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:
•potential disruption to our business caused by the proposed acquisition of us
by Microsoft;
•our ability to complete the Merger in a timely manner or at all;
•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, natural language
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understanding, semantic processing, domain-specific reasoning, dialog management
capabilities, AI, and voice biometric speaker authentication. We report our
business in three segments, Healthcare, Enterprise, and Other.
•Healthcare. Our healthcare segment provides intelligent systems that support a
more natural and insightful approach to clinical documentation, freeing
clinicians to spend more time caring for patients and helping care teams and
health organizations drive meaningful financial and clinical outcomes. Our
principal solutions include dragon medical cloud-based solutions ("Dragon
Medical One"), computer assisted physician documentation, diagnostic imaging
solutions, Nuance® Dragon Ambient eXperience™ ("DAX"), clinical documentation
improvement and coding.
•Enterprise. Our Enterprise segment is a leading provider of AI-powered
intelligent customer engagement solutions and services, which enable enterprises
and contact centers to enhance and automate customer service and sales
engagement. Our principal solutions include interactive voice responses
solutions, intelligent engagement solutions and security & biometric solutions.
•Other. Our Other segment currently consists primarily of voicemail
transcription services.
•Discontinued Operations. On November 17, 2020 , we entered into a definitive
agreement to sell the Business, comprised of our medical transcription and EHR
implementation businesses. On March 1, 2021 , we completed the sale of the
Business and received proceeds of approximately $29.8 million , subject to
certain customary post-closing adjustments. For all periods presented, the
Businesses' results of operations have been included within discontinued
operations in our condensed consolidated financial statements.
Acquisition of Nuance Communications, Inc. by Microsoft Corporation
On April 11, 2021 , we entered into a Merger Agreement with Microsoft. Subject to
the terms and conditions of the Merger Agreement, Microsoft has agreed to
acquire Nuance for $56.00 per share in an all-cash transaction valued at
approximately $19.7 billion , inclusive of Nuance's net debt. Pursuant to the
Merger Agreement, following consummation of the Merger Nuance will be a
wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease
to be a publicly traded company. We have agreed to various customary covenants
and agreements, including, among others, agreements to conduct our business in
the ordinary course during the period between the execution of the Merger
Agreement and the effective time of the Merger. We do not believe these
restrictions will prevent us from meeting our debt service obligations, ongoing
costs of operations, working capital needs, or capital expenditure requirements.
If the Merger Agreement is terminated under certain specified circumstances, we
will be required to pay Microsoft a termination fee of $515.0 million (including
in connection with our entry into an agreement with respect to a Superior
Proposal, as defined in the Merger Agreement, if certain conditions are met).
The consummation of the Merger remains subject to customary closing conditions
including approval of the Merger Agreement by our stockholders, satisfaction of
certain regulatory approvals and other customary closing conditions, but it is
currently intended to close by December 31, 2021 .
For additional information related to the Merger Agreement, please refer to the
definitive proxy statement and other relevant materials in connection with the
transaction that we will file with the SEC and which will contain important
information about Nuance and the Merger.
Key Metrics
In evaluating the financial condition and operating performance of our business,
management focuses on revenue, net income (loss), gross margins, operating
margins, cash flow from operations, and changes in deferred revenue. A summary
of key financial metrics for the six months ended March 31, 2021 , as compared to
the six months ended March 31, 2020 , is as follows:
•Total revenues were $692.7 million for the six months ended March 31, 2021 , as
compared to $677.4 million for the six months ended March 31, 2020 ;
•Net income from continuing operations for the six months ended March 31, 2021
was $19.7 million , compared to net income from continuing operations of $17.1
million for the six months ended March 31, 2020 ;
•Gross margins for the six months ended March 31, 2021 were 62.7%, compared to
59.6% for the six months ended March 31, 2020 ;
•Operating margins for the six months ended March 31, 2021 were 10.3%, compared
to 7.0% for six months ended March 31, 2020 ; and
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•Operating cash flows from continuing operations increased by $27.0 million to
$142.5 million for the six months ended March 31, 2021 , compared to $115.5
million for the six months ended March 31, 2020 .
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 March 31, Dollar Percent
2021 2020 Change Change
Hosting and professional services $ 198.0 $ 182.1 $ 15.8 8.7 %
Product and licensing 85.8 69.6 16.2 23.4 %
Maintenance and support 63.2 64.2 (1.0) (1.6) %
Total revenues $ 347.0 $ 315.9 $ 31.1 9.8 %
United States $ 278.0 $ 246.2 $ 31.8 12.9 %
International 69.0 69.8 (0.8) (1.1) %
Total revenues $ 347.0 $ 315.9 $ 31.1 9.8 %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Hosting and professional services $ 393.8 $ 356.1 $ 37.7 10.6 %
Product and licensing 171.8 194.6 (22.7) (11.7) %
Maintenance and support 127.1 126.8 0.3 0.2 %
Total revenues $ 692.7 $ 677.4 $ 15.3 2.3 %
United States $ 550.6 $ 543.5 $ 7.0 1.3 %
International 142.2 133.9 8.3 6.2 %
Total revenues $ 692.7 $ 677.4 $ 15.3 2.3 %
The geographic split was 80% of total revenues in the United States and 20%
internationally for the three months ended March 31, 2021 , as compared to 78% of
total revenues in the United States and 22% internationally for the three months
ended March 31, 2020 .
