revenues. Our reportable segments are the same as our
operating segments. Net revenues and operating income (loss) of each operating
segment reflect net revenues and expenses that directly benefit only that
segment. The operating segment performance measures reviewed by our Chief
Executive Officer exclude certain costs incurred on a company-wide basis,
primarily stock-based compensation, as well as acquisition-related adjustments.
These items are not allocated to our operating segments and are presented in the
financial information by segment as "Corporate."
Significant Events
During the past two fiscal years, we completed acquisitions for the purpose of
expanding our product and service offerings, as well as expanding our geographic
reach. Our two largest acquisitions, Hypercom in August 2011 and Point in
December 2011, have significantly increased our revenues and operating results
outside the U.S. Additionally, our other acquisitions during fiscal year 2012
are expected to contribute to future North America results through new product
and service offerings that we intend to also expand internationally. The results
of operations from each of these acquisitions are included in our Consolidated
Financial Statements from the date of acquisition. See Note 2, Business
Combinations, of this Annual Report on Form 10-K for further information on
these acquisitions.
On December 28, 2011, VeriFone, Inc. entered into the 2011 Credit Agreement,
which initially consisted of a $918.5 million Term A loan, $231.5 million Term B
loan, and $350.0 million Revolving loan, of which $300.0 million was initially
funded. This financing, supplemented by our cash on hand, was used to fund the
acquisition of Point, repay our previously outstanding loans, fund an escrow
account to pay the interest and principal of the 1.375% Senior Convertible Notes
that matured in June 2012, and fund the financing costs related to the 2011
Credit Agreement. On October 15, 2012, we entered into an Additional Credit
Extension Amendment to the 2011 Credit Agreement, under which the Term A loan
was increased by $109.5 million and the maximum amount available under the
Revolving loan was increased by $75.5 million. See Note 12, Financings, of this
Annual Report on Form 10-K for additional information.
On June 8, 2012, we received an unfavorable jury verdict in a patent
infringement litigation captioned Cardsoft, Inc. and Cardsoft (Assignment for
the Benefit of Creditors), LLC v. VeriFone Holdings, Inc. et al., in which the
jury awarded infringement damages of approximately $15.4 million based on the
jury's determination to apply a $3 per unit royalty on those of our terminals
that were subject to the infringement claim. In addition, although the district
court has not yet issued judgment in this matter, Cardsoft filed a motion
seeking a future royalty higher than the rate awarded by the jury. Given that an
ongoing royalty is probable and estimable, effective in our fiscal quarter ended
July 31, 2012, when the jury verdict was issued, we accrued $3 per unit to cost
of net revenues for potential ongoing royalties. During the fiscal quarter ended
October 31, 2012, we completed redesigns of the terminals subject to the jury's
verdict specifically to address Cardsoft's allegations, and implemented such
redesign in the U.S. We obtained the legal opinion of independent intellectual
property counsel that our terminals, as redesigned, do not infringe the Cardsoft
patents-in-suit, taking into account the claim construction of the District
Court in the Cardsoft action. Accordingly, although the question of whether our
products, as redesigned, infringe the Cardsoft patents-in-suit is subject to
determination by a court, whether the District Court in the underlying trial or
another court, we concluded based on the procedures taken and legal reviews
obtained, that it is not probable that an ongoing royalty based on the jury's
verdict applies to our terminals as redesigned, and ceased accruing an ongoing
royalty on the basis for our implementation of the redesigns. See further
discussion in Note 13, Commitments and Contingencies, of this Annual Report on
Form 10-K for further information on this litigation.
Our Sources of Revenue
Our payment solutions generally consist of POS electronic payment systems that
run our proprietary and third-party operating systems, security, encryption,
application and certified payment software, as well as other third-party
value-added applications. Our electronic payment systems are available in
several modular configurations, offering our customers flexibility to support a
variety of connectivity options, including various of the wired and wireless
Internet connectivity infrastructures deployed globally. Our proprietary
architecture enables multiple value-added applications, such as gift-card and
loyalty-card programs, healthcare insurance eligibility, and time and attendance
tracking, to reside on the same system without requiring recertification when
new applications are added to the system.
Services are an increasingly important part of our overall revenue mix. We offer
traditional services that span different aspects of the payments ecosystem,
including equipment repair or maintenance, gateway processing, remote terminal
management, software post-contract support, customized application development,
helpdesk, customer service, warehousing and encryption or tokenization. We offer
full service solutions, such as Point's "All in One" payment solution (also
referred to as "Payment-as-a-Service"), as well as end-to-end estate management
services. In addition, we offer more market specific services such as our
GlobalBay mobile retailing software, LIFT retail services deployed at gas
stations and convenience stores, and our digital media
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solutions, which utilize media enabled equipment to display digital content,
such as our VNET (VeriFone digital network), in taxis and at petroleum
dispensers at gas stations. We also offer our customers technical support for
our installed payment systems, consulting and project management services for
system deployment, and customization of integrated software solutions.
Timing of our customer orders may cause our revenue to vary from quarter to
quarter. Specifically, revenues recognized in our fiscal quarters can vary
significantly when larger customers or our distributors hold back orders due to
regulatory or budget concerns. In addition, revenues can be back-end weighted
when we receive sales orders and deliver a higher proportion of our System
solutions toward the end of our fiscal quarters. This variability and back-end
weighting of orders may adversely affect our results of operations in a number
of ways and could negatively impact revenues and profits. First, the product mix
of orders may not align with manufacturing forecasts, which could result in a
shortage of the components needed for production. Second, existing manufacturing
capacity may not be sufficient to deliver the desired volume of orders in a
concentrated time when they are received. Third, back-end weighted demand could
negatively impact gross margins through higher labor, delivery and other
manufacturing and distribution costs. If, on the other hand, we were to seek to
manage the fulfillment of back-end weighted orders through holding increased
inventory levels, we would risk higher inventory obsolescence charges if our
sales fall short of our expectations.
Because our revenue recognition depends on, among other things, the timing of
product shipments, decisions we make about product shipments, particularly
toward the end of a fiscal quarter, may impact our reported revenues. The timing
of product shipments may depend on a number of factors, including price
discussions with our customers, operating costs, including costs of air
shipments if required, the delivery date requested by customers and our
operating capacity to fill orders and ship products, as well as our own long and
short-term business planning. These factors may affect timing of shipments and
consequently revenues recognized for a particular period.
Critical Accounting Polices and Estimates
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with U.S. GAAP (generally accepted accounting
principles). Our significant accounting policies are more fully described in
Note 1, Principles of Consolidation and Summary of Significant Accounting
Policies, in the Notes to Consolidated Financial Statements of this Annual
Report on Form 10-K. On an ongoing basis, we evaluate our critical accounting
policies and estimates. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for our judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time the estimate is made, and if different
estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially
impact our consolidated financial statements. The Company believes that the
following discussion addresses the Company's most critical accounting policies.
Revenue Recognition
While the majority of our sales transactions contain standard business terms and
conditions, there are some transactions that contain non-standard business terms
and conditions, and, as a result, significant contract interpretation is
sometimes required to determine whether an arrangement exists and what is
included in the arrangement. In addition, our revenue recognition policy
requires an assessment as to whether collection is probable, which inherently
requires us to evaluate the creditworthiness of our customers.
We routinely enter into customer arrangements involving the long term use of our
equipment (revenue generating assets). The assessment of whether these
arrangements are operating or sales type leases requires judgment and estimates,
including determining the expected residual value of the revenue generating
assets at the end of the lease term. We estimate residual value considering the
expected life of the revenue generating assets, which is generally five years.
We periodically enter into software development contracts with our customers
that we recognize as net revenues on a completed contract or milestone basis.
The assessment of possible losses on these arrangements requires that we
estimate the total costs of the software development project. Changes in these
estimates could materially impact our financial results.
We enter into arrangements with customers that include multiple deliverables.
Significant judgment is required to determine the appropriate accounting for
multiple element arrangements including: (1) whether elements represent separate
deliverables; (2) the ESP (estimated selling price) for each deliverable; (3)
the arrangement consideration to be allocated among the deliverables;
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(4) when to recognize net revenues on the deliverables; and (5) whether
undelivered elements are essential to the functionality of delivered elements.
Further, our determination of the ESP involves assessing factors such as the
cost to produce the deliverable, the anticipated margin on that deliverable, the
economic conditions and trends, the selling price and profit margin for similar
parts and our ongoing pricing strategy and policies.
Changes in judgments on the above assumptions and estimates could materially
impact the timing of revenue recognition. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Inventory Valuation and Liability for Purchase Commitments with Contract
Manufacturers and Suppliers
The valuation of inventories requires us to determine obsolete or excess
inventory and inventory that is not of salable quality. The determination of
obsolete or excess inventories requires us to estimate the future demand for our
products within specific time horizons, generally six months. If our demand
forecast for specific products is greater than actual demand and we fail to
reduce manufacturing output accordingly, we could be required to record
additional inventory write-offs, which would have a negative impact on our gross
profit percentage.
