NUANCE COMMUNICATIONS, INC.
The following Management's Discussion and Analysis is intended to help the
reader understand the results of operations and financial condition of our
business. Management's Discussion and Analysis is provided as a supplement to,
and should be read in conjunction with, our condensed consolidated financial
statements and the accompanying notes to the condensed consolidated financial
statements.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks, uncertainties and assumptions that, if they never materialize or if they
prove incorrect, could cause our consolidated results to differ materially from
those expressed or implied by such forward-looking statements. These
forward-looking statements include predictions regarding:
• our future bookings, revenues, cost of revenues, research and development
expenses, selling, general and administrative expenses, amortization of
intangible assets and gross margin;
• our strategy relating to our segments;
• our programs to reduce costs and optimize processes;
• market trends;
• technological advancements;
• the potential of future product releases;
• our product development plans and the timing, amount and impact of
investments in research and development;
• future acquisitions, divestitures and other strategic transactions, and
anticipated benefits from such transactions;
• international operations and localized versions of our products;
• the impact of the COVID-19 pandemic; and
• the conduct, timing and outcome of legal proceedings and litigation matters.
You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue" or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A - "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. OVERVIEW Business Overview We are a pioneer and leader in conversational and cognitive AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio including automated speech recognition ("ASR"), natural language understanding ("NLU"), semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other. • Healthcare. Our healthcare segment provides intelligent systems that support a
more natural and insightful approach to clinical documentation, freeing
clinicians to spend more time caring for patients and helping technicians and
health organizations drive meaningful financial and clinical outcomes. Our
principal solutions include Nuance® Dragon Ambient eXperience™ ("DAX"), dragon
medical cloud-based solutions ("Dragon Medical One"), computer assisted
physician documentation ("CAPD"), clinical documentation improvement ("CDI")
and coding, diagnostic solutions, and medical transcription services.
• Enterprise. Our Enterprise segment is a leading provider of AI-powered
intelligent customer engagement solutions and services, which enable
enterprises and contact centers to enhance and automate customer service and
sales engagement. Our principal solutions include interactive voice responses
solutions, intelligent engagement solutions and security & biometric
solutions.
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• Other. Our Other segment currently consists primarily of voicemail
transcription services following the sale of our Mobile Operator Services
business and the wind-down of Devices in 2019.
• Discontinued Operations. On
Imaging business and received approximately
estimated transaction expenses. On
previously announced spin-off of our Automotive business, Cerence, into an
independent public company. As a result, the historical results of operations
for Imaging and Automotive have been included within discontinued operations
in our condensed consolidated financial statements.
COVID-19 Impact
The novel coronavirus ("COVID-19") pandemic has disrupted economic markets, and
the future economic impact, duration and spread of COVID-19 is uncertain at this
time. Through June 30, 2020 , our liquidity and operations had been adversely
impacted by the pandemic. Our revenue for the third quarter was negatively
impacted by reduced volume in medical transcription and radiology, as well as
delays in professional services and software license transactions. Our operating
cash flows were also negatively impacted by delayed collections. Nevertheless,
the negative effects of the pandemic were partially mitigated by our proactive
expense containment and reduction efforts.
As multiple states commenced a phased reopening towards the end of June, our
transaction volumes in medical transcription and radiology solutions have mostly
recovered from the lows in April. However, we expect the negative impact of
COVID-19 to continue into the fourth quarter as the healthcare industry and many
of our customers are still coping with the operational and financial disruptions
caused by the pandemic. While we expect revenue to partially recover in the
fourth quarter, we expect ongoing delayed cash collections as we continue to
support our customers under our customer payment relief program.
As a precaution amid the pandemic, we borrowed $230.0 million under our
revolving credit facility in March, which was fully repaid in June as we became
more confident in our liquidity position. We remain committed to maximizing
shareholders' return, and may resume our share repurchase activities based upon
the prevailing market conditions, general economic conditions, capital
allocation alternatives, and other factors.
While we continue to assess the full impact as the pandemic develops, we expect
to our fiscal year 2020 revenue to be approximately $30 million to $70 million
lower due to the pandemic. However, we expect the revenue reduction to be
partially offset by lower discretionary spend. As a result, we expect to our
full year operating margin to be approximately 50 basis points lower.
Additionally, we expect our full year operating cash flows to be approximately
$235 million to $265 million , which reflects lower revenue and cash collection
delays due to the pandemic. As the pandemic situation develops, we may revise
our assessment, and the actual amounts may differ materially from our estimates.
Key Metrics
In evaluating the financial condition and operating performance of our business,
management focuses on revenue, net income, gross margins, operating margins,
cash flow from operations, and changes in deferred revenue. A summary of key
financial metrics for the nine months ended June 30, 2020 , as compared to the
nine months ended June 30, 2019 , is as follows:
• Total revenues were $1,126.0 million for the nine months ended June 30, 2020 ,
as compared to
• Net income from continuing operations for the nine months ended
was
million for the nine months ended
• Gross margins for the nine months ended
54.6% for the nine months ended
• Operating margins for the nine months ended
to 6.7% for nine months ended
• Operating cash flows from continuing operations decreased by
million for the nine months ended June 30, 2019 .
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RESULTS OF OPERATIONS
Total Revenues
The following tables show total revenues by product type and by geographic
location, based on the location of our customers, in dollars and percentage
change (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Hosting and professional services $ 225.3 $ 232.9 $ (7.6 ) (3.2 )%
Product and licensing 48.7 78.2 (29.5 ) (37.7 )%
Maintenance and support 64.4 66.4 (2.0 ) (3.0 )%
Total revenues $ 338.4 $ 377.4 $ (39.0 ) (10.3 )%
United States $ 266.2 $ 310.9 $ (44.7 ) (14.4 )%
International 72.2 66.5 5.7 8.5 %
Total revenues $ 338.4 $ 377.4 $ (39.0 ) (10.3 )%
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Hosting and professional services $ 691.3 $ 678.1 $ 13.2 1.9 %
Product and licensing 243.5 252.3 (8.8 ) (3.5 )%
Maintenance and support 191.2 203.3 (12.1 ) (6.0 )%
Total revenues $ 1,126.0 $ 1,133.7 $ (7.7 ) (0.7 )%
United States $ 904.3 $ 926.9 $ (22.6 ) (2.4 )%
International 221.7 206.8 14.9 7.2 %
Total revenues $ 1,126.0 $ 1,133.7 $ (7.7 ) (0.7 )%
The geographic split was 79% of total revenues in the United States and 21%
internationally for the three months ended June 30, 2020 , as compared to 82% of
total revenues in the United States and 18% internationally for the three months
ended June 30, 2019 .