The geographic split was 79% of total revenues in the United States and 21%
internationally for the six months ended March 31, 2021 , as compared to 80% of
total revenues in the United States and 20% internationally for the six months
ended March 31, 2020 .
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):
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Three Months Ended March 31, Dollar Percent
2021 2020 Change Change
Hosting revenue $ 171.9 $ 151.8 $ 20.2 13.3 %
Professional services revenue 26.0 30.4 (4.3) (14.3) %
Hosting and professional services revenue $ 198.0 $ 182.1 $ 15.8 8.7 %
As a percentage of total revenue 57.1 % 57.7 %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Hosting revenue $ 339.3 $ 298.1 $ 41.1 13.8 %
Professional services revenue 54.5 57.9 (3.4) (5.9) %
Hosting and professional services revenue $ 393.8 $ 356.1 $ 37.7 10.6 %
As a percentage of total revenue 56.8 % 52.6 %
Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 Hosting revenue for the three months endedMarch 31, 2021 increased by$20.2 million , or 13.3%, primarily due to a$25.4 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenue, hosting revenue increased from 48.0% to 49.6% for the three months endedMarch 31, 2021 . Professional services revenue for the three months endedMarch 31, 2021 decreased by$4.3 million , or 14.3%, primarily due to a$3.0 million decrease in Enterprise. Enterprise professional services revenue decreased primarily due to a decrease in professional services related to the voice engagement suite of products. As a percentage of total revenue, professional services revenue decreased from 9.6% to 7.5% for the three months endedMarch 31, 2021 . Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 Hosting revenue for the six months endedMarch 31, 2021 increased by$41.1 million , or 13.8%, primarily due to a$48.0 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenue, hosting revenue increased from 44.0% to 49.0% for the six months endedMarch 31, 2021 . Professional services revenue for the six months endedMarch 31, 2021 decreased by$3.4 million , or 5.9%, primarily due to the decrease in professional services related to the voice engagement suite of products. As a percentage of total revenue, professional services revenue decreased from 8.6% to 7.9% for the six months endedMarch 31, 2021 . Product and Licensing Revenue Product and licensing revenue primarily consist of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended March 31, Dollar Percent 2021 2020 Change Change Product and licensing revenue$ 85.8 $ 69.6 $ 16.2 23.4 % As a percentage of total revenue 24.7 % 22.0 % Six Months Ended March 31, Dollar Percent 2021 2020 Change Change Product and licensing revenue$ 171.8 $ 194.6
As a percentage of total revenue 24.8 % 28.7 % Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 Product and licensing revenue for the three months endedMarch 31, 2021 increased by$16.2 million , or 23.4%, primarily due to an$18.1 million increase in Healthcare. Healthcare product and licensing revenue increased primarily due to a non-strategic 36 -------------------------------------------------------------------------------- Table of Contents legacy term license contract. As a percentage of total revenue, product and licensing revenue increased from 22.0% to 24.7% for the three months endedMarch 31, 2021 . Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 Product and licensing revenue for the six months endedMarch 31, 2021 decreased by$22.7 million , or 11.7%, primarily due to a$19.0 million decrease in Healthcare. Healthcare product and licensing revenue decreased primarily due to a non-strategic legacy term license contract. Also contributing to the decrease is the continued transition from a license model to a cloud based model within our Healthcare segment. As a percentage of total revenue, product and licensing revenue decreased from 28.7% to 24.8% for the six months endedMarch 31, 2021 . Maintenance and Support Revenue Maintenance and support revenue primarily consist of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended March 31, Dollar Percent 2021 2020 Change Change Maintenance and support revenue$ 63.2 $ 64.2 $ (1.0) (1.6) % As a percentage of total revenue 18.2 % 20.3 % Six Months Ended March 31, Dollar Percent 2021 2020 Change Change Maintenance and support revenue$ 127.1 $ 126.8
As a percentage of total revenue 18.3 % 18.7 % Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 Maintenance and support revenue for the three months endedMarch 31, 2021 decreased by$1.0 million , or 1.6%, primarily driven by the continued transition from software sold with maintenance and support to cloud-based solutions in Healthcare. As a percentage of total revenue, maintenance and support revenue decreased from 20.3% to 18.2% for the three months endedMarch 31, 2021 . Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 Maintenance and support revenue for the six months endedMarch 31, 2021 increased by$0.3 million , or 0.2%, primarily due to an increased volume in digital engagement and security biometrics license transactions in Enterprise. COSTS AND EXPENSES Cost of Hosting and Professional Services Revenue Cost of hosting and professional services revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of hosting and professional services revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions): Three Months Ended March 31, Dollar Percent 2021 2020 Change Change Cost of hosting and professional services revenue$ 106.0 $ 100.4 $ 5.6 5.6 % As a percentage of professional services and hosting revenue 53.5 % 55.1 % Six Months Ended March 31, Dollar Percent 2021 2020 Change Change Cost of hosting and professional services revenue$ 211.6 $ 201.7 $ 9.9 4.9 % As a percentage of professional services and hosting revenue 53.7 % 56.7 % 37