We review the adequacy of our inventory valuation on a quarterly basis. For
production inventory, our methodology involves an assessment of the
marketability of the product based on a combination of shipment history and
future demand. We then evaluate the inventory found to be in excess and take
appropriate write-downs to reflect the risk of obsolescence. This methodology is
affected by our sales estimates. If actual demand were to be substantially lower
than estimated, additional inventory write-downs for excess or obsolete
inventories may be required.
We record accruals for estimated cancellation fees related to orders placed with
our suppliers that have been canceled or are expected to be canceled. Consistent
with industry practice, we acquire inventory through a combination of purchase
orders, supplier contracts, and open orders based on projected demand
information. These commitments typically cover our requirements for periods
ranging from one to five months. If there is an abrupt and substantial decline
in demand for one or more of our products or an unanticipated change in
technological requirements for any of our products, we may be required to record
additional accruals for cancellation fees that would negatively affect our
results of operations in the period when the cancellation fees are identified
and recorded.
Warranty Costs
We accrue for estimated warranty obligations at the time that revenue is
recognized, and base those accruals on an estimate of future warranty costs for
the delivered product. Our warranty obligation generally extends from one to
three years from the date of shipment. We estimate such obligations based on the
size of the installed base of products subject to warranty protection,
historical and projected warranty claim rates, historical and projected costs
associated with claims, and knowledge of specific product failures that are
outside of our typical experience. Our estimates and judgments are affected by
actual product failure rates and actual costs to repair. These estimates and
judgments are more subjective for new product introductions as these estimates
and judgments are based on our experience for similar products because we do not
yet have actual history or experience for new products.
From time to time we encounter situations where our costs of warranty on a
product vary significantly from expectations due to factors including defective
parts, defective workmanship, or other unanticipated environmental or usage
patterns. When encountered, a specific reserve is established for these atypical
situations on a case by case basis and best available estimates are used to
quantify the potential exposure.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to pay their invoices to us in full. We regularly
review the adequacy of our allowance for doubtful accounts, considering the size
of each customer's accounts receivable balance, their expected ability to pay,
aging of their accounts receivable balances, and our collection history with
them. An appropriate provision is made taking into account these factors. The
Company's level of reserves for its customer accounts receivable fluctuates
depending upon all of the factors mentioned above and could change significantly
if their financial condition changes or the economy in general deteriorates.
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Goodwill
Assessing qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount
involves assessing relevant events and circumstances that may impact the fair
value and the carrying amount of the reporting unit. The identification of
relevant events and circumstances and how these may impact a reporting units'
fair value or carrying amount involve significant judgments and assumptions.
These assumptions include identification of macroeconomic conditions, industry
and market considerations, cost factors, overall financial performance, VeriFone
specific events and share price trends, whether those trends are more than
temporary, and making the assessment on whether each relevant factor will impact
the impairment test positively or negatively and the magnitude of any such
impact.
When we perform a quantitative assessment of goodwill impairment, the
determination of the fair value of a reporting unit involves the use of
significant estimates and assumptions. These estimates and assumptions include
revenue growth rates and operating margins used to calculate projected future
cash flows, risk-adjusted discount rates, future economic and market conditions
and determination of appropriate market comparables. We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable
and inherently uncertain. Actual future results may differ from those estimates.
In addition, we make certain judgments and assumptions in allocating shared
assets and liabilities to determine the carrying values for each of our
reporting units.
Intangible Assets
We make judgments about the recoverability of purchased finite-lived intangible
assets whenever events or changes in circumstances indicate that an impairment
may exist. Each period we evaluate the estimated remaining useful lives of
purchased intangible assets and whether events or changes in circumstances
warrant a revision to the remaining periods of amortization. We base our fair
value estimates on assumptions we believe to be reasonable but that are
unpredictable and inherently uncertain. Actual future results may differ from
those estimates.
Contingencies and Litigation
The outcome of litigation is inherently uncertain and subject to numerous
factors outside of our control. Significant judgment is required when we assess
the likelihood of any adverse judgments or outcomes to a potential claim or
legal proceeding, as well as potential ranges of probable losses, when the
outcomes of the claims or proceedings are probable and reasonably estimable. A
determination of the amount of accrued liabilities required, if any, for these
contingencies is made after the analysis of each matter. Because of
uncertainties related to these matters, we base our estimates on the information
available at the time. As additional information becomes available, we reassess
the potential liability related to pending claims and litigation and may revise
our estimates. Any revisions in the estimates of potential liabilities could
have a material impact on our results of operations and financial position.
Stock-Based Compensation
We account for stock-based employee compensation plans using fair value
recognition and measurement principles and recognize compensation over the
requisite service period for awards expected to vest. The estimation of stock
awards that will ultimately vest requires judgment, and to the extent actual
results differ from our estimates, such amounts will be recorded as a cumulative
adjustment in the period estimates are revised. In valuing stock-based awards,
significant judgment is required in determining the expected volatility and the
expected term individuals will hold their stock-based awards prior to
exercising. Expected volatility of the stock is based on a blend of factors,
such as the implied volatility of our options and the historical volatility of
our own stock. The expected term of options granted is derived from the
historical actual term of option grants and an estimate of future exercises
during the remaining contractual period of the option. In the future, our
expected volatility and expected term may change, which could substantially
change the grant-date fair value of future awards of stock options and
ultimately the expense we record.
Business Combinations
We are required to estimate the fair values assigned to assets acquired and
liabilities assumed of acquired companies. Such valuations require management to
make significant estimates and assumptions, especially with respect to
intangible assets.
Critical estimates in valuing intangible assets include but are not limited to:
future expected cash flows from customer contracts, customer lists, distribution
agreements and acquired developed technologies and patents; expected costs to
develop IPR&D into commercially viable products and estimating cash flows from
projects when completed; brand awareness and market position, as well as
assumptions about the period of time the brand will continue to be used in our
product portfolio; customer attrition rates
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and discount rates. Management's estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates.
Future expected cash flow to be generated from an acquired business is estimated
based on the current financial performance of the business, then adjusted for
expected market participant synergies that can be realized, the expected timing
of future cash flows of all of the acquired business' products and services, the
expected customer attrition rates and the future growth rates. The higher the
projected cash flows, the higher the value of intangible assets.
Discount rates reflect the nature of our investment and the perceived risk of
the underlying cash flows.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using enacted tax rates in effect for the
year the differences are expected to reverse. In evaluating our ability to
recover our deferred tax assets we consider all available positive and negative
evidence including our past operating results, the existence of cumulative
losses in past fiscal years and our forecast of future taxable income in the
jurisdictions in which we have operations.
We have placed a valuation allowance on certain U.S. foreign tax credit related
deferred tax assets and certain non-U.S. deferred tax assets because realization
of these tax benefits through future taxable income does not meet the
more-likely-than-not threshold. We intend to maintain the valuation allowances
until sufficient positive evidence exists to support the reversal of the
valuation allowances. An increase in the valuation allowance would result in
additional tax expense in such period. We make estimates and judgments about our
future taxable income that are based on assumptions that are consistent with our
plans and estimates. Should the actual amounts differ from the estimates, the
amount of the valuation allowance could be materially impacted.
We must make certain estimates and judgments in determining income tax expense
for financial statement purposes. These estimates and judgments occur in the
calculation of tax credits and deductions, and in the calculation of certain tax
assets and liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial statement purposes, as
well as the interest and penalties relating to these uncertain tax positions.
Significant changes to these estimates may result in an increase or decrease to
our tax provision in a subsequent period.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws. Our estimate for the potential outcome of
any uncertain tax issue is based on detailed facts and circumstances of each
issue. Resolution of these uncertainties in a manner inconsistent with our
expectations could have a material impact on our results of operations and
financial condition.
As a result of the implementation of ASC 740-10, we recognize liabilities for
uncertain tax positions based on the two-step process prescribed within the
interpretation. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more
likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon ultimate settlement. It is
inherently difficult and subjective to estimate such amounts, as this requires
us to determine the probability of various possible outcomes. We re-evaluate
these uncertain tax positions on a quarterly basis. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and new audit
activity. Such a change in recognition or measurement would result in the
recognition of a tax benefit or an additional charge to the tax provision in the
period.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements may be found in
Note 1, Principles of Consolidation and Summary of Significant Accounting
Policies, in the Notes to Consolidated Financial Statements of this Annual
Report on Form 10-K, which section is incorporated herein by reference.
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Results of Operations
Net Revenues
Our sources of net revenues include (1) products, which include the sale or
lease of electronic payment systems with incidental software or accessories; (2)
services, which include our "All-in-One" payment services, fees for installation
and deployment, customer support, repair services, transaction processing,
custom software development and extended warranties, as well as advertising (or
"placement") in and on taxis and displays at petroleum dispensers; and (3)
software, which includes licenses for software to manage electronic payment
solutions and encryption, enable mobile payment and provide value-added features
to payment solutions.
We refer to net revenues from products and associated perpetual software
licenses and accessories as System solutions net revenues. We refer to net
revenues from services, equipment leases and term software licenses as Services
net revenues.