The geographic split was 80% of total revenues in the United States and 20%
internationally for the nine months ended June 30, 2020 , as compared to 82% of
total revenues in the United States and 18% internationally for the nine months
ended June 30, 2019 .
Hosting and Professional Services Revenue
Hosting revenue primarily relates to delivering on-demand hosted services, such
as medical transcription and automated customer care applications, over a
specified term. Professional services revenue primarily consists of consulting,
implementation and training services for customers. The following table shows
hosting and professional services revenue, in dollars and as a percentage of
total revenues (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Hosting revenue $ 191.8 $ 188.0 $ 3.8 2.0 %
Professional services revenue 33.5 44.8 (11.3 ) (25.3 )%
Hosting and professional services revenue $ 225.3 $ 232.9 $ (7.6 ) (3.2 )%
As a percentage of total revenue 66.6 % 61.7 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Hosting revenue $ 584.6 $ 554.0 $ 30.6 5.5 %
Professional services revenue 106.7 124.1 (17.4 ) (14.0 )%
Hosting and professional services revenue $ 691.3 $ 678.1 $ 13.2 1.9 %
As a percentage of total revenue 61.4 % 59.8 %
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Three Months EndedJune 30, 2020 compared to Three Months EndedJune 30, 2019 Hosting revenue for the three months endedJune 30, 2020 increased by$3.8 million , or 2.0%, primarily due to a$5.0 million increase in Healthcare and a$2.0 million increase in Enterprise, offset in part by a$3.2 million decrease in our Other segment. Healthcare hosting revenue increased primarily due to the continued growth in our Dragon Medical cloud-based solutions, offset in part by a decline in our medical transcription services, which was aggravated by the transaction volume loss during the COVID-19 pandemic. Enterprise hosting revenue increased primarily due to increases in security biometrics and voice engagement. Other hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in fiscal year 2019. As a percentage of total revenue, hosting revenue increased from 49.8% to 56.7% for the three months endedJune 30, 2020 . Professional services revenue for the three months endedJune 30, 2020 decreased by$11.3 million , or 25.3%, primarily due to a$12.6 million decrease in Healthcare, offset in part by a$1.5 million increase in Enterprise. Healthcare professional services revenue decreased primarily driven by lower revenue from EHR implementation due to project deferrals during the pandemic. Enterprise professional services revenue increased primarily due to the increase in our digital engagement. As a percentage of total revenue, professional services revenue decreased from 11.9% to 9.9% for the three months endedJune 30, 2020 . Nine Months EndedJune 30, 2020 compared to Nine Months EndedJune 30, 2019 Hosting revenue for the nine months endedJune 30, 2020 increased by$30.6 million , or 5.5%, primarily due to a$42.5 million increase in Healthcare and a$4.2 million increase in Enterprise, offset in part by a$16.1 million decrease in our Other segment. Healthcare hosting revenue increased primarily due to the continued growth in our Dragon Medical cloud-based solutions, offset in part by a decline in our medical transcription services, which was aggravated by the transaction volume loss during the COVID-19 pandemic. Enterprise hosting revenue increased due to increases across all business lines. Other hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in fiscal year 2019. As a percentage of total revenue, hosting revenue increased from 48.9% to 51.9% for the nine months endedJune 30, 2020 . Professional services revenue for the nine months endedJune 30, 2020 decreased by$17.4 million , or 14.0%, primarily due to a$17.5 million decrease in Healthcare and a$2.4 million decrease in Other, offset in part by a$2.6 million increase in Enterprise. Healthcare professional services revenue decreased primarily due to lower revenue from EHR implementation due to project deferrals during the pandemic. Other professional services revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business inBrazil andIndia during fiscal year 2019. Enterprise professional services revenue increased primarily due to increases in our digital engagement and security biometrics. As a percentage of total revenue, professional services revenue decreased from 10.9% to 9.5% for the nine months endedJune 30, 2020 . Product and Licensing Revenue Product and licensing revenue primarily consist of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended June 30, Dollar Percent 2020 2019 Change Change Product and licensing revenue$ 48.7 $ 78.2 $ (29.5 ) (37.7 )% As a percentage of total revenue 14.4 % 20.7 % Nine Months Ended June 30, Dollar Percent 2020 2019 Change Change Product and licensing revenue$ 243.5 $ 252.3 $ (8.8 ) (3.5 )% As a percentage of total revenue 21.6 % 22.3 % Three Months EndedJune 30, 2020 compared to Three Months EndedJune 30, 2019 Product and licensing revenue for the three months endedJune 30, 2020 decreased by$29.5 million , or 37.7%, primarily due to a$17.9 million decrease in Healthcare and an$11.5 million decrease in Enterprise. Healthcare product and licensing revenue decreased primarily due to the continued transition from term licenses to cloud-based solutions. Enterprise product and licensing revenue decreased primarily due to the timing of software license transactions as well as the negative impact of COVID-19. As a percentage of total revenue, product and licensing revenue decreased from 20.7% to 14.4% for the three months endedJune 30, 2020 . 39
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Nine Months EndedJune 30, 2020 compared to Nine Months EndedJune 30, 2019 Product and licensing revenue for the nine months endedJune 30, 2020 decreased by$8.8 million , or 3.5%, primarily due to a$17.4 million decrease in Healthcare and a$2.9 million decrease in Other, offset in part by an$11.5 million increase in Enterprise. Healthcare product and licensing revenue decreased primarily due to the continued transition from term licenses to cloud-based solutions. Enterprise product and licensing revenue increased as the increase in digital engagement was offset in part by decreases in security biometrics and voice engagement, which was primarily due to the timing of software license transactions as well as the negative impact of COVID-19. Other product and licensing revenue decreased primarily due to the wind-down of Devices. As a percentage of total revenue, product and licensing revenue decreased from 22.3% to 21.6% for the nine months endedJune 30, 2020 . Maintenance and Support Revenue Maintenance and support revenue primarily consist of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions): Three Months EndedJune 30 ,
Dollar Percent
2020 2019 Change Change
Maintenance and support revenue $ 64.4 $ 66.4 $ (2.0 ) (3.0 )%
As a percentage of total revenue 19.0 % 17.6 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Maintenance and support revenue $ 191.2 $ 203.3 $ (12.1 ) (6.0 )%
As a percentage of total revenue 17.0 % 17.9 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
Maintenance and support revenue for the three months ended June 30, 2020
decreased by $2.0 million , or 3.0%, primarily due to the decrease in Healthcare.