-------------------------------------------------------------------------------- Table of Contents Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 Cost of hosting and professional services revenue for the three months endedMarch 31, 2021 increased by$5.6 million , or 5.6%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin increased by 1.6 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive. Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 Cost of hosting and professional services revenue for the six months endedMarch 31, 2021 increased by$9.9 million , or 4.9%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin increased by 2.9 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive. Cost of Product and Licensing Revenue Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions): Three Months Ended March 31, Dollar Percent 2021 2020 Change Change Cost of product and licensing revenue $ 8.5$ 9.1 $ (0.6) (6.9) % As a percentage of product and licensing revenue 9.9 % 13.1 % Six Months Ended March 31, Dollar Percent 2021 2020 Change Change Cost of product and licensing revenue$ 22.9 $ 43.0 $ (20.2) (46.8) % As a percentage of product and licensing revenue 13.3 %
22.1 %
Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 Cost of product and licensing revenue for the three months endedMarch 31, 2021 decreased by$0.6 million , or 6.9%. Gross margin increased by 3.2 percentage points, primarily due to higher licensing revenue on relatively flat licensing costs in Enterprise. Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 Cost of product and licensing revenue for the six months endedMarch 31, 2021 decreased by$20.2 million , or 46.8%. Gross margin increased by 8.8 percentage points year-over-year. The decrease in cost and increase in gross margin were primarily due to higher royalty costs related to a legacy term license transaction in Healthcare for the first quarter of fiscal year 2021. 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 March 31, Dollar Percent 2021 2020 Change Change Cost of maintenance and support revenue $ 7.3$ 8.0 $ (0.7) (9.3) % As a percentage of maintenance and support revenue 11.5 % 12.5 % Six Months Ended March 31, Dollar Percent 2021 2020 Change Change Cost of maintenance and support revenue$ 14.8 $ 15.9 $ (1.1) (7.1) % As a percentage of maintenance and support revenue 11.6 % 12.5 % 38
-------------------------------------------------------------------------------- Table of Contents Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 Cost of maintenance and support revenue for the three months endedMarch 31, 2021 decreased by$0.7 million , or 9.3%, 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 driven by higher margin on Dragon Medical maintenance and support services in Healthcare. Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 Cost of maintenance and support revenue for the six months endedMarch 31, 2021 decreased by$1.1 million , or 7.1%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margins increased by 0.9 percentage points primarily driven by higher margin on Dragon Medical maintenance and support services in Healthcare. Research and Development Expense Research and development ("R&D") expense primarily consists of salaries, benefits, and overhead relating to engineering staff as well as third party engineering costs. The following table shows R&D expense, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended March 31, Dollar Percent 2021 2020 Change Change Research and development expense$ 59.5 $ 56.1 $ 3.4 6.1 % As a percentage of total revenue 17.1 % 17.8 % Six Months Ended March 31, Dollar Percent 2021 2020 Change Change Research and development expense$ 116.0 $ 110.7
As a percentage of total revenue 16.7 % 16.3 % Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 R&D expense increased by$3.4 million , or 6.1%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions. Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 R&D expense increased by$5.3 million , or 4.8%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions. Sales and Marketing Expense Sales and marketing expense include salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a percentage of total revenues (dollars in millions): 39
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Three Months Ended March 31, Dollar Percent
2021 2020 Change Change
Sales and marketing expense $ 70.3 $ 70.2 $ 0.2 0.2 %
As a percentage of total revenue 20.3 % 22.2 %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Sales and marketing expense $ 135.7 $ 136.0 $ (0.2) (0.2) %
As a percentage of total revenue 19.6 % 20.1 %
Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
Sales and marketing expense for the three months ended March 31, 2021 increased
by $0.2 million , or 0.2%, primarily due to our investment in sales force to
support new products and solutions.
Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020
Sales and marketing expense for the six months ended March 31, 2021 decreased by
$0.2 million , or 0.2%, primarily due to lower traveling and entertainment
expenses, mostly 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 March 31, Dollar Percent
2021 2020 Change Change
General and administrative expense $ 35.8 $ 38.0 $ (2.3) (6.0) %
As a percentage of total revenue 10.3 % 12.0 %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
General and administrative expense $ 76.9 $ 76.4 $ 0.5 0.7 %
As a percentage of total revenue 11.1 % 11.3 %
Three Months EndedMarch 31, 2021 compared to Three Months EndedMarch 31, 2020 G&A expense decreased by$2.3 million , or 6.0%, primarily driven by decreases in professional services costs due to our cost savings initiatives, and lower traveling and entertainment expenses. Six Months EndedMarch 31, 2021 compared to Six Months EndedMarch 31, 2020 G&A expense increased by$0.5 million , or 0.7%, primarily driven by increases in compensation and professional services costs, offset in part by lower traveling and entertainment expenses. 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): 40
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Three Months Ended March 31, Dollar Percent
2021 2020 Change Change
Cost of revenue $ 4.9 $ 6.6 $ (1.6) (24.8) %
Operating expenses 10.8 8.5 2.2 26.1 %
Total amortization expense $ 15.7 $ 15.1 $ 0.6 4.0 %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Cost of revenue $ 9.2 $ 13.1 $ (3.9) (30.0) %
Operating expenses 21.3 17.7 3.6 20.1 %
Total amortization expense $ 30.5 $ 30.8 $ (0.4) (1.2) %
The increases in the three months ended March 31, 2021 of total amortization of
intangible assets was primarily due to the amortization of acquired technology
assets from the recent acquisition. The decrease in six months ended March 31,
2021 of total amortization of intangible assets was primarily due to the certain
intangible assets having been fully amortized or written off during fiscal year
2021.
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 March 31, Dollar Percent
2021 2020 Change Change
Transition and integration costs $ 1.1 $ 1.4 $ (0.2) (16.4) %
Professional service fees 0.5 0.3 0.2 68.9 %
Total Acquisition-related costs, net $ 1.7 $ 1.7 $ - (0.5) %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Transition and integration costs $ 1.2 $ 2.8 $ (1.6) (57.0) %
Professional service fees 0.8 0.1 0.7 887.3 %
Total Acquisition-related costs, net $ 2.0 $ 2.9 $ (0.9) (31.2) %
The decrease in acquisition-related cost, net for the three and six months ended
March 31, 2021 , as compared to prior-year periods, was primarily due to overall
reduced acquisition and integration activities as we focus on portfolio
optimization and organizational simplification.
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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 March 31,
2021 2020
Other
Personnel Facilities Total Restructuring Other Charges Total Personnel Facilities Total Restructuring Charges Total
Healthcare $ 702 $ 114 $ 816 $ - $ 816 $ 353 $ 248 $ 601 $ - $ 601
Enterprise 82 2,732 2,814 - 2,814 233 213 446 - 446
Other - 139 139 - 139 - 54 54 - 54
Corporate 323 18 341 (1,631) (1,290) 683 883 1,566 3,509 5,075
Total $ 1,107 $ 3,003 $ 4,110 $ (1,631) $ 2,479 $ 1,269 $ 1,398 $ 2,667 $ 3,509 $ 6,176
Six Months Ended March 31,
2021 2020
Other
Personnel Facilities Total Restructuring Other Charges Total Personnel
Facilities Total Restructuring Charges Total
Healthcare $ 3,334 $ 681 $ 4,015 $ - $ 4,015 $ 1,629 $ 1,775 $ 3,404 $ - $ 3,404
Enterprise 1,264 5,204 6,468 - 6,468 1,537 718 2,255 - 2,255
Other - 168 168 - 168 - (311) (311) - (311)
Corporate 1,298 21 1,319 (925) 394 1,016 351 1,367 6,144 7,511
Total $ 5,896 $ 6,074 $ 11,970 $ (925) $ 11,045 $ 4,182 $ 2,533 $ 6,715 $ 6,144 $ 12,859
Fiscal Year 2021
For the six months ended March 31, 2021 , we recorded restructuring charges of
$12.0 million , which included $5.9 million related to the termination of
approximately 79 employees and $6.1 million of charges related to closing
certain idle facilities. Of these amounts, $4.1 million was recorded for the
three months ended March 31, 2021 , which included $1.1 million related to the
termination of approximately 22 employees and $3.0 million charge related to
closing certain idle facilities. These actions were part of our strategic
initiatives focused on investment rationalization, process optimization and cost
reduction as we continue to evaluate the geographic footprint of our offices and
facilities. We expect the remaining outstanding severance of $1.6 million to be
substantially paid during fiscal year 2021, and the remaining $16.8 million
lease payments to be made through fiscal year 2027, in accordance with the terms
of the applicable leases.
Additionally, for the six months ended March 31, 2021 , we recorded $0.9 million
for professional service receipts related to other corporate initiatives, of
which we recorded $1.6 million during the three months ended March 31, 2021 .
Fiscal Year 2020
For the six months ended March 31, 2020 , we recorded restructuring charges of
$6.7 million , which included $4.2 million related to the termination of
approximately 51 employees and $2.5 million related to certain restructuring
facilities. Of these amounts, $2.7 million was recorded for the three months
ended March 31, 2020 , which included $1.3 million related to the termination of
approximately 14 employees and $1.4 million related to certain restructuring
facilities. These actions were part of our strategic initiatives focused on
investment rationalization, process optimization and cost reduction.
