| BUSINESS COMBINATIONS | BUSINESS COMBINATIONS Year Ended January 31, 2017 Contact Solutions, LLC On February 19, 2016, we completed the acquisition of Contact Solutions, LLC ("Contact Solutions"), a provider of real-time, contextual self-service solutions, based in Reston, Virginia. The purchase price consisted of $66.9 million of cash paid at closing, and a $2.5 million post-closing purchase price adjustment based upon a determination of Contact Solutions' acquisition-date working capital, which was paid during the three months ended July 31, 2016. The cash paid for this acquisition was funded with cash on hand. The purchase price for Contact Solutions was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. Among the factors contributing to the recognition of goodwill as a component of the Contact Solutions purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Customer Engagement segment and is deductible for income tax purposes. In connection with the purchase price allocation for Contact Solutions, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $0.6 million of current and long-term deferred revenue, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not yet been received, we recorded a $2.9 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $1.2 million of which is included within prepaid expenses and other current assets, and $1.7 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value. Transaction and related costs directly related to the acquisition of Contact Solutions, consisting primarily of professional fees and integration expenses, were $1.4 million and $0.1 million for the years ended January 31, 2017 and 2016, respectively, and were expensed as incurred and are included in selling, general and administrative expenses. Revenue attributable to Contact Solutions included in our consolidated statement of operations for the year ended January 31, 2017 was not material. Contact Solutions reported a loss before provision (benefit) for income taxes of $8.5 million for the year ended January 31, 2017. OpinionLab, Inc. On November 16, 2016, we completed the acquisition of all of the outstanding shares of OpinionLab, Inc. ("OpinionLab"), a leading SaaS provider of omnichannel Voice of Customer (“VoC”) feedback solutions which help organizations collect, understand, and leverage customer insights, helping drive smarter, real-time business action. OpinionLab is based in Chicago, Illinois. The purchase price consisted of $56.4 million of cash paid at the closing, funded from cash on hand, partially offset by $6.4 million of OpinionLab's cash received in the acquisition, resulting in net cash consideration at closing of $50.0 million , and we agreed to pay potential additional future cash consideration of up to $28.0 million , contingent upon the achievement of certain performance targets over the period from closing through January 31, 2021, the acquisition date fair value of which was estimated to be $15.0 million . The purchase price is subject to customary purchase price adjustments related to the final determination of OpinionLab's cash, net working capital, transaction expenses, and taxes as of November 16, 2016. The acquired business is being integrated into our Customer Engagement operating segment. The purchase price for OpinionLab was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. Among the factors contributing to the recognition of goodwill as a component of the OpinionLab purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Customer Engagement segment and is not deductible for income tax purposes. In connection with the purchase price allocation for OpinionLab, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $3.1 million of current and long-term deferred revenue, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not yet been received, we recorded a $5.4 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $3.4 million of which is included within prepaid expenses and other current assets, and $2.0 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value. The purchase price allocation for OpinionLab has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available during the measurement period (up to one year from the acquisition date). Fair values still under review include values assigned to identifiable intangible assets and certain pre-acquisition loss contingencies. Transaction and related costs directly related to the acquisition of OpinionLab, consisting primarily of professional fees and integration expenses, were $0.6 million for the year ended January 31, 2017, and were expensed as incurred and are included in selling, general and administrative expenses. Revenue and (loss) income before provision (benefit) for income taxes attributable to OpinionLab included in our consolidated statement of operations for the year ended January 31, 2017 were not material. The following table sets forth the components and the allocation of the purchase price for our acquisitions of Contact Solutions and OpinionLab. (in thousands) Contact Solutions OpinionLab Components of Purchase Price: Cash paid at closing $ 66,915 $ 56,355 Fair value of contingent consideration — 15,000 Other purchase price adjustments 2,518 — Total purchase price $ 69,433 $ 71,355 Allocation of Purchase Price: Net tangible assets (liabilities): Accounts receivable $ 8,102 $ 748 Other current assets, including cash acquired 2,392 10,625 Property and equipment, net 7,007 298 Other assets 1,904 2,036 Current and other liabilities (4,943 ) (1,600 ) Deferred revenue - current and long-term (642 ) (3,082 ) Deferred Income Taxes - current and long-term — (9,995 ) Net tangible assets (liabilities) 13,820 (970 ) Identifiable intangible assets: Customer relationships 18,000 19,100 Developed