Net revenues, which include System solutions and Services, are summarized in the
following table (in thousands, except percentages):
Years Ended October 31,
% of Total % of Total % of Total
2012 net revenues Change % Change 2011 net revenues Change % Change 2010 net revenues
System
solutions $ 1,339,024 71.8 % $ 305,113 29.5 % $ 1,033,911 79.3 % $ 204,962 24.7 % $ 828,949 82.8 %
Services 526,947 28.2 % 256,992 95.2 % 269,955 20.7 % 97,367 56.4 % 172,588 17.2 %
Total net
revenues $ 1,865,971 100.0 % $ 562,105 43.1 % $ 1,303,866 100.0 % $ 302,329 30.2 % $ 1,001,537 100.0 %
Total net revenues grew substantially in each year primarily due to net revenue
contributions from acquired businesses. Net revenues were also impacted
unfavorably in 2012 and slightly favorably in 2011 due to fluctuations in
currency rates in certain geographies where we conduct business.
When used herein "net revenues from acquired businesses", which is measured
quarterly, refers to net revenues from businesses acquired during the prior
twelve months, and consists of net revenues derived from the sales channels of
acquired resellers and distributors, and net revenues from System solutions and
services attributable to businesses acquired in the twelve months preceding the
respective financial quarters. For acquisitions of small businesses that are
integrated within a relatively short time after the close of the acquisition, we
assume quarterly net revenues attributable to such acquired businesses during
the twelve months following acquisition remain at the same level as in the first
full quarter after the acquisition closed.
Fiscal year 2012 net revenues included $460.0 million of net revenues from
acquired businesses. These revenues were comprised of $189.5 million from Point,
$223.0 million from Hypercom, and $47.5 million from other acquisitions. Fiscal
year 2011 sales by VeriFone to Point totaled $21.6 million.
Fiscal year 2011 net revenues included $154.4 million of net revenues from
acquired businesses. These revenues were comprised of $68.5 million from
Hypercom and $85.9 million from other acquisitions.
We evaluate our revenues geographically based upon our two reportable segments:
International and North America. Our International segment consists of our
business in the EMEA, LAC and ASPAC territories. Our EMEA territory is comprised
of our operations in Europe, the Middle East, and Africa. Our LAC territory
consists of our operations in Latin America, which includes South America,
Central America, including Mexico, and the Caribbean. Our ASPAC territory
consists of our operations in the Asia Pacific region, including China, India,
Japan, Australia, New Zealand and other countries in the region. Our North
America territory is comprised of the U.S. and Canada.
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Growth in net revenues with and without the impact of foreign currency
fluctuations, is as follows:
For fiscal year 2012 compared to fiscal year
2011 For fiscal year 2011 compared to fiscal year 2010
Net Net
revenues revenues
Impact due growth at Impact due growth at
Net revenues to foreign constant to foreign constant
growth currency currency Net revenues growth currency currencyInternational
EMEA 80.8 % (8.9)pts 89.7 % 55.7 % 2.9pts 52.8 %
LAC 34.4 % (6.9)pts 41.3 % 39.5 % 1.0pts 38.5 %
ASPAC 68.0 % (2.0)pts 70.0 % 30.8 % 3.3pts 27.5 %
Total
International 63.2 % (7.2)pts 70.4 % 45.8 % 2.3pts 43.5 %
North America 9.3 % (0.1)pts 9.4 % 10.3 % 0.2pts 10.1 %
Total 43.1 % (4.5)pts 47.6 % 30.2 % 1.4pts 28.8 %
Excluding the impact of foreign currency fluctuations, our net revenues
increased during both of the past two fiscal years primarily due to acquired
businesses, increases in customer demand and global expansion of our product and
service offerings into new territories. During fiscal year 2012, these increases
were partially offset by changes in foreign currency rates. Foreign currency had
the most significant impact in EMEA and LAC, due to fluctuations in the values
of the Euro, British Pound and Brazilian Reais. During fiscal year 2011 foreign
currency had a small positive impact on our growth rate.
Given the large percentage of our business outside the United States, we expect
that future growth rates will also be impacted by foreign currency fluctuations.
We refer to our net revenues excluding the impact of foreign currency exchange
rates as net revenues at constant currency. We determine net revenues at
constant currency by recomputing net revenues denominated in currencies other
than U.S. dollars in the current fiscal year using average exchange rates for
that particular currency during the corresponding quarter of the prior year. We
use this non-GAAP measure to evaluate performance on a comparable basis
excluding the impact of foreign currency fluctuations. Net revenues at constant
currency is a non-GAAP financial measure, which is information derived from
consolidated financial information but not presented in our financial statements
prepared in accordance with GAAP. Our management uses this non-GAAP measure to
evaluate VeriFone's performance and operations, and to compare VeriFone's
current results with those for prior periods as well as with the results of peer
companies. This non-GAAP financial measure contains limitations, as it is not
based on any comprehensive set of accounting rules or principles and may
therefore differ from similar non-GAAP financial measures used by other
companies. As a result, this non-GAAP measure should be considered as a
supplement to, and not as a substitute for, or superior to, disclosures made in
accordance with GAAP.
Net revenues product mix
System solutions net revenues as a percent of total net revenues has decreased
in each of the past two fiscal years as a result of our emphasis on increasing
recurring Services net revenues. The increase in the percentage of Services net
revenues as a percent of total net revenues in fiscal year 2012 is primarily due
to our acquisition of Point and the $79.4 million of net revenues derived from
their "All-in-One" service offering. Additionally, Services net revenues grew at
a faster pace than System solutions net revenues in both years as we have
expanded our managed services offerings, launched a software post-contract
support program in July 2011 in our North America Petroleum Services group,
expanded our taxi media operations, and transitioned legacy taxi media
agreements from solution to service oriented arrangements.
We expect to see a continued shift towards a higher proportion of Services net
revenues relative to total net revenues in fiscal year 2013 due to the
acquisition of Point and our continued development and sales of our Services
offerings. We plan to expand the roll-out of Point's "All-In-One" payment
solution beyond Point's traditional markets and also expect to offer more
services to our systems solutions customers. As we transition to service
oriented arrangements to drive increased recurring Services net revenues, we may
experience a shift in the timing of Systems solutions net revenues depending on
our performance obligations. We believe these service offerings will also
provide opportunities for increases in recurring revenues.
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System Solutions Revenues
System solutions net revenues are summarized in the following table (in
thousands, except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change % Change 2010
International
EMEA $ 502,952 $ 151,493 43.1 % $ 351,459 $ 121,362 52.7 % $ 230,097
LAC 322,723 82,510 34.3 % 240,213 67,013 38.7 % 173,200
ASPAC 176,997 67,476 61.6 % 109,521 23,847 27.8 % 85,674
Total International 1,002,672 301,479 43.0 % 701,193 212,222 43.4 % 488,971
North America 342,933 7,435 2.2 % 335,498 (4,491 ) -1.3 % 339,989
Corporate (6,581 ) (3,801 ) 136.7 % (2,780 ) (2,769 ) nm (11 )
Total $ 1,339,024 $ 305,113 29.5 % $ 1,033,911 $ 204,962 24.7 % $ 828,949
nm - not meaningful
Fiscal Year 2012 vs. Fiscal Year 2011
The System solutions net revenues increase was primarily comprised of a $205.5
million increase in net revenues from acquired businesses and a $103.4 million
increase from growth in our legacy operations. Economic improvements in certain
international territories are driving infrastructure development initiatives and
new product launches are increasing demand. In addition, net revenues increased
as our Vx Evolution products became certified in new geographies. The increase
in System solutions net revenues from acquired businesses included $165.6
million from Hypercom, $27.5 million for Point and $12.4 million from other
fiscal year 2012 and 2011 acquisitions.
The International System solutions net revenues increase was primarily comprised
of a $195.5 million increase from acquired businesses and $106.0 million
increase due to international growth.
The EMEA System solutions net revenues increase was primarily comprised of a
$130.4 million increase from acquired businesses and a $61.8 million increase in
distributor sales. Overall, demand has increased in the region as merchants
shift to using less cash and more electronic payment solutions. These increases
were partially offset by a $24.0 million decrease in Southeast Europe due to the
timing of customer orders. In particular, net revenues in Turkey decreased $12.1
million due to the timing of customer orders, exacerbated by the lack of clarity
regarding technical specifications required to meet government certification
requirements in June 2013 for certain payment systems. To the extent that these
or other technical requirements are not clarified, we expect continued delays in
customer demand. Net revenues also decreased $13.7 million in Western Europe due
to a decrease in overall demand in vertical markets, such as banking, retail and
petroleum, as a result of consolidation in our banking customer base and timing
of large deployment projects. In Europe, net revenues were negatively impacted
by fluctuations in the Euro and British Pound.
The LAC System solutions net revenues increase was primarily comprised of a
$24.7 million increase from acquired businesses and a $57.8 million increase as
a result of greater demand throughout the region driven by continued economic
growth and the expansion of the electronic payment card industry as these
economies modernize. Brazil grew $22.0 million, primarily due to large
electronic payment initiatives as the Brazil electronic payment card industry
continues to grow rapidly. We anticipate that growth in the electronic payment
card industry in Brazil will continue but at decreased year over year rates. In
addition, net revenues are heavily dependent on when these customers place
orders. For example, net revenues from one customer increased $88.6 million
during fiscal 2012, which was offset by a $60.0 million decrease from another
customer. Net revenues increased $35.8 million in other areas of LAC due to
increases in customer demand associated with modernization of these economies
and the expansion of the electronic payment card industry.