Additionally, for the six months ended March 31, 2020 , we recorded $4.2 million
of costs related to the separation of our Automotive business and $2.0 million
related to the impairment of a right-of-use asset of a restructuring facility,
offset in part by a $0.1 million cash receipt from insurance claims related to a
malware incident that occurred in the third quarter of fiscal year 2017 (the
"2017 Malware Incident"). Of these amounts, we recorded $1.4 million costs
related to the separation of our Automotive business, $2.0 million related to
the impairment of a right-of-use asset of a restructuring facility, and a
$0.1 million cash expense from insurance claims related to the 2017 Malware
Incident for the three months ended March 31, 2020 . The $2.0 million impairment
charge for the three and six months ended March 31, 2020 was related to a
restructuring facility as we re-assessed the timing and fees of the assumed
sublease as a result of the COVID-19 pandemic.
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Other Income (Expense), Net
A summary is as follows (dollars in millions):
Three Months Ended March 31, Dollar Percent
2021 2020 Change Change
Interest income $ 0.2 $ 1.5 $ (1.3) (88.4) %
Interest expense (23.1) (23.6) 0.6 (2.4) %
Other income (expense), net 0.6 (1.7) 2.3 (134.5) %
Total other expense, net $ (22.3) $ (23.8) $ 1.5 (6.3) %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Interest income $ 0.4 $ 3.7 $ (3.3) (89.1) %
Interest expense (46.1) (47.4) 1.4 (2.9) %
Other income (expense), net 1.1 (13.7) 14.8 (107.9) %
Total other expense, net $ (44.6) $ (57.5) $ 12.9 (22.4) %
Interest income for the three and six months ended March 31, 2021 decreased
primarily due to lower yields and decreases in cash and marketable securities
for the current year period.
Interest expense for the three and six months ended March 31, 2021 decreased as
we repaid $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 and six months ended March 31, 2021 decreased
primarily due to losses on redemption and repurchases of debt in the second
quarter of fiscal year 2020.
Provision (Benefit) for Income Taxes
The following table shows the provision (benefit) for income taxes on continuing
operations and the effective income tax rate (dollars in millions):
Three Months Ended March 31, Dollar Percent
2021 2020 Change Change
Provision for income taxes $ 4.8 $ 13.9 $ (9.0) (65.2) %
Effective income tax rate 27.5 % (110.0) %
Six Months Ended March 31, Dollar Percent
2021 2020 Change Change
Provision (benefit) for income taxes $ 7.1 $ (27.4) $ 34.6 (126.0) %
Effective income tax rate 26.6 % 266.7 %
The effective income tax rate is based upon the income for the year, the
geographic mix of our income, the composition of the income in different
countries, changes relating to valuation allowances and the potential tax
consequences of resolving audits or other tax contingencies.
Our effective income tax rate was 27.5% for the three months ended March 31,
2021 , compared to (110.0)% for the three months ended March 31, 2020 . The
effective tax rate for the three months ended March 31, 2021 differed from the
U.S. federal statutory rate of 21.0% primarily due to the base erosion
anti-abuse tax offset by a change in the valuation allowance in the United
States . The effective tax rate for the three months ended March 31, 2020
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 and a foreign
uncertain tax position reserve.
Our effective income tax rate was 26.6% for the six months ended March 31, 2021 ,
compared to 266.7% for the six months ended March 31, 2020 . The effective tax
rate for the six months ended March 31, 2021 differed from the U.S. federal
statutory
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rate of 21.0% primarily due to the base erosion anti-abuse tax offset by a
change in the valuation allowance in the United States . The effective tax rate
for the six months ended March 31, 2020 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 .
Valuation Allowances
As of March 31, 2021 and September 30, 2020 , we had a full valuation allowance
against net domestic deferred tax assets and certain foreign deferred tax
assets. We intend to maintain valuation allowances on these deferred tax assets
until there is sufficient evidence to support the release of all or some portion
of these allowances. A significant portion of our domestic deferred tax assets
relate to U.S. net operating losses. The company continues to believe its
negative evidence outweighs its positive evidence after considering recent
profitability trends and the disposition of the medical transcription and EHR
implementation businesses. The Company continues to evaluate all sources of
domestic taxable income including both the reversal of existing deferred tax
liabilities and the likelihood that we could sustain pretax profitability in the
future. As of March 31, 2021 , we believe that there is a reasonable possibility
that within the next twelve months these sources of taxable income may become
sufficient positive evidence to support a conclusion that a substantial portion
of the domestic valuation allowance, excluding capital losses, could be
released.
Net (Loss) Income from Discontinued Operations
Disposition of Our Medical Transcription and EHR Implementation businesses
On November 17, 2020 , we entered into the Agreement to sell the Business,
comprised of our medical transcription and EHR implementation businesses to
Assured Healthcare Partners and Aeries Technology Group (together, the "Buyer").
Pursuant to the Agreement, we sold and transferred, and the Buyer purchased and
acquired, (a) the shares of certain subsidiaries through which we operate a
portion of the Business and (b) certain assets used in or related to the
Business; and the Buyer assumed certain liabilities related to such assets of
the Business, subject to certain exclusions and indemnities as set forth in the
Agreement.