technology 13,100 10,400 Trademarks and trade names 2,400 1,800 Total identifiable intangible assets 33,500 31,300 Goodwill 22,113 41,025 Total purchase price allocation $ 69,433 $ 71,355 For the acquisition of Contact Solutions, the acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of ten years , four years , and five years , respectively, the weighted average of which is approximately 7.3 years. For the acquisition of OpinionLab, the acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of ten years , six years , and four years , respectively, the weighted average of which is approximately 8.3 years. The weighted-average estimated useful life of all finite-lived identifiable intangible assets acquired during the year ended January 31, 2017 is 7.8 years. The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives. Other Business Combinations During the year ended January 31, 2017, we completed two transactions that qualified as business combinations in our Customer Engagement segment. These business combinations were not material to our consolidated financial statements individually or in the aggregate. Year Ended January 31, 2016 During the year ended January 31, 2016, we completed three business combinations: • On February 12, 2015, we completed the acquisition of a business that has been integrated into our Customer Engagement operating segment. • On May 1, 2015, we completed the acquisition of a business that has been integrated into our Cyber Intelligence operating segment. • On August 11, 2015, we acquired certain technology and other assets for use in our Customer Engagement operating segment in a transaction that qualified as a business combination. The combined consideration for these business combinations was approximately $49.5 million , including $33.2 million of combined cash paid at the closings. For one of these business combinations, we also agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $30.5 million , contingent upon the achievement of certain performance targets over periods extending through April 2020. The fair value of these contingent consideration obligations was estimated to be $16.2 million at the applicable acquisition date. Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $28.7 million of goodwill associated with these business combinations, $7.7 million and $21.0 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively. For income tax purposes, $5.1 million of this goodwill is deductible and $23.6 million is not deductible. $0.6 million and $1.4 million for the years ended January 31, 2017 and 2016, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. The purchase price allocations for business combinations completed during the year ended January 31, 2016 are final. The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the year ended January 31, 2016, including adjustments identified subsequent to the respective valuation dates, none of which were material: (in thousands) Amount Components of Purchase Prices: Cash $ 33,222 Fair value of contingent consideration 16,237 Total purchase prices $ 49,459 Allocation of Purchase Prices: Net tangible assets (liabilities): Accounts receivable $ 992 Other current assets, including cash acquired 4,274 Other assets 395 Current and other liabilities (3,037 ) Deferred revenue - current and long-term (1,872 ) Deferred income taxes - current and long-term (2,922 ) Net tangible liabilities (2,170 ) Identifiable intangible assets: Customer relationships 1,212 Developed technology 20,300 Trademarks and trade names 300 In-process research and development 1,100 Total identifiable intangible assets 22,912 Goodwill 28,717 Total purchase price allocations $ 49,459 five years to ten years, from four years to five years, and three years, respectively, the weighted average of which is approximately 4.4 years. Year Ended January 31, 2015 KANA Software, Inc. On February 3, 2014, we completed the acquisition of Sunnyvale, California-based KANA Software, Inc. and its subsidiaries ("KANA"), a leading global provider of on-premises and cloud-based solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market organizations. The purchase price consisted of $542.4 million of cash paid at the closing, partially offset by $25.1 million of KANA’s cash received in the acquisition, and a $0.7 million post-closing purchase price adjustment, resulting in net cash consideration of $516.6 million . The merger consideration was funded by a combination of cash on hand, $300.0 million of incremental term loans incurred in connection with an amendment to our Credit Agreement, and $125.0 million of borrowings under our 2013 Revolving Credit Facility (further details for which appear in Note 6, "Long-Term Debt"). KANA has been integrated into our Customer Engagement operating segment. Among the factors contributing to the recognition of goodwill as a component of the KANA purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Customer Engagement segment and while generally not deductible for income tax purposes, certain goodwill related to previous business combinations by KANA is deductible for income tax purposes. In connection with the purchase price allocation for KANA, the estimated fair value of undelivered performance obligations under customer contracts assumed in the merger was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $7.9 million of current and long-term deferred revenue, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not yet been received, we recorded an $18.6 million asset within prepaid expenses and other current assets as a component of the purchase price allocation. We are amortizing this asset over the underlying delivery periods for these obligations as a reduction to revenue, which reduces the