The ASPAC System solutions net revenues increase was primarily comprised of a
$40.4 million increase from acquired businesses and a $27.0 million increase,
primarily in China and Greater Asia, due to increased demand in new markets
where the payment card industry is expanding, such as Indonesia and
Thailand. ASPAC net revenues in developed markets, such as Australia and New
Zealand, were also impacted by the timing of customer orders.
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The North America System solutions net revenues increase was primarily comprised
of a $10.0 million increase from acquired businesses and a $22.0 million
increase in vertical markets due to adoption of newer technologies, particularly
our mobile solutions, offset by a $10.4 million reduction in Canada, where the
conversion to EMV terminals has been largely completed, and a $14.9 million
decrease related to sales to distributors that serve small and medium-sized
business. These distributors have reduced their overall inventory levels as part
of their ongoing efforts to improve inventory management costs and operational
efficiencies. We believe distributor decisions are driven by a number of
factors, including cost management efforts, which may cause distributors to
alter their distribution models or inventory levels, timing of changes in
standards, such as EMV, which in turn impact timing of purchases from us, and
each distributor's perception of shifts in demand in their end markets.
Fiscal Year 2011 vs. Fiscal Year 2010
The System solutions net revenues increase was primarily comprised of a $103.9
million increase in net revenues from businesses acquired in fiscal year 2011
and a $103.8 million increase from growth in our legacy business. System
solutions net revenue increases from acquired businesses included $50.1 million
from Hypercom and $53.8 million from other fiscal year 2011 acquisitions.
The International net revenues increase was comprised of a $102.8 million
increase from acquired businesses and $109.4 million due to growth in our
existing operations and expansion in new geographies. Organic growth was a
result of economic improvements in some of our existing territories and new
product launches which boosted demand. The increase due to acquired businesses
included $49.0 million from Hypercom (which we acquired on August 4, 2011), and
$53.8 million from other acquisitions.
The EMEA net revenues increase was comprised of a $75.1 million increase from
acquired businesses, $26.0 million increase in Russia due to improved economic
conditions, $8.9 million increase in the U.K. driven by terminal deployment
projects, $5.4 million increase in Africa due to increased demand and $13.2
million increase in Turkey associated with Vx Evolution product launches and
improved economic conditions.
The LAC net revenues increase was comprised of a $9.0 million increase from
acquired businesses, and a $58.0 million increase primarily as a result of
increased demand throughout the region driven substantially by increased demand
for the newly introduced the Vx Evolution products.
The ASPAC System solutions net revenues increase was comprised of a $18.7
million increase from acquired businesses, $6.9 million in Australia and New
Zealand due to compliance driven terminal upgrades, $6.4 million in India
associated with a terminal deployment cycle that was initiated by financial
institutions in the second quarter of fiscal year 2011 and $3.4 million in
southeast Asia from the addition of new customers, partially offset by an $11.4
million decrease in China as a result of a long-term customer's decision to
delay purchases pending an internal asset management audit.
North America System solutions net revenues decreased $32.8 million as most
petroleum customers completed their efforts to address the July 2010 PCI-PED
compliance deadlines in fiscal year 2010 and $13.2 million due to the renewal of
customer agreements as Service rather than System Solution arrangements. These
decreases were partially offset by a $25.8 million increase in net revenues from
our financial solutions market, which sells payment systems to small and
medium-sized businesses through ISOs and payment processors and benefited from a
reduction in resellers' inventory levels in the channel during the prior fiscal
year that spurred renewed demand from these resellers in fiscal 2011.
Additionally, the decreases were offset by a $10.4 million increase in our
vertical solutions market due to timing of multi-lane retail and vertical market
customers upgrading their systems and $7.4 million related to the Semtek
business, which we acquired in September 2010 and continued to develop.
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Outlook
Improved economic conditions in some parts of the world, particularly Latin
America, Africa and parts of the Middle East, have favorably impacted global
demand for our products. In Brazil, demand has increased substantially as result
of the aggressive distribution of our payment terminals by two of our major
distributors to Brazilian merchants in anticipation of potential new competition
in the acquirer market in Brazil. We cannot predict whether this demand will be
sustained. We have also experienced fluctuations in our net revenues due to the
impact of foreign currency changes and are unable to predict how currency rates
may change in the future. Moreover, many economies that have experienced
economic improvements since the global recession in 2008, including the U.S.,
continue to experience some volatility and challenges in achieving sustained
economic growth. In particular, Europe continues to experience significant
economic volatility and uncertainty, including restrictive credit conditions due
to the current European sovereign debt crisis, and the U.S. may experience
volatility in the near future due to the impending "fiscal cliff" when certain
tax rates may change and trigger an impact on global economic conditions. Any
sustained economic weakness or deterioration in economic conditions,
particularly if persistent, would adversely affect our business, operating
results, and financial condition.
We expect International System solutions net revenues to benefit from the
addition of our global acquisitions, as well as from the continued overall
demand for our products internationally, including growth in emerging markets
that continue to adopt electronic payments and create retail establishments.
Globally, we expect that changes in payment technologies, our ability to develop
and release new products, the timing of customer orders, as well as competitive
pressures, may impact our net revenues in the future.
We expect growth in North America System solutions net revenues over the next
several years to be driven by anticipated customer refreshes to replace aging
terminals and by merchant purchases of more advanced systems in anticipation of
the adoption of new technologies, such as NFC and other mobile device enabled
payments at the POS. North America System solutions net revenues are also
anticipated to grow as a result of the EMV standard that we expect will be
adopted in the U.S. over the next several years, as the petroleum market
continues to adopt new and more secure payment devices for petroleum dispensers,
as our PAYware Mobile Enterprise solution grows as a result of retailers seeking
to take payment with mobile devices throughout their stores, and as revenues
from our acquired businesses continue to benefit from cross selling to legacy
VeriFone customers.
We expect to see a continued shift towards a higher proportion of Services net
revenues relative to total net revenues in fiscal year 2013 due to the
acquisition of Point and our continued development and sales of our Services
offerings. As we transition to service oriented arrangements, we may experience
a shift in the timing of Systems solutions net revenues depending upon when all
of our performance obligations are complete.
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Services Revenues
Services net revenues are summarized in the following table (in thousands,
except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change % Change 2010
International
EMEA $ 268,517 $ 200,389 294.1 % $ 68,128 $ 30,028 78.8 % $ 38,100
LAC 48,120 12,059 33.4 % 36,061 11,457 46.6 % 24,604
ASPAC 34,110 16,685 95.8 % 17,425 8,436 93.8 % 8,989
Total International 350,747 229,133 188.4 % 121,614 49,921 69.6 % 71,693
North America 190,097 38,892 25.7 % 151,205 50,292 49.8 % 100,913
Corporate (13,897 ) (11,033 ) 385.2 % (2,864 ) (2,846 ) 15,811.1 % (18 )
Total $ 526,947 $ 256,992 95.2 % $ 269,955 $ 97,367 56.4 % $ 172,588
nm - not meaningful
Fiscal Year 2012 vs. Fiscal Year 2011
The total Services net revenues increase was primarily due to a $231.5 million
increase from acquired businesses and a $36.4 million increase due to expansion
of our service offerings in new and existing territories. The increase from
acquired businesses was comprised of $140.4 million from Point, $57.4 million
from Hypercom and $33.7 million from other fiscal 2012 and 2011 acquisitions.
The International Services net revenues increase was primarily due to a $216.3
million increase from acquired businesses and an $18.3 million increase
throughout EMEA due to our efforts to develop various service offerings and
expand them globally. The increase from acquired businesses included $140.4
million from Point and $57.1 million from Hypercom, of which $23.4 million was
in EMEA, $17.0 million in LAC, and $16.6 million in ASPAC.
The North America Services net revenues increase was primarily due to a $15.2
million increase from acquired businesses and a $23.6 million increase that was
primarily a result of the expansion of service offerings throughout North
American markets, such as the 2011 launch of software maintenance programs in
our Petroleum business and the geographic expansion of our taxi payment
business, as well as increases in installation and deployment services
corresponding with the increased System solutions net revenues in vertical
markets.
The Corporate net revenues increase was primarily due to our acquisition of
Point which resulted in a $16.2 million fair value decrease (step-down) in
deferred Services net revenues at acquisition, of which $11.4 million was
amortized during fiscal 2012. Corporate net revenues represent the reduction in
net revenues post-acquisition resulting from the fair value decrease (step-down)
in acquired deferred revenue.
Fiscal Year 2011 vs. Fiscal Year 2010
International Services net revenues increased $18.5 million due to our
acquisition of Hypercom, which had service oriented businesses in all three
international territories, $11.5 million due to other acquisitions, primarily in
EMEA, and $19.9 million due to expansion of legacy service offerings globally.
North America Services net revenues increased $8.2 million due to the fiscal
year 2010 acquisitions of Clear Channel Taxi Media business and WAY Systems,
$13.2 million due to the impact of our transition of our taxi payments and
advertising services business from primarily a System solutions business model
to more of a Services model, $13.4 million due to the launch of software
maintenance programs in the Petroleum Services business in late fiscal year
2010, $3.1 million from system deployment projects at large vertical customers
and $1.9 million from our PAYware Connect gateway services.