On March 1, 2021 , we completed the sale of the Business and received
approximately $29.8 million in cash, subject to post-closing finalization of the
adjustments set forth in the Agreement. As a result, we recorded a loss of
$12.5 million , which is included within net (loss) income from discontinued
operations. There are a number of working capital and other adjustments under
the Agreement and related ancillary agreements. We do not believe that
post-closing working capital adjustments under the Agreement, if any, will have
a material impact on our results of operations.
For all periods presented, the Businesses' results of operations have been
included within discontinued operations in our condensed consolidated financial
statements.
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SEGMENT ANALYSISThe following table presents certain financial information about our operating segments (dollars in millions):
Three Months Ended March 31, Change Percent
2021 2020 Change
Segment Revenues (a):
Healthcare $ 211.9 $ 171.0 $ 40.9 23.9 %
Enterprise 130.0 137.4 (7.4) (5.4) %
Other 5.1 7.7 (2.6) (34.0) %
Total segment revenues $ 347.0 $ 316.1 $ 30.8 9.8 %
Less: acquisition related revenues adjustments - (0.2) 0.2 (100.0) %
Total revenues $ 347.0 $ 315.9 $ 31.1 9.8 %
Segment Profit:
Healthcare $ 85.2 $ 53.3 $ 32.0 60.0 %
Enterprise 32.6 38.0 (5.4) (14.2) %
Other 2.4 3.8 (1.4) (36.6) %
Total segment profit $ 120.3 $ 95.2 $ 25.1 26.4 %
Segment Profit Margin:
Healthcare 40.2 % 31.2 % 9.1
Enterprise 25.1 % 27.7 % (2.6)
Other 47.7 % 49.7 % (2.0)
Total segment profit margin 34.7 % 30.1 % 4.6
Six Months Ended March 31, Change Percent
2021 2020 Change
Segment Revenues (a):
Healthcare $ 411.2 $ 384.8 $ 26.4 6.9 %
Enterprise 269.1 275.9 (6.8) (2.5) %
Other 12.4 17.0 (4.7) (27.4) %
Total segment revenues $ 692.7 $ 677.7 $ 15.0 2.2 %
Less: acquisition related revenues adjustments - (0.3) 0.3 (100.0) %
Total revenues $ 692.7 $ 677.4 $ 15.3 2.3 %
Segment Profit:
Healthcare $ 160.0 $ 127.0 $ 33.0 26.0 %
Enterprise 74.1 79.8 (5.7) (7.2) %
Other 7.4 8.9 (1.5) (17.3) %
Total segment profit $ 241.5 $ 215.7 $ 25.8 12.0 %
Segment Profit Margin:
Healthcare 38.9 % 33.0 % 5.9
Enterprise 27.5 % 28.9 % (1.4)
Other 59.9 % 52.6 % 7.3
Total segment profit margin 34.9 % 31.8 % 3.0
(a)Segment revenues differ from reported revenues due to certain revenue
adjustments related to acquisitions that would otherwise have been recognized
but for the purchase accounting treatment of the business combinations. These
revenues are included to allow for more complete comparisons to the financial
results of historical operations and in evaluating management performance.
Segment Revenues
Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
•Healthcare segment revenue increased by $40.9 million , or 23.9%, driven
primarily by the timing of non-strategic healthcare coding contract renewal with
the government and growth in Dragon Medical cloud. Revenue from Dragon
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Medical cloud and DAX cloud-based solutions increased by $20.6 million , or
30.5%, to $88.2 million for the three months ended March 31, 2021 from $67.6
million for the three months ended March 31, 2020 , primarily due to the
continued market penetration and customer transition of Dragon Medical One.
•Enterprise segment revenue decreased by $7.4 million , or 5.4%, primarily due to
the timing of licensing transactions.
•Other segment revenue decreased by $2.6 million , or 34.0%, as we continue to
wind down our Other segment.
Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020
•Healthcare segment revenue increased by $26.4 million , or 6.9%, driven
primarily by growths in Dragon Medical cloud, offset in part by a decline in
Coding business. Revenue from Dragon Medical cloud and DAX cloud-based solutions
increased by $35.4 million , or 26.5%, to $168.8 million for the six months ended
March 31, 2021 from $133.4 million for the six months ended March 31, 2020 ,
primarily due to the continued market penetration and customer transition of
Dragon Medical One.
•Enterprise segment revenue decreased by $6.8 million , or 2.5%, primarily due to
the timing of licensing transactions.
•Other segment revenue decreased by $4.7 million , or 27.4%, as we continue to
wind down our Other segment.
Segment Profit
Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
•Healthcare segment profit increased by $32.0 million , or 60.0%, primarily
driven by revenue growth in Dragon Medical cloud and revenue increases in the
Coding business due to timing of non-strategic term license contracts. Segment
profit margin increased by 9.1 percentage points to 40.2%, primarily driven by
the growth in our Dragon Medical cloud-based solution, which is margin
accretive.