revenue we recognize for providing these services to its estimated fair value. Transaction and related costs directly related to the acquisition of KANA, consisting primarily of professional fees and integration expenses, were $0.6 million , $3.2 million , and $10.0 million for the years ended January 31, 2017, 2016, and 2015, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. UTX Technologies Limited On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited (“UTX”), a provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was the supplier of these products to our Cyber Intelligence operating segment prior to the acquisition. The purchase price consisted of $82.9 million of cash paid at closing, and up to $1.5 million of potential future contingent consideration payments to UTX Limited, the acquisition date fair value of which was estimated to be $1.3 million . During the year ended January 31, 2015, $1.5 million of contingent consideration was paid to UTX Limited. UTX is based in the Europe, the Middle East and Africa (“EMEA”) region and has been integrated into our Cyber Intelligence operating segment. Among the factors contributing to the recognition of goodwill as a component of the UTX purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Cyber Intelligence segment and is not deductible for income tax purposes. Transaction and related costs directly related to the acquisition of UTX, consisting primarily of professional fees, integration expenses and related adjustments, were $2.5 million for the year ended January 31, 2015 and not material for the years ended January 31, 2017 and 2016. Such costs were expensed as incurred and are included in selling, general and administrative expenses. As a result of the UTX acquisition, we recorded a $2.6 million charge for the impairment of certain capitalized software development costs during the year ended January 31, 2015, reflecting strategy changes in certain product development initiatives. This charge is reflected within cost of product revenue. Purchase Price Allocations The following table sets forth the components and the allocations of the purchase prices for our acquisitions of KANA and UTX, including adjustments identified subsequent to the respective acquisition dates: (in thousands) KANA UTX Components of Purchase Prices: Cash, including post-closing adjustments $ 541,685 $ 82,901 Fair value of contingent consideration — 1,347 Total purchase prices $ 541,685 $ 84,248 Allocation of Purchase Prices: Net tangible assets (liabilities): Accounts receivable $ 18,473 $ — Other current assets, including cash acquired 49,707 3,799 Other assets 14,494 924 Current and other liabilities (17,851 ) (263 ) Deferred revenue - current and long-term (7,932 ) (340 ) Deferred income taxes - current and long-term (60,879 ) (4,882 ) Net tangible liabilities (3,988 ) (762 ) Identifiable intangible assets: Customer relationships 152,700 2,000 Developed technology 55,500 37,400 Trademarks and trade names 11,500 — Other intangible assets — 1,100 Total identifiable intangible assets 219,700 40,500 Goodwill 325,973 44,510 Total purchase price allocations $ 541,685 $ 84,248 For the acquisition of KANA, the acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of five to ten years, three to five years, and five years, respectively, the weighted average of which is approximately 8.1 years. For the acquisition of UTX, the acquired customer relationships, developed technology and other intangible assets were assigned estimated useful lives of three years, four years, and four years, respectively, the weighted average of which is approximately 4.0 years. The weighted-average estimated useful life of all finite-lived identifiable intangible assets acquired during the year ended January 31, 2015 is 7.4 years. The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives. Pro Forma Information The following table provides unaudited pro forma operating results for the year ended January 31, 2015, as if KANA and UTX had been acquired on February 1, 2014. These unaudited pro forma results reflect certain adjustments related to these acquisitions, including amortization expense on finite-lived intangible assets acquired from KANA and UTX, interest expense and fees associated with additional long-term debt incurred to partially fund the acquisition of KANA, and adjustments to recognize the fair value of revenue associated with performance obligations assumed in the acquisition of KANA. The unaudited pro forma results do not include any operating efficiencies or potential cost savings associated with these business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on February 1, 2014, nor are they indicative of future operating results. (in thousands, except per share amounts) Year Ended January 31, 2015 Revenue $ 1,158,141 Net income $ 29,644 Net income attributable to Verint Systems Inc. $ 24,173 Net income per common share attributable to Verint Systems Inc.: Basic $ 0.42 Diluted $ 0.41 Other Business Combination Information The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general and administrative expenses in our consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets. For the years ended January 31, 2017, 2016, and 2015, we recorded a charge of $7.3 million , a benefit of $0.9 million , and a charge of $0.9 million , respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was $52.7 million at January 31, 2017, of which $10.0 million was recorded within accrued expenses and other current liabilities, and $42.7 million was recorded within other liabilities. Payments of contingent consideration earned under these agreements were $3.3 million , $7.4 million , and $12.0 million for the years ended January 31, 2017, 2016, and 2015, respectively. |