Healthcare maintenance and support revenue decreased primarily due to the
continued transition from term licenses with maintenance and support to
cloud-based solutions. As a percentage of total revenue, maintenance and support
revenue increased from 17.6% to 19.0% for the three months ended June 30, 2020 .
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
Maintenance and support revenue for the nine months ended June 30, 2020
decreased by $12.1 million , or 6.0%, primarily due a $17.0 million decrease in
Healthcare, offset in part by a $5.1 million increase in Enterprise. Healthcare
maintenance and support revenue decreased primarily due to the continued
transition from term licenses with maintenance and support to cloud-based
solutions in Healthcare. Enterprise maintenance and support revenue increased
primarily driven by the increase in license transactions in digital engagement
and security biometrics. As a percentage of total revenue, maintenance and
support revenue decreased from 17.9% to 17.0% for the nine months ended June 30,
2020 .
COSTS AND EXPENSES
Cost of Hosting and Professional Services Revenue
Cost of hosting and professional services revenue primarily consists of
compensation for services personnel, outside consultants and overhead, as well
as the hardware, infrastructure and communications fees that support our hosting
solutions. The following table shows the cost of hosting and professional
services revenue, in dollars and as a percentage of professional services and
hosting revenue (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of hosting and professional services
revenue $ 119.8 $ 138.4 $ (18.6 ) (13.4 )%
As a percentage of professional services
and hosting revenue 53.2 % 59.4 %
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Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of hosting and professional services
revenue $ 388.8 $ 409.3 $ (20.5 ) (5.0 )%
As a percentage of professional services
and hosting revenue 56.2 % 60.4 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
Cost of hosting and professional services revenue for the three months ended
June 30, 2020 decreased by $18.6 million , or 13.4%, primarily driven by lower
transaction volume and project deferrals due to the COVID-19 pandemic. Gross
margin increased by 6.2 percentage points primarily due to a favorable shift in
revenue mix towards higher-margin Dragon Medical cloud-based solutions from
lower-margin medical transcription and EHR implementation services.
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
Cost of hosting and professional services revenue for the nine months ended
June 30, 2020 decreased by $20.5 million , or 5.0%, primarily driven by lower
transaction volume and project deferrals due to the COVID-19 pandemic. Gross
margin increased by 4.1 percentage points primarily due to a favorable shift in
revenue mix towards higher-margin Dragon Medical cloud-based solutions from
lower-margin medical transcription and EHR implementation services.
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and
fulfillment costs, manufacturing and operations costs and third-party royalty
expenses. The following table shows the cost of product and licensing revenue,
in dollars and as a percentage of product and licensing revenue (dollars in
millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of product and licensing revenue $ 10.7 $ 18.7 $ (8.0 ) (42.9 )%
As a percentage of product and licensing
revenue 21.9 % 23.9 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of product and licensing revenue $ 54.2 $ 60.5 $ (6.3 ) (10.4 )%
As a percentage of product and licensing
revenue 22.2 % 24.0 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
Cost of product and licensing revenue for the three months ended June 30, 2020
decreased by $8.0 million , or 42.9%. Gross margin increased by 2.0 percentage
points year-over-year. The decrease in cost and increase in gross margin were
primarily due to the upfront recognition of certain project costs associated
with digital engagement in the third quarter of fiscal year 2019.
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
Cost of product and licensing revenue for the nine months ended June 30, 2020
decreased by $6.3 million , or 10.4%. Gross margin increased by 1.7 percentage
points year-over-year. The decrease in cost and increase in gross margin were
primarily due to the upfront recognition of certain project costs associated
with digital engagement in the third quarter of fiscal year 2019.
Cost of Maintenance and Support Revenue
Cost of maintenance and support revenue primarily consists of compensation for
product support personnel and overhead. The following table shows the cost of
maintenance and support revenue, in dollars and as a percentage of maintenance
and support revenue (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of maintenance and support revenue $ 7.3 $ 8.1 $ (0.9 ) (10.6 )%
As a percentage of maintenance and
support revenue 11.3 % 12.3 %
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Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of maintenance and support revenue $ 23.0 $ 24.8 $ (1.8 ) (7.2 )%
As a percentage of maintenance and
support revenue 12.1 % 12.2 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
Cost of maintenance and support revenue for the three months ended June 30, 2020
decreased by $0.9 million , or 10.6%, primarily due to the continued transition
from license transactions with maintenance and support to cloud-based solutions
in Healthcare. Gross margins increased by 1.0 percentage points primarily due to
higher margins on diagnostics maintenance and support revenue.
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
Cost of maintenance and support revenue for the nine months ended June 30, 2020
decreased by $1.8 million , or 7.2%, primarily due to the continued transition
from license transactions with maintenance and support to cloud-based solutions
in Healthcare. Gross margins increased by 0.2 percentage, or remained
essentially flat during the current period.
Research and Development Expense
Research and development ("R&D") expense primarily consists of salaries,
benefits, and overhead relating to engineering staff as well as third party
engineering costs. The following table shows R&D expense, in dollars and as a
percentage of total revenues (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Research and development expense $ 55.2 $ 47.1 $ 8.2 17.3 %
As a percentage of total revenue 16.3 % 12.5 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Research and development expense $ 169.7 $ 139.7 $ 30.0 21.5 %
As a percentage of total revenue 15.1 % 12.3 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
R&D expense increased by $8.2 million , or 17.3%, primarily due to higher
compensation costs as we continued to invest in our core technologies to power
new products and solutions.
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
R&D expense increased by $30.0 million , or 21.5%, primarily due to higher
compensation costs as we continued to invest in our core technologies to power
new products and solutions.