•Enterprise segment profit decreased by $5.4 million , or 14.2%, as lower segment
revenue was only partially offset by lower cost of sales and sales expenses. The
decrease in sales expense was primarily due to lower compensation costs and
traveling and entertainment expenses. Segment profit margin decreased by 2.6
percentage points to 25.1%, primarily due to lower segment revenues, offset in
part by cost savings in cost of sales and operating expenses.
•Other segment profit decreased by $1.4 million , or 36.6%, as we continue to
wind down our Other segment. Segment profit margin decreased by 2.0 percentage
points to 47.7%.
Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020
•Healthcare segment profit increased by $33.0 million , or 26.0%, primarily
driven by revenue growth in Dragon Medical cloud and revenue increases in the
Coding business due to timing of non-strategic term license contracts. Segment
profit margin increased by 5.9 percentage points to 38.9%, primarily driven by
the growth in our Dragon Medical cloud-based solution, which is margin
accretive.
•Enterprise segment profit decreased by $5.7 million , or 7.2%, as lower segment
revenue was only partially offset by lower cost of sales and sales expenses.
Segment profit margin decreased by 1.4 percentage points to 27.5%, primarily due
to lower segment revenues, offset in part by cost savings in cost of sales and
operating expenses.
•Other segment profit decreased by $1.5 million , or 17.3%, as we continue to
wind down our Other segment. Segment profit margin increased by 7.3 percentage
points to 59.9%.
LIQUIDITY AND CAPITAL RESOURCESLiquidity
We had cash and cash equivalents and marketable securities of$414.4 million as ofMarch 31, 2021 , an increase of$42.1 million from$372.3 million as ofSeptember 30, 2020 . Our working capital, defined as total current assets less total current liabilities from continuing operations, was$(803.8) million as ofMarch 31, 2021 , compared to$(256.5) million as ofSeptember 30, 2020 . Our working capital included$1,065.2 million and$432.2 million convertible debt as ofMarch 31, 2021 andSeptember 30, 2020 , respectively. As ofMarch 31, 2021 , we had$297.8 million available for borrowing under our revolving credit facility. OnFebruary 4, 2021 , we entered into the New Revolving Credit Agreement, which replaced our existing Amended Revolving Credit Agreement. The New Revolving Credit Agreement expiresFebruary 4, 2026 , and increases 46 -------------------------------------------------------------------------------- Table of Contents the aggregate borrowing commitments to$300.0 million . 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$54.0 million as ofMarch 31, 2021 and$60.9 million as ofSeptember 30, 2020 . We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and 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. Disposition of Our Medical Transcription and EHR Implementation Businesses In connection with our ongoing comprehensive portfolio and business review, onNovember 17, 2020 , we entered into a definitive agreement to sell our medical transcription and EHR implementation businesses. OnMarch 1, 2021 , we completed the sale of the Business and received approximately$29.8 million in cash, subject to post-closing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of$12.5 million , which is included within Net income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations. Convertible Debentures During the second quarter of fiscal year 2021, our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days endingMarch 31, 2021 . As a result, the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures betweenApril 1, 2021 andJune 30, 2021 . Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes inNovember 2021 . All three convertible notes with a total net book value of$1.07 billion was included within current liabilities as ofMarch 31, 2021 . Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. Although the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures previously had the right to convert their debentures betweenJanuary 1, 2021 andMarch 31, 2021 as our common stock price exceeded 130% of the applicable conversion price for these debentures for at least 20 trading days during the 30 consecutive trading days endingDecember 31, 2020 , there were no material exercises of the conversion rights during the second quarter endedMarch 31, 2021 . Subsequent to the balance sheet date, holders of our 1.5% 2035 Debentures submitted conversion notices with a total value of approximately$118.3 million . Our convertible debentures are actively traded in the open market. The 1.25% 2025 Debentures trade at a price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders of the 1.25% 2025 Debentures to early exercise their conversion rights. In the event that holders of any of our debentures presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities. Net Cash Provided by Operating Activities Cash provided by operating activities for the six months endedMarch 31, 2021 was$149.6 million , an increase of$8.2 million from$141.4 million cash provided for the six months endedMarch 31, 2020 . The increase was primarily due to: •An increase of$24.2 million in cash provided due to favorable changes in working capital, primarily due to the timing of cash collections and cash payments; and •An increase of$28.4 million in cash provided due to higher income before non-cash charges; offset in part by, •A decrease of$25.6 million in cash provided from changes in deferred revenue. Deferred revenue had a negative effect of$1.0 million on operating cash flows for the six months endedMarch 31, 2021 , as compared to a positive effect of$24.6 million for the six months endedMarch 31, 2020 ; and 47 -------------------------------------------------------------------------------- Table of Contents •A decrease of$18.8 million in cash flows from discontinued operations.Net Cash (Used in) Provided by Investing Activities Cash used in investing activities for the six months endedMarch 31, 2021 was$68.0 million , a decrease of$114.2 million from$46.3 million cash provided for the six