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Outlook
Worldwide, we have a number of programs underway that we believe will continue
to grow Services revenues. We are expanding the roll-out of Point's All-In-One
payment solution globally, we expect increased transaction and advertising
revenues in our VeriFone media and taxi payments businesses as they expand
internationally. We expect Services revenues in North America to increase as a
result of growth in software maintenance programs, our media solutions business,
and our expanded deployment of media related equipment at petroleum pumps to
generate advertising and other service fees or rental revenue streams. In
addition, we expect incremental Services net revenues as a result of the
inclusion of a full year of results and growth from acquired businesses.
Gross Margin
The following table shows the gross margin and gross margin percentages for
System solutions and Services (in thousands, except percentages):
Years Ended October 31,
2012 2011 2010
Change Change
Gross (% Gross (% Gross
Amounts Margin % points) Amounts Margin % points) Amounts Margin %
System solutions $ 527,383 39.4 % 2.8 $ 378,400 36.6 % 0.6 $ 298,128 36.0 %
Services 228,458 43.4 % 1.4 113,350 42.0 % 0.2 72,184 41.8 %
Total $ 755,841 40.5 % 2.8 $ 491,750 37.7 % 0.7 $ 370,312 37.0 %
Gross margins improved primarily due to acquisitions of service oriented
companies with higher gross margins, the expansion of our higher margin service
offerings and lower corporate costs.
System Solutions Gross Margin
Fiscal Year 2012 vs. Fiscal Year 2011
System solutions gross margin improved primarily due to a net $9.5 million
reduction in corporate items. International System solutions gross margins
improved 1.0 point as a result of higher margin equipment sales by acquired
businesses and into new markets. North America gross margins were comparable
year over year.
We include as corporate items the fair value decrease (step-down) in deferred
revenue at acquisition, increase to fair value (step-up) of inventory at
acquisition, inventory obsolescence and scrap, specific warranty provisions and
amortization of purchased intangible assets.
Corporate costs decreased due to an $18.5 million decrease in excess and
obsolescence provisions following our transition to the Vx Evolution generation
of products, which had resulted in an $11 million increase in the provision for
excess and obsolete inventory during fiscal year 2011, as well as decreasing
reserve requirements on inventory of acquired businesses such as Gemalto and
Hypercom. It also decreased as a result of an $8.0 million decrease in product
specific warranty reserves and a $6.5 million decrease in amortization of
inventory fair value adjustments as the Hypercom inventory fair value adjustment
has been fully amortized. These decreases were partially offset by $18.9 million
in additional amortization of purchased intangible assets given the increase in
purchased intangible assets from acquisitions in fiscal year 2012 and a $3.8
million decrease in the step-down of deferred revenues related to Hypercom.
As described above in the Overview to this Item 7, as a result of the
unfavorable verdict we received in the ongoing Cardsoft patent litigation, the
court for the Cardsoft matter may order that a royalty be applied to our future
sales of the accused products in the U.S., which may be at the $3 per unit
applied by the jury or at such higher rate as the court may determine. Although
we believe that we have made changes to ensure that our products are not
infringing, the court may not agree. If the court decides to order such a
royalty, the cost per unit of our sales in the U.S. of the products subject to
this litigation would be increased by the royalty ordered by the court, which
may be the $3 per unit applied by the jury or such higher rate as the court may
determine, and our gross margin may be materially adversely impacted. In fiscal
year 2012, subsequent to the jury verdict, we have accrued $1.2 million of
royalties to System solutions cost of net revenues.
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Fiscal Year 2011 vs. Fiscal Year 2010
System solutions gross margin increased only slightly because increases from
improved geography and product mix were offset by a $24.0 million increase in
corporate costs primarily due to acquisitions. International gross margin
increased as a result of favorable product mix impact due to increased sales of
newer higher margin product solutions, which carry higher margins compared to
certain previous generation solutions, as well as an improved geographic and
customer mix in some regions. North America gross margin increased as we
experienced favorable product and customer mix in our multi-lane retail and
financial solutions markets.
Services Gross Margin
Fiscal Year 2012 vs. Fiscal Year 2011
Services gross margin increased primarily due to the acquisition of Point,
offset by increased corporate items. Point's "All-in-One" payment solution,
which represented 22.6% of International Services net revenues, has a gross
margin higher than our fiscal 2011 Services gross margins. Gross margin also
improved in EMEA because the taxi media business in the United Kingdom continued
to expand. LAC Services gross margin decreased 9.7 points due to a less
favorable mix of customers and service offerings. North America gross margins
dropped 3.3 points primarily driven by reduced gross margin in our media
business due to the higher costs on renewed taxi leases and in new advertising
markets where revenues have not yet ramped, and also due to a shift in the mix
including new offerings from recently acquired businesses and new initiatives,
such as ChargeSmart and SAIL, that require initial investment resulting in lower
margins. Offsetting corporate items increased $17.2 million, comprised of an
$11.0 million increased step down in Services deferred revenue and $6.2 million
of increased corporate costs.
Fiscal Year 2011 vs. Fiscal Year 2010
Services gross margin increased slightly overall because the benefit of improved
Services gross margins in North America were offset by lower International
Services gross margins following the acquisition of Hypercom. North America
Services gross margins increased due to increased sales of higher margin
services, such as software maintenance, taxi payment services and advertising.
International Services gross margins decreased due to lower margins associated
with the Hypercom services business in LAC, Australia and New Zealand, Gemalto
services business in India and investments in the media and taxi payments
businesses in the United Kingdom. These decreases were partially offset by
non-Hypercom gross margin improvement in Brazil related to repair service cost
efficiencies, as well as recognition of previously deferred revenue from several
customers in Mexico.
Operating Expenses
Research and Development Expenses
Research and development expenses are summarized in the following table (in
thousands, except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change %Change 2010
Research and
development $ 152,001 $ 42,846 39.3 % $ 109,155 $ 34,928 47.1 % $ 74,227
Percentage of net
revenues 8.1 % 8.4 % 7.4 %
Fiscal Year 2012 vs. Fiscal Year 2011
Personnel related research and development expenses increased $29.0 million due
to headcount growth from acquired businesses and hiring to expand development of
new products on new platforms and in new geographies. In addition, outside
consultant costs incurred in developing our product portfolio increased $4.0
million, costs associated with the integration of our acquisitions increased
$4.2 million and stock-based compensation expense increased $2.1 million.
Fiscal Year 2011 vs. Fiscal Year 2010
Personnel related research and development expenses increased $27.0 million due
to headcount growth from acquired businesses and hiring to expand development of
new products on new platforms and in new geographies. In addition, outside
consultant costs incurred in developing our product portfolio increased $3.5
million, acquisition integration and restructuring related charges increased
$1.0 million and stock-based compensation expense increased $1.3 million.
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Outlook
We expect research and development expenses, assuming a stable currency
environment, to grow in absolute amounts primarily as a result of the full year
impact in fiscal year 2013 of businesses acquired in fiscal year 2012 and higher
product development activities for a larger portfolio of product offerings.
Sales and Marketing Expenses
Sales and marketing expenses are summarized in the following table (in
thousands, except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change % Change 2010
Sales and marketing $ 179,694 $ 41,427 30.0 % $ 138,267 $ 43,601 46.1 % $ 94,666
Percentage of net
revenues 9.6 % 10.6 % 9.5 %
Fiscal Year 2012 vs. Fiscal Year 2011
Personnel related sales and marketing expenses increased $33.6 million due to
headcount growth from acquired businesses and hiring to support business in new
geographies and the launch of new products and initiatives. In addition, sales
and marketing expenses associated with global marketing campaigns increased $7.9
million and stock-based compensation expense increased $2.8 million. These
increases were offset partially by a $6.1 million decrease in
acquisition-related integration charges.
Fiscal Year 2011 vs. Fiscal Year 2010
Personnel related sales and marketing expenses increased $28.3 million due to
headcount growth from acquired businesses and hiring to support general business
expansion and the launch of new products and initiatives. In addition,
restructuring related charges increased $5.4 million, stock-based compensation
expense increased $4.0 million, spending on global marketing initiatives
increased $2.8 million and acquisition related integration charges increased
$2.2 million.
Outlook
We expect sales and marketing expenses, assuming a stable currency environment,
to grow in absolute amounts as the result of the full year impact in fiscal year
2013 for businesses acquired in fiscal year 2012, and as general business growth
requires.
General and Administrative Expenses
General and administrative expenses are summarized in the following table (in
thousands, except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change % Change 2010
General and
administrative $ 175,174 $ 51,385 41.5 % $ 123,789 $ 39,418 46.7 % $ 84,371
Percentage of net
revenues 9.4 % 9.5 % 8.4 %
Fiscal Year 2012 vs. Fiscal Year 2011
Personnel related general and administrative expenses increased $25.0 million
due to headcount growth from acquisitions and hiring to support general business
growth. In addition, outside services such as legal, accounting and IT services
to support the growing business increased $15.0 million, and stock-based
compensation increased $5.1 million.