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Sales and Marketing Expense
Sales and marketing expense include salaries and benefits, commissions,
advertising, direct mail, public relations, tradeshow costs and other costs of
marketing programs, travel expenses associated with our sales organization and
overhead. The following table shows sales and marketing expense, in dollars and
as a percentage of total revenues (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Sales and marketing expense $ 64.4 $ 65.3 $ (1.0 ) (1.5 )%
As a percentage of total revenue 19.0 % 17.3 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Sales and marketing expense $ 201.8 $ 200.4 $ 1.5 0.7 %
As a percentage of total revenue 17.9 % 17.7 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
Sales and marketing expense for the three months ended June 30, 2020 decreased
by $1.0 million , or 1.5%, as lower traveling and entertainment expenses were
offset in part by our investment in sales force to support new products and
solutions.
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
Sales and marketing expense for the nine months ended June 30, 2020 increased by
$1.5 million , or 0.7%, as lower traveling and entertainment expenses were more
than offset by our investment in sales force to support new products and
solutions.
General and Administrative Expense
General and administrative ("G&A") expense primarily consists of personnel costs
for administration, finance, human resources, general management, fees for
external professional advisers including accountants and attorneys, and
provisions for doubtful accounts. The following table shows G&A expense, in
dollars and as a percentage of total revenues (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
General and administrative expense $ 37.7 $ 45.8 $ (8.2 ) (17.8 )%
As a percentage of total revenue 11.1 % 12.1 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
General and administrative expense $ 114.4 $ 129.2 $ (14.8 ) (11.5 )%
As a percentage of total revenue 10.2 % 11.4 %
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
G&A expense decreased by $8.2 million , or 17.8%, primarily driven by decreases
in compensation and professional services costs due to our cost saving
initiatives, and lower traveling and entertainment expenses.
Nine Months Ended June 30, 2020 compared to Nine Months Ended June 30, 2019
G&A expense decreased by $14.8 million , or 11.5%, primarily driven by decreases
in compensation and professional services costs due to our cost saving
initiatives, and lower traveling and entertainment expenses.
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Amortization of Intangible Assets
Amortization of acquired patents and technologies are included within cost of
revenue and the amortization of acquired customer and contractual relationships,
non-compete agreements, acquired trade names and trademarks, and other
intangibles are included within Operating expenses. Customer relationships are
amortized based upon the pattern in which the economic benefits of the customer
relationships are expected to be realized. Other identifiable intangible assets
are amortized on a straight-line basis over their estimated useful lives.
Amortization expense was recorded as follows (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of revenue $ 6.4 $ 6.6 $ (0.1 ) (2.0 )%
Operating expenses 11.8 13.4 (1.5 ) (11.4 )%
Total amortization expense $ 18.3 $ 19.9 $ (1.7 ) (8.3 )%
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Cost of revenue $ 19.7 $ 20.6 $ (0.9 ) (4.5 )%
Operating expenses 36.2 41.0 (4.8 ) (11.7 )%
Total amortization expense $ 55.9 $ 61.6 $ (5.7 ) (9.3 )%
The decreases in total amortization of intangible assets for the three and nine
months ended June 30, 2020 , as compared to the prior year periods, were
primarily due to certain intangible assets having been fully amortized or
written off during fiscal year 2019.
Acquisition-Related Costs, Net
Acquisition-related costs include costs related to business and asset
acquisitions. These costs consist of (i) transition and integration costs,
including retention payments, transitional employee costs, earn-out payments,
and other costs related to integration activities; (ii) professional service
fees, including financial advisory, legal, accounting, and other outside
services incurred in connection with acquisition activities, and disputes and
regulatory matters related to acquired entities; and (iii) fair value
adjustments to acquisition-related contingencies. A summary of the
Acquisition-related cost, net is as follows (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Transition and integration costs $ 0.9 $ 1.2 $ (0.4 ) (29.5 )%
Professional service fees (0.1 ) 0.9 (0.9 ) (109.2 )%
Acquisition-related adjustments - (1.3 ) 1.3 (96.8 )%
Total Acquisition-related costs, net $ 0.8 $ 0.8 $ - (3.8 )%
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Transition and integration costs $ 3.7 $ 6.1 $ (2.4 ) (38.9 )%
Professional service fees (0.1 ) 1.2 (1.2 ) (104.5 )%
Acquisition-related adjustments - (1.8 ) 1.8 (97.6 )%
Total Acquisition-related costs, net $ 3.6 $ 5.4
The decreases in Acquisition-related cost, net for the nine months ended
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Restructuring and Other Charges, Net
Restructuring and other charges, net include restructuring expenses together
with other charges that are unusual in nature, are the result of unplanned
events, or arise outside of the ordinary course of our business. While
restructuring and other charges, net are excluded from segment profits, the
table below presents the restructuring and other charges, net associated with
each segment (dollars in thousands):
Three Months Ended June 30,
2020 2019
Other
Personnel Facilities Total Restructuring Charges Total Personnel Facilities Total Restructuring Other Charges Total
Healthcare $ 119 $ 2 $ 121 $ - $ 121 $ 222 $ 1 $ 223 $ - $ 223
Enterprise (121 ) 76 (45 ) - (45 ) (165 ) - (165 ) - (165 )
Other - 34 34 - 34 529 15 544 239 783
Corporate 445 9 454 1,356 1,810 730 354 1,084 22 1,106
Total $ 443 $ 121 $ 564 $ 1,356 $ 1,920 $ 1,316 $ 370 $ 1,686 $ 261 $ 1,947
Nine Months Ended June 30,
2020 2019
Other Other
Personnel Facilities Total Restructuring
Charges Total Personnel Facilities Total Restructuring Charges
3,678 $ - $ 3,678 $ 4,672 $ 142 $ 4,814 $ - $ 4,814
Enterprise 1,416 794 2,210 - 2,210 5,086 13 5,099 - 5,099
Other - (277 ) (277 ) - (277 ) 1,443 15 1,458 3,306 4,764
Corporate 1,461 360 1,821 7,500 9,321 2,680 676 3,356 8,413 11,769
Total $ 4,778 $ 2,654 $ 7,432 $ 7,500 $ 14,932 $ 13,881 $ 846 $
14,727