months endedMarch 31, 2020 . The decrease was primarily due to: •An increase of$1.5 million in cash used for capital expenditures; and •An increase of$45.2 million in cash used for payments for business and asset acquisitions; and •A decrease of$76.6 million in net proceeds from the sale and purchase of marketable securities and other investments; and •A decrease of$0.8 million in cash provided by other investing activities; offset in part by, •Net proceeds of$9.9 million from the sale of our medical transcription and EHR implementation businesses.Net Cash Used in Financing Activities Cash used in financing activities for the six months endedMarch 31, 2021 was$42.8 million , a decrease of$303.1 million from$345.9 million cash used for the six months endedMarch 31, 2020 . The decrease was primarily due to: •A decrease of$513.6 million in cash used for the repayment and redemption of debt; and •A decrease of$169.2 million in cash used for share repurchases; offset in part by, •A net contribution of$139.1 million from Cerence in connection with the spin-off of our Automotive business during the first quarter of fiscal year 2020; and •A decrease of$230.0 million in proceeds from the revolving credit facility; and •An increase of$12.5 million in cash used for payments for taxes related to net share settlement of equity awards. Debt For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 11 to the accompanying condensed consolidated financial statements. As ofMarch 31, 2021 , we were in compliance with all the debt covenants. We may from time to time, depending on market and business conditions, repurchase outstanding debt in the open market or by private negotiation. We expect to incur cash interest payments of approximately$20.8 million for the remainder of fiscal year 2021, based on the stated yields and the outstanding debt principals as ofMarch 31, 2021 . 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 and six months endedMarch 31, 2021 . We repurchased 3.8 million shares of our common stock for$76.8 million for the three months endedMarch 31, 2020 and 9.5 million shares of our common stock for$169.2 million for the six months endedMarch 31, 2020 . The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased 73.8 million shares for$1,238.8 million . As ofMarch 31, 2021 , approximately$261.2 million remained available for future repurchases under the program. Off-Balance Sheet Arrangements, Contractual Obligations 48 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table outlines our contractual payment obligations (dollars in millions):
Contractual Payments Due in Fiscal Year
Remainder of
Contractual Obligations Total 2021 2022 and 2023 2024 and 2025 Thereafter
Convertible debentures (1) $ 1,166.5 $ 1,166.5 $ - $ - $ -
Senior notes (2) 500.0 - - - 500.0
Interest payable on long-term debt (3) 195.8 20.8 71.6 61.2 42.2
Letters of credit (4) 2.2 2.2 - - -
Lease obligations and other liabilities:
Operating leases (5) 120.5 13.2 39.3 24.5 43.5
Operating leases under restructuring 15.6 2.4 7.8 3.6 1.8
Purchase commitments for inventory,
property and equipment (6) 121.7 38.5 83.2 - -
Total contractual cash obligations $ 2,122.3 $
1,243.6
(1)As ofMarch 31, 2021 , the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures betweenApril 1, 2021 andJune 30, 2021 . Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes inNovember 2021 . As a result, these convertible debentures were treated as if they were due in fiscal year 2021. (2)The repayment schedule reflects all the senior notes outstanding as ofMarch 31, 2021 . (3)Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as ofMarch 31, 2021 , the stated interest rate of each debt instrument and the assumed redemption dates discussed above. (4)Letters of credit are in place primarily to secure future operating lease payments. (5)Obligations include contractual lease commitments related to facilities that have subsequently been subleased. As ofMarch 31, 2021 , we have subleased certain facilities with total sublease income of$11.0 million through fiscal year 2027. (6)These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customer backlog. Total unrecognized tax benefits as ofMarch 31, 2021 were$59.4 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 predetermined 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 ofMarch 31, 2021 , we may be required to pay the selling stockholders up to$3.0 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 ofMarch 31, 2021 , the remaining deferred payment obligations of$16.2 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 ThroughMarch 31, 2021 , 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, 2020 . There has been no material change to our critical accounting policies sinceSeptember 30, 2020 . 49 -------------------------------------------------------------------------------- Table of Contents RECENTLY ADOPTED ACCOUNTING STANDARDS AND ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED See 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, and Indian rupee. Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As ofMarch 31, 2021 , we had not designated any contracts as fair value or cash flow hedges. The contracts generally have a maturity of less than 90 days. As ofMarch 31, 2021 , the notional contract amount of outstanding foreign currency exchange contracts was$25.0 million . Interest Rate Sensitivity We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities. AtMarch 31, 2021 , we held approximately$414.4 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$4.1 million per annum, based on the balances of cash and cash equivalents and marketable securities as ofMarch 31, 2021 . 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$43.64 as ofMarch 31, 2021 (dollars in millions): 50
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March 31, 2021
Conversion Increase to Increase to
Fair value value fair value conversion value1.5% 2035 Debentures$ 482.3 $ 481.5 $ 47.2 $ 48.1 1.0% 2035 Debentures$ 1,252.6 $ 1,223.9 $ 110.3 $ 122.4 1.25% 2025 Debentures$ 597.7 $ 582.2 $ 52.8 $ 58.2
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