Fiscal Year 2011 vs. Fiscal Year 2010
Acquisition related charges, largely professional and outside service fees,
increased $23.7 million, personnel related costs increased $15.3 million due to
headcount growth from acquisitions and hiring to support VeriFone's growing
business requirements, and stock-based compensation expense increased $7.1
million.
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Outlook
We expect general and administrative expenses, assuming a stable currency
environment, to vary due to the full year impact in fiscal year 2013 for
acquisitions completed in fiscal years 2012, as well as future acquisitions and
changes in acquisition related charges.
Patent Litigation Loss Contingency Expense
We recognized a $17.6 million patent litigation loss contingency expense in
fiscal year 2012 as a result of an unfavorable jury verdict issued on June 8,
2012 against VeriFone and Hypercom in an ongoing patent infringement action that
was filed in 2008 and which alleges patent infringement by certain VeriFone and
Hypercom products. In addition to the unfavorable jury verdict, we believe it is
probable that the district court in this matter will order an ongoing royalty on
sales of the accused devices in the U.S. of at least $3 per unit. See further
discussion in Note 13, Commitments and Contingencies, in the Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K.
Future patent litigation loss contingency expense is dependent on the outcome of
legal matters. See Note 13, Commitments and Contingencies of this Annual Report
on Form 10-K for additional information.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets expenses are summarized in the
following table (in thousands, except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change %Change 2010
Cost of net
revenues $ 40,468 $ 21,310 111.2 % $ 19,158 $ (2,109 ) (9.9 )% $ 21,267
Operating expenses 83,795 68,966 465.1 % 14,829 205 1.4 % 14,624
Total amortization
of purchased
intangible assets $ 124,263 $ 90,276 265.6 % $ 33,987 $ (1,904 ) (5.3 )% $ 35,891
Fiscal Year 2012 vs. Fiscal Year 2011
Amortization of purchased intangible assets increased as a result of new
acquisitions. Amortization of intangibles from the Point acquisition totaled
$58.6 million in fiscal 2012. Amortization of intangibles from the Hypercom
acquisition totaled $42.7 million and $10.8 million in fiscal years 2012 and
2011.
Fiscal Year 2011 vs. Fiscal Year 2010
Amortization of purchased intangible assets increased primarily as a result of
amortization of new intangible assets from fiscal year 2011 acquisitions,
partially offset by a decrease in amortization as purchased intangible assets
became fully amortized.
Outlook
We expect amortization of purchased intangible assets to increase in fiscal year
2013 due to the full year impact of amortization of intangible assets related to
businesses acquired in fiscal year 2012, offset partially by previously acquired
intangibles reaching the end of their respective useful lives.
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Other Income and Expenses
Interest Expense
Interest expenses are summarized in the following table (in thousands, except
percentages):
Years Ended October 31,
2012 Change % Change 2011 Change %Change 2010
Interest expense $ 62,830 $ 33,880 117.0 % $ 28,950 $ 606 2.1 % $ 28,344
Fiscal Year 2012 vs. Fiscal Year 2011
Interest expense increased primarily as a result of the 2011 Credit Agreement,
which was entered into in December 2011 in connection with the Point
acquisition. Outstanding debt at October 31, 2012 was $1.3 billion compared to
$483.8 million at October 31, 2011. In addition, interest expense during fiscal
year 2012 included $5.3 million of accelerated amortization of debt issuance
costs in connection with debt extinguishments.
Fiscal Year 2011 vs. Fiscal Year 2010
Interest expense was relatively unchanged between fiscal years 2011 and 2010.
Outlook
We expect interest expense to increase in fiscal year 2013 as a result of the
full fiscal year impact of the higher outstanding borrowings.
Interest Income
Interest Income is summarized in the following table (in thousands, except
percentages):
Years Ended October 31,
2012 Change % Change 2011 Change %Change 2010
Interest income $ 4,399 $ 1,804 69.5 % $ 2,595 $ 1,317 103.1 % $ 1,278
Fiscal Year 2012 vs. Fiscal Year 2011
Interest income increased due to higher interest earned on our short-term
investments in Brazil, where interest rates have been over 7.5%, and due to an
increase in average interest-earning cash balances in Singapore.
Fiscal Year 2011 vs. Fiscal Year 2010
Interest income increased primarily due to higher interest income from our
short-term investments in Brazil, combined with the impact of an increase in
average cash balances.
Outlook
We expect interest income to fluctuate based upon our invested cash balances and
the interest rate markets in the countries where we maintain significant cash
balances.
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Other Income (Expense), Net
Other Income (Expense), net is summarized in the following table (in thousands,
except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change %Change 2010
Other income
(expense), net $ (20,761 ) $ (32,690 ) -274.0 % $ 11,929 $ 8,545 252.5 % $ 3,384
Fiscal Year 2012 vs. Fiscal Year 2011
Other income (expense), net decreased primarily due to a $22.5 million foreign
currency loss recognized in December 2011 related to the difference between the
forward rate on contracts purchased to lock in the U.S. dollar equivalent
purchase price for our Point acquisition and the actual rate on the date of
derivative settlement. This loss was partially offset by a $1.5 million gain on
the currency we held from the date of the derivative settlement until the funds
were transferred to purchase Point. In addition, there were $8.8 million of
one-time gains in fiscal 2011 that did not recur in fiscal 2012, $2.9 million
increased losses on equity investments, and a $1.5 million increase in foreign
currency losses. These items were partially offset by a $2.5 million increase in
releases of acquisition-related contingency accruals as statutes of limitations
expired.
Fiscal Year 2011 vs. Fiscal Year 2010
Other income (expense), net increased $4.6 million due to a gain related to the
settlement agreement we reached with Lehman Derivatives for the call options on
the Senior Convertible Notes, (see Note 12, Financings, in the Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K), $1.8
million due to the bargain purchase gain on our acquisition of the Gemalto POS
business, a $2.4 million gain from adjustments to deferred acquisition
consideration payable, the non-recurrence of a $1.9 million loss on equity
investment and a $1.8 million decrease in net foreign exchange losses, offset by
a $2.9 million decrease in the amounts reversed as a result of the expiration of
the statute of limitations on certain tax contingencies.
Outlook
Due to the varied nature of the transactions included in Other income (expense),
net, future fluctuations are not predictable.
Provision for Income Taxes
The provision (benefit) for income taxes is summarized in the following table
(in thousands, except percentages):
Years Ended October 31,
2012 Change % Change 2011 Change %Change 2010
Provision for
(benefit from)
income taxes $ 2,050 $ 193,462 -101.1 % $ (191,412 ) $ (170,830 ) 830.0 % $ (20,582 )
The income tax expense recorded for fiscal year 2012 was primarily attributable
to earnings from operations in the U.S. The income tax benefit for fiscal year
2011 was primarily attributable to the release of a portion of our valuation
allowance against U.S. federal and state deferred tax assets. The income tax
benefit recorded for fiscal year 2010 was primarily attributable to the
recognition of a worthless stock deduction.
The effective tax rate for fiscal year 2012 is lower than the U.S. statutory tax
rate due to earnings in countries where we are taxed at lower rates compared to
the U.S. federal and state statutory rates and reversal of uncertain tax
position liabilities as statutes of limitations expired and issues were
resolved. During January 2012, we entered into a formal settlement with the
Israeli tax authorities for the calendar year 2006 audit and, accordingly,
released $2.6 million of excess accrued tax liabilities associated with this
audit.
As of October 31, 2012, on a worldwide basis we have recorded a net deferred tax
asset of $30.1 million. The realization of the deferred tax assets is primarily
dependent on us generating sufficient U.S. and foreign taxable income in future
fiscal years. Based on historical profits and expectations of future results, we
determined that there was sufficient positive evidence to support the
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release of the valuation allowance of $210.5 million against the majority of our
U.S. federal and state deferred tax assets in the fourth quarter of fiscal 2011.
Additionally, we have maintained a valuation allowance on certain U.S. foreign
tax credit related deferred tax assets and certain non-U.S. deferred tax assets
because realization of these tax benefits through future taxable income is not
more likely than not as of October 31, 2012. We intend to maintain the valuation
allowances until sufficient positive evidence exists to support the reversal of
the valuation allowances. The valuation allowance for deferred tax assets was
$173.2 million and $168.2 million, as of October 31, 2012 and 2011. Our deferred
tax asset valuation allowance increased by $5.0 million for the fiscal year
ended October 31, 2012 primarily attributable to the increase in U.S. foreign
tax credit during the year.
The tax loss carry forwards as of October 31, 2012 were primarily related to tax
losses in the U.S. of $240.6 million, in Ireland of $144.8 million, in Brazil of
$76.9 million, in Sweden of $39.3 million, in the United Kingdom of $33.9
million, and various other non-U.S. countries of $46.1 million. Approximately
$280.0 million of foreign tax losses may be carried forward indefinitely. The
remaining balance of approximately $301.5 million of tax losses is subject to
limited carry forward terms of 5 to 20 years.
We are currently under audit by the Internal Revenue Service for fiscal years
2005-2010 related to our 5 year net operating loss carry back from fiscal 2010.
The examination is currently in process with no proposed adjustments to date.