Fiscal Year 2020 For the nine months endedJune 30, 2020 , we recorded restructuring charges of$7.4 million , which included$4.8 million related to the termination of approximately 186 employees and$2.7 million related to the shutdown of certain facilities. Of these amounts,$0.6 million was recorded for the three months endedJune 30, 2020 , which included$0.4 million related to the termination of approximately 111 employees and$0.1 million related to the shutdown of facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the footprint of our offices and facilities. We expect the remaining outstanding severance of$1.2 million to be substantially paid during fiscal year 2020, and the remaining balance of$14.1 million related to facilities to be paid through fiscal year 2027, in accordance with the terms of the applicable leases. Additionally, for the nine months endedJune 30, 2020 , we recorded$4.6 million expenses related to the separation of our Automotive business, a$2.0 million impairment charge a right-of-use asset due to the COVID-19 pandemic, and a$0.9 million expense related to a malware incident that occurred in the third quarter of fiscal year 2017 (the "2017 Malware Incident"). Of these amounts, we recorded$0.4 million related to the separation of our Automotive business and$0.9 million related to the 2017 Malware Incident for the three months endedJune 30, 2020 . Fiscal Year 2019 For the nine months endedJune 30, 2019 , we recorded restructuring charges of$14.7 million , which included$13.9 million related to the termination of approximately 305 employees and$0.8 million related to the shutdown of certain facilities. Of these amounts,$1.7 million was recorded for the three months endedJune 30, 2019 , which included$1.3 million related to the termination of approximately 31 employees and$0.4 million related to the shutdown of facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction. Additionally, for the nine months endedJune 30, 2019 , we recorded$9.2 million of professional services fees related to the execution of our corporate transformational efforts and$3.3 million of accelerated depreciation related to our Mobile Operator Services business, offset in part by a$0.7 million cash receipt from insurance claims related to the 2017 Malware Incident. Of these amounts, we recorded$0.4 million of professional services fees related to the execution of our corporate transformational efforts and$0.2 million of accelerated depreciation related to our Mobile Operator Services business, offset in part by a$0.4 million cash receipt related to the 2017 Malware Incident for the three months endedJune 30, 2019 . 45
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Other (Expense) Income, Net
A summary is as follows (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
Interest income $ 0.6 $ 3.8 $ (3.2 ) (83.9 )%
Interest expense (23.7 ) (28.4 ) 4.7 (16.5 )%
Other income, net 0.6 3.3 (2.7 ) (80.7 )%
Total other expense, net $ (22.4 ) $ (21.3 ) $ (1.1 ) 5.4 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
Interest income $ 4.3 $ 10.0 $ (5.7 ) (56.9 )%
Interest expense (71.1 ) (91.8 ) 20.7 (22.5 )%
Other (expense) income, net (13.1 ) 2.3 (15.4 ) (663.3 )%
Total other expense, net $ (79.9 ) $ (79.5 ) $ (0.4 ) 0.6 %
Interest income for the three and nine months ended June 30, 2020 decreased
primarily due to lower yields on marketable securities for the current year
periods.
Interest expense for the three and nine months ended June 30, 2020 decreased as
we repaid $300.0 million of the 2020 Senior Notes in March 2019 and $300.0
million of the 2024 Senior Notes in October 2019 . We also repurchased $123.8
million notional amounts of the 1.25% and 1.5% Convertible Debentures during the
second quarter of fiscal year 2020.
Other income, net for the three months ended June 30, 2020 decreased primarily
due to income recognized under the transition services agreement related to the
Imaging sale in fiscal year 2019. Other expense, net for the nine months ended
June 30, 2020 increased primarily due to losses on redemption and repurchases of
debt in fiscal year 2020, offset in part by higher gains on foreign currency
transactions.
(Benefit) Provision for Income Taxes
The following table shows the (benefit) provision for income taxes on continuing
operations and the effective income tax rate (dollars in millions):
Three Months Ended June 30, Dollar Percent
2020 2019 Change Change
(Benefit) provision for income taxes $ (16.7 ) $ 10.7 $ (27.4 ) (255.4 )%
Effective income tax rate NA 106.8 %
Nine Months Ended June 30, Dollar Percent
2020 2019 Change Change
(Benefit) provision for income taxes $ (31.8 ) $ 12.1 $ (43.9 ) (362.1 )%
Effective income tax rate (161.1 )% (394.6 )%
The effective income tax rate is based upon the income for the year, the
composition of the income in different countries, changes relating to valuation
allowances for certain countries if and as necessary, and adjustments, if any,
for the potential tax consequences, benefits or resolutions of audits or other
tax contingencies. Our effective income tax rate may be adversely affected by
earnings being lower than anticipated in countries where we have lower statutory
tax rates and higher than anticipated in countries where we have higher
statutory tax rates.
We recorded a $16.7 million tax benefit on near-zero income (loss) before income
taxes for the three months ended June 30, 2020 , primarily due to the valuation
allowance on deferred tax assets in the United States and a foreign tax benefit
of $14.7 million related to prior-year intangible property transfers. The
effective tax rate for the three months ended June 30, 2019 differed from the
U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on
deferred tax assets in the United States .
The effective tax rate for the nine months ended June 30, 2020 differed from the
U.S. federal statutory rate of 21.0% due to a net $29.9 million deferred tax
benefit from an adjustment to domestic valuation allowance, primarily related to
the Cerence spin-off, and a foreign tax benefit of $14.7 million related to
prior-year intangible property transfers. The effective tax rate for the nine
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months endedJune 30, 2019 differed from theU.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets inthe United States . Valuation Allowances As ofJune 30, 2020 andSeptember 30, 2019 , we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to continue maintaining valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate toU.S. net operating losses. Cumulative pretax losses have historically represented significant negative evidence of our ability to realize our domestic deferred tax assets. We continue to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As ofJune 30, 2020 , we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released. Net Income (Loss) from Discontinued Operations As more fully described in Note 4 to the accompanying condensed consolidated financial statements, onFebruary 1, 2019 , we completed the sale of our Imaging business and received approximately$404.0 million in cash, after estimated transaction expenses. OnOctober 1, 2019 , we completed the spin-off of our Automotive business into an independent public company, Cerence. As a result, the historical results of operations for Imaging and Automotive have been included within discontinued operations in our condensed consolidated financial statements. 47
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SEGMENT ANALYSIS
As more fully described in Note 4, on October 1, 2019 , we completed the spin-off
of our Automotive business as an independent publicly traded company. Effective
the first quarter of fiscal year 2020, our Automotive business's historical
results of operations have been included within discontinued operations. For the
three months ended June 30, 2019 , $4.0 million of stranded costs previously
allocated to our Automotive segment have been re-allocated to Healthcare,
Enterprise, and Other; for the nine months ended June 30, 2019 , $12.9 million of
stranded costs previously allocated to our Automotive segment have been
re-allocated to Healthcare, Enterprise, and Other.
The following table presents certain financial information about our operating
segments (dollars in millions):
Three Months Ended June 30, Change Percent
2020 2019 Change
Segment Revenues (a):
Healthcare $ 199.9 $ 228.4 $ (28.5 ) (12.5 )%
Enterprise 130.4 137.9 (7.5 ) (5.4 )%
Other 8.1 11.8 (3.6 ) (30.9 )%
Total segment revenues $ 338.4 $ 378.1 $ (39.7 ) (10.5 )%
Less: acquisition related revenues adjustments - (0.6 ) 0.6 (100.0 )%
Total revenues $ 338.4 $ 377.4 $ (39.0 ) (10.3 )%
Segment Profit:
Healthcare $ 62.9 $ 79.3 $ (16.5 ) (20.7 )%
Enterprise 37.0 38.7 (1.8 ) (4.5 )%
Other 5.0 3.0 2.0 65.7 %
Total segment profit $ 104.9 $ 121.1 $ (16.2 ) (13.4 )%
Segment Profit Margin:
Healthcare 31.5 % 34.7 % (3.3 )
Enterprise 28.4 % 28.1 % 0.3
Other 62.0 % 25.8 % 36.1
Total segment profit margin 31.0 % 32.0 % (1.0 )
Nine Months Ended June 30, Change Percent
2020 2019 Change
Segment Revenues (a):
Healthcare $ 694.8 $ 704.9 $ (10.1 ) (1.4 )%
Enterprise 406.3 383.2 23.1 6.0 %
Other 25.2 46.9 (21.7 ) (46.3 )%
Total segment revenues $ 1,126.3 $ 1,135.0 $ (8.7 ) (0.8 )%
Less: acquisition related revenues adjustments (0.3 ) (1.3 ) 1.0 (77.1 )%
Total revenues $ 1,126.0 $ 1,133.7 $ (7.7 ) (0.7 )%
Segment Profit:
Healthcare $ 227.8 $ 244.2 $ (16.4 ) (6.7 )%
Enterprise 118.3 101.3 16.9 16.7 %
Other 14.0 13.4 0.6 4.5 %
Total segment profit $ 360.1 $ 359.0 $ 1.1 0.3 %
Segment Profit Margin:
Healthcare 32.8 % 34.6 % (1.9 )
Enterprise 29.1 % 26.4 % 2.7
Other 55.7 % 28.6 % 27.1
Total segment profit margin 32.0 % 31.6 % 0.3
(a) Segment revenues differ from reported revenues due to certain revenue
adjustments related to acquisitions that would otherwise have been
recognized but for the purchase accounting treatment of the business
combinations. These revenues are included to allow for more complete
comparisons to the financial results of historical operations and in
evaluating management performance.
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Segment Revenues Three Months EndedJune 30, 2020 compared to Three Months EndedJune 30, 2019 • Healthcare segment revenue decreased by$28.5 million , or 12.5%, primarily
driven by:
• Revenue from Dragon Medical cloud-based solutions increased by$18.1 million , or 33.8%, to$71.4 million for the three months endedJune 30, 2020 from$53.3 million for the three months endedJune 30, 2019 ,
primarily due to the continued market penetration and customer transition
to our cloud-based solutions.
• Revenue from radiology and other decreased by
for the three months ended
multi-year term license renewals and the negative impact of COVID-19.
• Revenue from transcription services decreased by
to
million for the three months ended
customers' transition to our cloud-based solutions and lower transaction
volume due to COVID-19.
• Revenue from Dragon Medical licensing and maintenance and support
decreased by
ended
2019, primarily driven by the continued transition from term licenses sold
with maintenance and support to cloud-based solutions.
• Professional services revenue decreased by
million for the three months ended
the three months ended
related to EHR implementation due to project deferrals during the
pandemic.
• Enterprise segment revenue decreased by
in digital engagement was more than offset by decreases in security
biometrics and voice engagement, which was primarily due to the timing of
software license transactions and the negative impact of COVID-19.
• Other segment revenue decreased by
wind down our Other segment.
Nine Months Ended
driven by:
• Revenue from Dragon Medical cloud-based solutions increased by$61.6 million , or 43.0%, to$204.8 million for the nine months endedJune 30, 2020 from$143.2 million for the nine months endedJune 30, 2019 ,
primarily due to the continued market penetration and customer transition
to our cloud-based solutions.
• Revenue from radiology and other decreased by
for the nine months ended
multi-year term license renewals and the negative impact of COVID-19.
• Revenue from transcription services decreased by
to
million for the nine months ended
customers' transition to our cloud-based solutions and lower transaction
volume due to COVID-19.
• Revenue from Dragon Medical licensing and maintenance and support
decreased by
ended
2019, primarily driven by the continued transition from term licenses sold
with maintenance and support to cloud-based solutions.
• Professional services revenue decreased by $15.9 million or 29.1%, to
for the nine months ended
related to EHR implementation due to project deferrals during the
pandemic.
• Enterprise segment revenue increased by $23.1 million , or 6.0%, as thegrowths in digital engagement and security biometrics were offset in part by
the decrease in voice engagement, which was primarily due to the timing of
software license transactions and the negative impact of COVID-19.
• Other segment revenue decreased by
wind down our Other segment.
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Segment Profit Three Months EndedJune 30, 2020 compared to Three Months EndedJune 30, 2019 • Healthcare segment profit decreased by$16.5 million , or 20.7%, primarily due
to lower revenue and higher R&D and sales and marketing expenses, offset in
part by gross margin improvement. The increases in R&D and sales and
marketing expenses were primarily due to higher spend to support the
development and launch of new products and solutions. Gross margin increased
primarily due to a favorable shift in mix to higher margin Dragon Medical
cloud-based solution from lower margin medical transcription and EHR
implementation services. As a result, segment profit margin decreased by 3.3
percentage points to 31.5%.