We also have certain foreign subsidiaries under audit, by foreign tax
authorities, including Brazil for calendar years 2004 and 2006, Israel for
fiscal years 2007 to 2009 and India for fiscal years 2006 to 2009. Although we
believe we have properly provided for income taxes for the years subject to
audit, the Brazil, Israel and Indian taxing authorities may adopt different
interpretations. We have not yet received any final determinations with respect
to these audits. We have accrued tax liabilities associated with these audits.
With few exceptions, we are no longer subject to tax examination for periods
prior to 2003.
We have a Singapore Pioneer Tax Holiday for fiscal years 2006 through 2011 with
a one year extension through our fiscal year 2012. At the expiration of the tax
holiday, our income in Singapore will be taxed at the statutory rate of 17%
instead of the agreed Pioneer Tax Holiday rate of 0% which may impact our
effective tax rate. As a result of the expiration of the Singapore tax holiday
at October 31, 2012 we have established a new foreign principal company in
another low tax jurisdiction effective November 1, 2012. This will reduce the
impact of the expiration of the tax holiday on the effective tax rate. The tax
benefit of the tax holiday for the years ended October 31, 2012, 2011, and 2010
was $19.2 million ($0.17 per diluted share), $13.6 million ($0.14 per diluted
share), and $8.3 million ($0.10 per diluted share). Singapore was the single
most significant foreign tax jurisdiction during fiscal year 2012.
Our effective tax rate could be adversely affected by a number of factors,
including shifts in the mix of pretax profits and losses by tax jurisdiction,
loss or cessation of tax holidays or other tax benefit in one or more
jurisdictions, our ability to use tax credits, changes in tax laws or related
interpretations in the jurisdictions in which we operate, including
jurisdictions which currently impose low or no taxes on our operations in those
jurisdictions.
Effective November 1, 2007, we adopted ASC 740 -10, Accounting for Uncertainty
in Income Taxes. We have recorded our ASC 740 liability as a long-term liability
and we will continue to recognize interest and penalties related to income tax
matters in income tax expense. The amount of unrecognized tax benefits could be
reduced upon closure of tax examinations or if the statute of limitations on
certain tax filings expires without assessment from the tax authorities. We
believe that it is reasonably possible that there could be a reduction in
unrecognized tax benefits due to statute of limitation expirations in multiple
tax jurisdictions during the next 12 months that is not material. Interest and
penalties accrued on these uncertain tax positions will also be released upon
the expiration of the applicable statutes of limitations.
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Liquidity and Capital Resources
Our primary liquidity and capital resource needs are to service our debt,
finance working capital, and to make capital expenditures and investments. As of
October 31, 2012, our primary sources of liquidity were cash and cash
equivalents of $454.1 million, as well as amounts available to us under the
Revolving loan, which is part of our 2011 Credit Agreement.
Cash and cash equivalents as of October 31, 2012 included $410.3 million held by
our foreign subsidiaries. If we decide to distribute or use such cash and cash
equivalents outside those foreign jurisdictions, including a distribution to the
U.S., we may be subject to additional taxes or costs.
On December 28, 2011, VeriFone, Inc. entered into the 2011 Credit Agreement,
which initially consisted of a $918.5 million Term A loan, $231.5 million Term B
loan, and $350.0 million Revolving loan, of which $300.0 million was initially
funded. This financing, supplemented by our cash on hand, was used to fund the
acquisition of Point, repay our previously outstanding loans, fund an escrow
account to pay the interest and principal of our 1.375% Senior Convertible Notes
that matured in June 2012, and fund certain financing and transaction costs. On
October 15, 2012, we entered into an Additional Credit Extension Amendment to
the 2011 Credit Agreement, under which the Term A loan was increased by $109.5
million and the maximum amount available under the Revolving loan was increased
by $75.5 million. As of October 31, 2012, our outstanding borrowings under the
2011 Credit Agreement consisted of $993.6 million in Term A loans, $99.8 million
in Term B loans and a $425.5 million Revolving loan, of which $210.0 million was
drawn and outstanding as of such date. See Note 12, Financings, of this Annual
Report on Form 10-K for additional information.
Our future capital requirements may vary significantly from prior periods as
well as from those currently planned. These requirements will depend on a number
of factors, including operating factors such as our terms and payment experience
with customers and investments we may make in product or market development, as
well as timing and availability of financing. Finally, our capital needs may be
significantly affected by any acquisition we may make in the future due to any
cash consideration in the purchase price, related transaction costs, and related
restructuring costs. Based upon our current level of operations, we believe that
we have the financial resources to meet our business requirements for the next
year, including capital expenditures, working capital requirements, future
strategic investments, and compliance with our financial covenants.
The net increases (decreases) in cash and cash equivalents are summarized in the
following table (in thousands):
Years Ended October 31,
2012 Change 2011 Change 2010
Net cash provided by (used in):
Operating activities $ 217,963 $ 43,390 $ 174,573 $ 18,547 $ 156,026
Investing activities (1,118,034 ) (1,054,865 ) (63,169 ) (38,070 ) (25,099 )
Financing activities 768,146 729,472 38,674 49,056 (10,382 )
Effect of foreign currency exchange
rate changes on cash (8,565 ) (7,912 ) (653 ) (249 ) (404 )
Net increase (decrease) in cash and
cash equivalents $ (140,490 ) $ (289,915 ) $ 149,425 $ 29,284 $ 120,141
Operating Activities
Fiscal Year 2012 vs. Fiscal Year 2011
Net cash provided by operating activities increased due to a $112.5 million
increase in net cash provided by operating activities before changes in
operating assets and liabilities, partially offset by an $69.1 million decrease
in cash flows that resulted from changes in operating assets and liabilities.
The $112.5 million increase in net cash provided by operating activities before
changes in operating assets and liabilities reflects the $264.1 million increase
in our gross margins due to our revenue growth. Our increased gross margins were
offset by an
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approximately $82.3 million increase in cash operating expenses, a $31.6 million
increase in cash paid for interest as a result of our increased debt and a $39.7
million increase in cash paid for income taxes.
The $69.1 million decrease in cash flows from changes in operating assets and
liabilities is primarily due to an investment in inventory, increased prepaids
and other assets, and decreased current and long-term liabilities, offset by
increases in cash flows due to decreased deferred revenue, a smaller increase in
accounts receivable compared with the prior year, and increased accounts
payable.
Fiscal Year 2011 vs. Fiscal Year 2010
Net cash provided by operating activities increased primarily due to an increase
in cash flows resulting from changes in working capital. The change in cash
provided by operations before changes in working capital was due to a $183.4
million increase in net income and a $28.2 million increase in non-cash items,
offset by a $211.6 million increase in deferred income taxes.
Changes in working capital during the fiscal year ended October 31, 2011 were
largely attributable to a $29.5 million increase in accounts payable due to
increased business activities, a $23.2 million decrease in inventory due to
timing of product purchases and shipments, a $14.8 million increase in deferred
revenues due to an increase in sales volume, and a $22.6 million increase in
other current and long-term liabilities. These changes were partially offset by
a $72.4 million increase in accounts receivable primarily due to increased net
revenues and billings that were later in the fourth quarter of fiscal year 2011
than the same period in fiscal year 2010, and a $1.8 million increase in prepaid
expenses and other assets.
Outlook
We expect to continue to generate cash from operating activities as operating
profits expand with the growth of the business and as acquisition and
integration costs diminish (excluding the impact of any future acquisitions).
Excluding the impact of any future acquisitions, we expect spending on
acquisition and integration costs to decrease as we complete integration of past
acquisitions. Working capital levels fluctuate significantly depending on the
timing of cash receipts and payments.
Investing Activities
Fiscal Year 2012 vs. Fiscal Year 2011
Net cash used in investing activities increased as a result of our acquisition
of Point in December 2011 for a net cash outlay of $999.2 million ($1,024.5
million in cash consideration paid, offset by $25.3 million in cash acquired),
$70.2 million due to cash outlays for other acquisitions, and $48.4 million due
to an increase in capital expenditures primarily to support our growing Services
businesses. These cash outlays were offset by $13.4 million of cash received
during fiscal 2012 upon collection of other receivables acquired as part of our
acquisition of Hypercom.
Fiscal Year 2011 vs. Fiscal Year 2010
Net cash used in investing activities increased primarily due to $39.1 million
of increased net cash applied to acquisitions of businesses, partially offset by
$5.0 million in equity investments made in fiscal year 2010. In fiscal year
2011, the main uses of cash were payments of $14.2 million for the Gemalto POS
acquisition and $35.8 million for the Hypercom acquisition, and $14.8 million
for purchases of machinery and computer equipment. These cash payments were
partially offset by $3.5 million net cash acquired in the CSC acquisition.
Outlook
We expect that cash flows for investing activities will continue for
transactions such as business acquisitions, capital expenditures for new service
infrastructure to support our global business. In particular, we expect to make
additional investments in revenue generating assets as we expand the roll-out of
Point's "All-In-One" payment solution beyond Point's traditional markets and as
we expand deployment of media-related equipment.