• Enterprise segment profit decreased by
to lower revenue and higher R&D expense, offset in part by higher gross
margin and lower sales and marketing expenses. Gross margin increased
primarily due to the upfront recognition of certain project costs associated
with digital engagement in the same period of last year. The increase in R&D
expense was primarily due to higher spend on core technologies to support
future growth. The decrease in sales and marketing expense was primarily
driven by lower travel and entertainment expenses due to the pandemic. As a
result, segment profit margin increased by 0.3 percentage points to 28.4%.
• Other segment profit increased by
lower expense profile of the remaining business, offset in part by lower
revenue as we continue to wind down our Other segment. As a result, segment
profit margin increased by 36.1 percentage points to 62.0%.
Nine Months Ended
to lower revenue and higher R&D and sales and marketing expenses, offset in
part by gross margin improvement. Gross margin increased primarily due to a
favorable shift in mix to higher margin Dragon Medical cloud-based solution
from lower margin medical transcription and EHR implementation services. The
increases in R&D and sales and marketing expenses were primarily due to
higher spend to support the development and launch of new products and
solutions. As a result, segment profit margin decreased by 1.9 percentage
points to 32.8%.
• Enterprise segment profit increased by
to higher segment revenue and gross margin, offset in part by higher R&D and
sales and marketing expenses. Gross margin improvement was primarily driven
by a favorable shift in revenue mix towards higher margin licensing revenue.
The increase in R&D expense was primarily due to higher spend on core
technologies to support future growth. The increase in sales and marketing
expense was primarily driven by higher commission costs due to higher
bookings, offset in part by lower travel and entertainment expenses due to
the pandemic. As a result, segment profit margin increased by 2.7 percentage
points to 29.1%.
• Other segment profit increased by
lower expense profile of the remaining business, offset in part by lower
revenue as we continue to wind down our Other segment. As a result, segment
profit margin increased by 27.1 percentage points to 55.7%.
LIQUIDITY AND CAPITAL RESOURCESLiquidity
We had cash and cash equivalents and marketable securities of$312.8 million as ofJune 30, 2020 , a decrease of$452.0 million from$764.8 million as ofSeptember 30, 2019 . Our working capital, defined as total current assets less total current liabilities from continuing operations, was$148.1 million as ofJune 30, 2020 , compared to$591.3 million as ofSeptember 30, 2019 . As ofJune 30, 2020 , we had$240.0 million available for borrowing under our revolving credit facility. We believe that our existing sources of liquidity are sufficient to support our operating needs, capital requirements and any debt service requirements for the next twelve months. Cash and cash equivalents and marketable securities held by our international operations totaled$75.8 million as ofJune 30, 2020 and$135.9 million as ofSeptember 30, 2019 . We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and ourU.S. operation to be funded through its own operating cash flows, cash and marketable securities within theU.S. , and if necessary, borrowing under our revolving credit facility. As more fully described in "COVID-19 Impact" in the "Overview", we expect our full year operating cash flows to be approximately$235 million to$265 million , which reflects lower revenue and delayed collections due to the pandemic. As a precaution amid the pandemic, we borrowed$230.0 million under our revolving credit facility in March, which was fully repaid in June as we 50
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became more confident in our liquidity position. We remain committed to maximizing shareholders' return in the long term, and may resume our share repurchase activity based upon the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors. We believe our existing cash and investments, revolving credit facility, and future cash flows from operations to be sufficient for future liquidity needs. Spin-Off of Automotive OnOctober 1, 2019 , we completed the previously announced spin-off of our Automotive business as an independent public company, Cerence, and a pro rata and tax-free distribution to our stockholders of all of the outstanding shares of Cerence owned by Nuance onOctober 1, 2019 . The distribution was made in the amount of one share of Cerence common stock for every eight shares of Nuance common stock owned by Nuance's stockholders of record as of5:00 p.m. Eastern Time onSeptember 17, 2019 . Upon the spin-off onOctober 1, 2019 , we received an approximately$139.1 million distribution from Cerence. We used the proceeds from the distribution and existing cash to redeem all the$300.0 million outstanding principal amount of the 2024 Senior Notes for$313.5 million , plus accrued and unpaid interest of$4.5 million . For the nine months endedJune 30, 2020 , we incurred cash payments of$13.3 million related to the separation and spin-off of our Automotive business, which have been presented as operating cash flows from discontinued operations. Net Cash Provided by Operating Activities Cash provided by operating activities for the nine months endedJune 30, 2020 was$173.7 million , a decrease of$123.5 million from$297.2 million cash provided for the nine months endedJune 30, 2019 . The decrease was primarily due to: • A decrease of$78.0 million in cash provided due to unfavorable changes in
working capital, primarily due to the timing of cash collections and cash
payments;
• A decrease of
offset in part by,
• An increase of
non-cash charges; and
• An increase of
revenue. Deferred revenue had a positive effect of
cash flows for the nine months ended
million for the nine months ended
Net Cash Provided by Investing Activities Cash provided by investing activities for the nine months endedJune 30, 2020 was$88.4 million , a decrease of$289.8 million from$378.3 million cash provided for the nine months endedJune 30, 2019 . The decrease was primarily due to: • Net proceeds of$407.0 million , primarily from the sale of our Imaging
business during the second quarter of fiscal year 2019;
• An increase of
part by,
• An increase of
marketable securities and other investments; and
• An increase of
Net Cash Used in Financing Activities Cash used in financing activities for the nine months endedJune 30, 2020 was$579.4 million , an increase of$123.1 million from$456.3 million cash used for the nine months endedJune 30, 2019 . The increase was primarily due to: • An increase of$213.6 million in cash used for the repayment and redemption
of debt; and
• An increase of
part by,
• A net contribution of
spin-off of our Automotive business during the first quarter of fiscal year
2020.
Debt
For a detailed description of the terms and restrictions of the debt and
revolving credit facility, see Note 10 to the accompanying condensed
consolidated financial statements. For the nine months ended
million distribution from Cerence. We used the proceeds from the
distribution and existing cash to redeem all the
outstanding principal amount of the 2024 Senior Notes for
plus accrued and unpaid interest of $4.5 million .