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Financing Activities
Fiscal Year 2012 vs. Fiscal Year 2011
Net cash provided by financing activities increased primarily due to $1,647.1
million of net proceeds from borrowings under the 2011 Credit Agreement, of
which $279.2 million was used to redeem the 1.375% Senior Convertible Notes,
including interest, upon their maturity in June 2012, and $216.8 million was
used to repay prior debt in December 2011 when the 2011 Credit Agreement was
funded.
During fiscal year 2012, we reduced the amount drawn under our Revolving loan
from $300.0 million to $210.0 million with available cash on hand in order to
minimize our interest cost, while preserving the ability to re-borrow funds
under the Revolving loan. We also repaid $130.0 million of our Term B loan and
made $36.2 million of scheduled debt repayments on the Term A and Term B loans.
After execution of the Extension Amendment on October 15, 2012, we utilized the
proceeds of the $109.5 million add-on Term A loans plus $1.3 million cash to
repay $110.0 million of the outstanding Revolving loan and to pay additional
debt issuance costs of $0.8 million.
Net proceeds received from issuance of common stock through equity incentive
plans decreased by $18.2 million in the fiscal year 2012. We also paid $24.6
million for acquisition related contingent consideration and hold-back amounts
related to past acquisitions.
Fiscal Year 2011 vs. Fiscal Year 2010
Net cash flows from financing activities increased primarily due to a $35.7
million increase in proceeds from stock option exercises and the $11.7 million
acquisition of the noncontrolling interest in a business in April 2010 that did
not recur. The fiscal year 2011 cash provided by financing activities consisted
primarily of $48.5 million of proceeds from the exercise of stock options under
our employee equity incentive plans, partially offset by $10.2 million of
repayments of debt.
Outlook
We expect future cash outflows related to financing activities as we make
voluntary and scheduled payments on borrowings under the 2011 Credit Agreement
and settle acquisition-related contingent obligations, which we expect will
exceed future proceeds received from issuance of common stock through equity
incentive plans.
2011 Credit Agreement
On December 28, 2011, VeriFone, Inc. entered into the 2011 Credit Agreement,
which initially consisted of a $918.5 million Term A loan, $231.5 million Term B
loan, and $350.0 million Revolving loan, of which $300.0 million was initially
funded. This financing, supplemented by our cash on hand, was used to fund the
acquisition of Point for €600.0 million (approximately USD $774.3 million at
foreign exchange rates on the closing date), repay Point's outstanding debt of
approximately €190 million (approximately $250.3 million at exchange rates on
the closing date), repay $216.8 million on our previously outstanding loans,
fund a $279.2 million escrow account to pay the interest and principal of our
1.375% Senior Convertible Notes that matured in June 2012, and fund $41.6
million of financing and transaction costs. On October 15, 2012, we entered into
an Additional Credit Extension Amendment to the 2011 Credit Agreement, under
which the Term A loan was increased by $109.5 million and the maximum amount
available under the Revolving loan was increased by $75.5 million. In addition,
we reduced the outstanding balance of the Revolving loan by $110.0 million. The
Revolving loan expires on December 28, 2016. As of October 31, 2012, our
outstanding borrowings under the 2011 Credit Agreement consisted of a $993.6
million Term A loan, a $99.8 million Term B loan and a $425.5 million Revolving
loan, of which $210.0 million was drawn and outstanding. See Note 12,
Financings, of this Annual Report on Form 10-K for additional information.
In fiscal year 2012, we repaid $130.0 million of our Term B loan. In connection
with these transactions, we expensed $3.2 million of deferred debt issuance
costs related to the Term B loan.
After execution of the Extension Amendment, we utilized the proceeds of the
$109.5 million add-on Term A loans plus $1.3 million cash to repay $110.0
million of the outstanding Revolving loan and to pay additional debt issuance
costs of $0.8 million.
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We incurred $41.6 million of issuance costs in connection with the 2011 Credit
Agreement and $0.8 million of issuance costs in connection with the Extension
Agreement. These costs were capitalized in Other long-term assets on our
Consolidated Balance Sheets, and the costs are being amortized to interest
expense using the effective interest method over the term of the credit
facilities, which is 5 or 7 years.
As of October 31, 2012, VeriFone has elected the "Eurodollar Rate" margin option
under our borrowings under the 2011 Credit Agreement. As such, the interest rate
on the Term A and Revolving loan was 2.72%, which was one month LIBOR plus 2.50%
margin, and the interest rate on the Term B loan was 4.25%, which was the higher
of one month LIBOR or 1.00% plus 3.25% margin. The unused revolving loan
facility's commitment fee was 0.375% and the amount available to draw under the
Revolving loan was $215.5 million.
As of October 31, 2012, interest margins are 2.50% for the Term A loan and the
Revolving loan, and 3.25% for the Term B loan.
We were in compliance with all financial covenants under the 2011 Credit
Agreement as of October 31, 2012.
On March 23, 2012, we entered into a number of interest rate swap agreements to
effectively convert $500.0 million of the Term Loan A from a floating rate to a
0.71% fixed rate plus applicable margin. The interest rate swaps qualify for
hedge accounting treatment as cash flow hedges. The interest rate swaps are
effective for the period from March 30, 2012 to March 31, 2015 or 36 months.
Point Overdraft Facility
Our 51% majority owned subsidiary of Point, Babs Paylink AB, has an unsecured
overdraft facility with Swedbank, the 49% stockholder of Babs Paylink AB, that
terminates in December 2012. The overdraft facility limit is SEK (Swedish Krona)
60.0 million (approximately $9.0 million at foreign exchange rates as of October
31, 2012). The interest rate is the bank's published rate plus a margin of
2.55%. At October 31, 2012, the interest rate was 3.9%. There is a 0.25%
commitment fee payable annually in advance, and the overdraft facility is
renewable annually on December 31. As of October 31, 2012, SEK 15.6 million
(approximately $2.3 million at foreign exchange rates as of October 31, 2012)
was outstanding and SEK 44.4 million (approximately $6.7 million at foreign
exchange rates as of October 31, 2012) was available.
Contractual Commitments
Contractual Obligations
The following table summarizes our contractual obligations as of October 31,
2012 (in thousands):
Years Ended October 31,
2013 2014 2015 2016 2017 Thereafter Total
2011 Credit
Agreement (1) $ 89,233 $ 125,964 $ 135,995 $ 209,583 $ 788,217 $ 99,424 $ 1,448,416
Capital lease
obligations and
other loans 3,142 889 50 40 40 471 4,632
Operating leases (2) 44,866 33,644 25,976 21,164
19,264 36,486 181,400
Minimum purchase
obligations 134,711 - - - - - 134,711
$ 271,952 $ 160,497 $ 162,021 $ 230,787 $ 807,521 $ 136,381 $ 1,769,159
(1) Interest in the above table has been calculated using the rate in effect
at October 31, 2012.
(2) Operating leases includes $113.1 million of minimum contractual obligations on taxi related leases where payments are based upon taxis in
service. Amounts in the above table are based upon the number of
operational taxicabs under those arrangements at October 31, 2012.
We expect that we will be able to fund our remaining obligations and commitments
with future cash flows from our ongoing operations and our $454.1 million of
cash and cash equivalents held as of October 31, 2012. To the extent we are
unable to fund these obligations and commitments with existing cash and cash
flows from operations, we can draw upon the additional amounts available under
our 2011 Credit Agreement or future debt or equity financings.
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Bank Guarantees
We have issued bank guarantees to certain of our customers and vendors as
required in some countries to support certain of our performance obligations
under our service or other agreements with these respective customers or
vendors. As of October 31, 2012, the maximum amounts that may become payable
under these guarantees was $5.8 million.
Manufacturing Agreements
We work on a purchase order basis with third-party contract manufacturers with
facilities primarily located in China, Singapore, Malaysia, Brazil, Germany,
Romania, and France, and component suppliers located throughout the world to
supply nearly all of our finished goods inventories, spare parts, and
accessories. We generally provide each such supplier with a purchase order to
cover the manufacturing requirements, which, subject to the underlying terms and
conditions, constitutes a binding commitment by us to purchase materials and
finished goods produced by the manufacturer as specified in the purchase order.
Most of these purchase orders are considered to be non-cancelable and are
expected to be paid within one year of the issuance date. As of October 31,
2012, the amount of purchase commitments issued to contract manufacturers and
component suppliers totaled approximately $134.7 million. Of this amount, $14.6
million has been recorded in Other current liabilities in the accompanying
Consolidated Balance Sheets because these commitments are not expected to have
future value to us.
We utilize a limited number of third parties to manufacture our products and
rely upon these contract manufacturers to produce and deliver products to our
customers on a timely basis and at an acceptable cost. Furthermore, a majority
of our manufacturing activities are concentrated in China. As a result,
disruptions to the business or operations of the contract manufacturers or to
their ability to produce the required products in a timely manner, and
particularly disruptions to the manufacturing facilities located in China, could
significantly impact our business and operations. In addition, a number of
components that are necessary to manufacture and assemble our systems are
specifically customized for use in our products and are obtained from sole
source suppliers on a purchase order basis. Because of the customized nature of
these components and the limited number of available suppliers, if we were to
experience a supply disruption, it would be difficult and costly to find
alternative sources in a timely manner.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K.
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