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• During the second quarter of fiscal year 2020, we repurchased
million notional amount of our 1.25% 2025 Debentures for
and $36.5 million notional amount of 1.5% 2035 Debentures for $41.3
million .
• In
2.75% 2031 Debentures at par.
• On
facility at an effective interest rate of 2.68% per annum, which was fully
repaid on
As ofJune 30, 2020 , we were in compliance with all the debt covenants. We may from time to time, depending on market and business conditions, repurchase outstanding debt in the open market or by private negotiation. We will not incur any cash interest payments during the fourth quarter of fiscal year 2020 due to the timing of such payments due. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows. Share Repurchase Program OnApril 29, 2013 , our Board of Directors approved a share repurchase program for up to$500.0 million , which was increased by$500.0 million onApril 29, 2015 . OnAugust 1, 2018 , our Board of Directors approved an additional$500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors. We did not repurchase any shares of our common stock for the three months endedJune 30, 2020 and repurchased 9.5 million shares of our common stock for$169.2 million for the nine months endedJune 30, 2020 . We repurchased 1.7 million shares of our common stock for$29.6 million for the three months endedJune 30, 2019 , and repurchased 7.8 million shares of our common stock for$120.9 million for the nine months endedJune 30, 2019 under the program. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased an aggregate of 73.8 million shares for$1,238.8 million . As ofJune 30, 2020 , approximately$261.2 million remained available for future repurchases under the program. Off-Balance Sheet Arrangements, Contractual Obligations Contractual Obligations The following table outlines our contractual payment obligations (dollars in millions): Contractual Payments Due in Fiscal Year Contractual Obligations Total 2020 2021 and 2022 2023 and 2024 Thereafter Convertible debentures (1)$ 1,166.6 $ - $ 227.4 $ 676.5$ 262.7 Senior notes (2) 500.0 - - - 500.0 Interest payable on long-term debt (3) 217.5 10.4 80.0 64.5 62.6 Letters of credit (4) 2.5 2.5 - - - Lease obligations and other liabilities: Operating leases (5) 139.4 7.3 48.1 30.9 53.1 Operating leases under restructuring 16.1 1.2 7.1 4.6 3.2 Purchase commitments for inventory, property and equipment (6) 160.0 17.5 99.1 43.4 - Total contractual cash obligations$ 2,202.1 $ 38.9 $ 461.7 $ 819.9$ 881.6
(1) Pursuant to the terms of each convertible instrument, holders have the right
to redeem the debt on specific dates prior to maturity. The repayment
schedule above assumes that payment is due on the next redemption date after
June 30, 2020 . (2) The repayment schedule reflects all the senior notes outstanding as ofJune 30, 2020 .
(3) Interest per annum is due and payable semi-annually and is determined based
on the outstanding principal as of
of each debt instrument and the assumed redemption dates discussed above.
(4) Letters of credit are in place primarily to secure future operating lease
payments.
(5) Obligations include contractual lease commitments related to facilities that
have subsequently been subleased. As of
certain facilities with total sublease income of $13.1 million through
fiscal year 2027.
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(6) These amounts include non-cancelable purchase commitments for property and
equipment as well as inventory in the normal course of business to fulfill
customer backlog.
Total unrecognized tax benefits as ofJune 30, 2020 were$26.0 million . We do not expect any significant change in the amount of unrecognized tax benefits within the next twelve months. Contingent Liabilities and Commitments Certain acquisition payments to selling shareholders were contingent upon the achievement of pre-determined performance target over a period of time after the acquisition. Such contingent payments were recorded at estimated fair values upon the acquisition and re-measured in subsequent reporting periods. As ofJune 30, 2020 , we may be required to pay the selling stockholders up to$4.8 million upon achieving specified performance goals, including the achievement of future bookings and sales targets related to the products of the acquired entities. In addition, certain deferred compensation payments to selling shareholders contingent upon their continued employment after the acquisition was recorded as compensation expense over the requisite service period. Additionally, as ofJune 30, 2020 , the remaining deferred payment obligations of$12.4 million to certain former stockholders, which are contingent upon their continued employment, will be recognized ratably as compensation expense over the remaining requisite service periods. Off-Balance Sheet Arrangements ThroughJune 30, 2020 , we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are included in the "Critical Accounting Policies" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K for the fiscal year endedSeptember 30, 2019 . There has been no material change to our critical accounting policies sinceSeptember 30, 2019 .
RECENTLY ADOPTED ACCOUNTING STANDARDS AND ISSUED ACCOUNTING STANDARDS NOT YET
ADOPTEDSee Note 2 to the accompanying condensed consolidated financial statements for a discussion of the recently adopted and issued accounting standards. Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. Exchange Rate Sensitivity We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations. Assets and liabilities of our foreign entities are translated intoU.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of theU.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Brazilian real, Canadian dollar, Japanese yen, and Indian rupee. Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As ofJune 30, 2020 , we had not designated any contracts as fair value or cash flow hedges. The contracts generally have a maturity of less than 90 days. As ofJune 30, 2020 , the notional contract amount of outstanding foreign currency exchange contracts was$41.4 million . Interest Rate Sensitivity We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities. 53
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AtJune 30, 2020 , we held approximately$312.8 million of cash and cash equivalents and marketable securities consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would increase by approximately$3.1 million per annum, based on theJune 30, 2020 reported balances of our investment accounts. Convertible Debentures The fair values of our convertible debentures are dependent on the price and volatility of our common stock as well as movements in interest rates. The fair market values of these debentures will generally increase as the market price of our common stock increases and will decrease as the market price of our common stock decreases. The fair market values of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect the fair market values of these debentures, but do not impact our financial position, results of operations or cash flows due to the fixed nature of the debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may provide the holders of these debentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement. The following table summarizes the fair value and conversion value of our convertible debentures, and the estimated increase in fair value and conversion value with a hypothetical 10% increase in the stock price of$25.31 as ofJune 30, 2020 (dollars in millions): June 30, 2020 Increase to Increase to Fair value Conversion value fair value conversion value 1.5% 2035 Debentures$ 293.9 $ 279.2$ 23.8 $ 27.9 1.0% 2035 Debentures$ 789.4 $ 709.7$ 46.4 $ 71.0 1.25% 2025 Debentures$ 367.9 $ 337.6$ 25.4 $ 33.8
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