Attached files
file | filename |
---|---|
EX-3.1 - EXHIBIT 3.1 - BMC SOFTWARE INC | c03730exv3w1.htm |
EX-31.2 - EXHIBIT 31.2 - BMC SOFTWARE INC | c03730exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - BMC SOFTWARE INC | c03730exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - BMC SOFTWARE INC | c03730exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - BMC SOFTWARE INC | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - BMC SOFTWARE INC | c03730exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-16393
BMC Software, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 74-2126120 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
2101 CityWest Boulevard Houston, Texas |
77042-2827 | |
(Address of principal executive offices) | (Zip Code) |
(713) 918-8800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of July 26, 2010, there were outstanding 178,626,000 shares of Common Stock, par value $.01, of
the registrant.
BMC SOFTWARE, INC.
QUARTER ENDED JUNE 30, 2010
QUARTER ENDED JUNE 30, 2010
INDEX
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value data)
(In millions, except par value data)
June 30, 2010 | March 31, 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,410.0 | $ | 1,368.6 | ||||
Short-term investments |
10.3 | 65.5 | ||||||
Trade accounts receivable, net |
168.4 | 212.3 | ||||||
Trade finance receivables, net |
71.5 | 117.7 | ||||||
Deferred tax assets |
42.7 | 53.7 | ||||||
Other current assets |
86.0 | 87.2 | ||||||
Total current assets |
1,788.9 | 1,905.0 | ||||||
Property and equipment, net |
99.0 | 95.0 | ||||||
Software development costs |
159.9 | 145.5 | ||||||
Long-term investments |
51.0 | 62.4 | ||||||
Long-term trade finance receivables, net |
75.5 | 122.6 | ||||||
Intangible assets, net |
138.2 | 158.8 | ||||||
Goodwill |
1,354.9 | 1,365.6 | ||||||
Other long-term assets |
272.2 | 282.7 | ||||||
Total assets |
$ | 3,939.6 | $ | 4,137.6 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 37.0 | $ | 37.5 | ||||
Finance payables |
10.5 | 23.0 | ||||||
Accrued liabilities |
227.2 | 324.7 | ||||||
Deferred revenue |
985.1 | 975.9 | ||||||
Total current liabilities |
1,259.8 | 1,361.1 | ||||||
Long-term deferred revenue |
820.0 | 847.2 | ||||||
Long-term borrowings |
348.4 | 340.9 | ||||||
Other long-term liabilities |
169.4 | 200.7 | ||||||
Total liabilities |
2,597.6 | 2,749.9 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.01 par value, 1.0 shares authorized, none issued and
outstanding |
| | ||||||
Common stock, $.01 par value, 600.0 shares authorized, 249.1 shares issued |
2.5 | 2.5 | ||||||
Additional paid-in capital |
979.1 | 965.4 | ||||||
Retained earnings |
2,481.8 | 2,389.3 | ||||||
Accumulated other comprehensive (loss) income |
(12.7 | ) | 5.4 | |||||
3,450.7 | 3,362.6 | |||||||
Treasury stock, at cost (70.3 and 67.2 shares) |
(2,108.7 | ) | (1,974.9 | ) | ||||
Total stockholders equity |
1,342.0 | 1,387.7 | ||||||
Total liabilities and stockholders equity |
$ | 3,939.6 | $ | 4,137.6 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
BMC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In millions, except per share data)
(Unaudited)
AND COMPREHENSIVE INCOME
(In millions, except per share data)
(Unaudited)
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
License |
$ | 171.2 | $ | 167.0 | ||||
Maintenance |
253.8 | 251.2 | ||||||
Professional services |
35.9 | 31.8 | ||||||
Total revenue |
460.9 | 450.0 | ||||||
Operating expenses: |
||||||||
Cost of license revenue |
31.9 | 28.1 | ||||||
Cost of maintenance revenue |
40.7 | 37.3 | ||||||
Cost of professional services revenue |
35.7 | 33.2 | ||||||
Selling and marketing expenses |
141.3 | 125.9 | ||||||
Research and development expenses |
38.0 | 53.7 | ||||||
General and administrative expenses |
53.8 | 54.6 | ||||||
Amortization of intangible assets |
8.4 | 8.0 | ||||||
Severance, exit costs and related charges |
3.0 | 1.0 | ||||||
Total operating expenses |
352.8 | 341.8 | ||||||
Operating income |
108.1 | 108.2 | ||||||
Other income (loss), net: |
||||||||
Interest and other income, net |
0.6 | 3.6 | ||||||
Interest expense |
(5.1 | ) | (5.5 | ) | ||||
Gain (loss) on investments, net |
(1.0 | ) | 1.2 | |||||
Total other income (loss), net |
(5.5 | ) | (0.7 | ) | ||||
Earnings before income taxes |
102.6 | 107.5 | ||||||
Provision for income taxes |
9.8 | 25.1 | ||||||
Net earnings |
$ | 92.8 | $ | 82.4 | ||||
Basic earnings per share |
$ | 0.51 | $ | 0.45 | ||||
Diluted earnings per share |
$ | 0.50 | $ | 0.44 | ||||
Shares used in computing basic earnings per share |
180.3 | 184.3 | ||||||
Shares used in computing diluted earnings per share |
183.8 | 187.9 | ||||||
Comprehensive income: |
||||||||
Net earnings |
$ | 92.8 | $ | 82.4 | ||||
Net changes in accumulated comprehensive income (loss): |
||||||||
Foreign currency translation adjustment |
(18.8 | ) | 20.0 | |||||
Unrealized gain on available-for-sale securities |
0.7 | 0.7 | ||||||
Comprehensive income |
$ | 74.7 | $ | 103.1 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
BMC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 92.8 | $ | 82.4 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
44.7 | 42.8 | ||||||
Deferred income tax provision (benefit) |
6.1 | (0.5 | ) | |||||
Share-based compensation expense |
25.1 | 20.6 | ||||||
Loss (gain) on investments, net |
1.0 | (1.2 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts receivable |
43.3 | 83.2 | ||||||
Trade finance receivables |
95.6 | 84.0 | ||||||
Accrued and other current liabilities |
(107.9 | ) | (90.7 | ) | ||||
Deferred revenue |
(18.0 | ) | (60.1 | ) | ||||
Other operating assets and liabilities |
(15.3 | ) | (5.2 | ) | ||||
Net cash provided by operating activities |
167.4 | 155.3 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of investments |
50.0 | 0.9 | ||||||
Proceeds from sales of investments |
18.4 | 35.1 | ||||||
Purchases of investments |
(1.9 | ) | (173.4 | ) | ||||
Capitalization of software development costs |
(30.1 | ) | (12.8 | ) | ||||
Purchases of property and equipment |
(5.0 | ) | (7.8 | ) | ||||
Other investing activities |
1.0 | | ||||||
Net cash provided by (used in) investing activities |
32.4 | (158.0 | ) | |||||
Cash flows from financing activities: |
||||||||
Treasury stock acquired |
(149.0 | ) | (50.0 | ) | ||||
Repurchases of stock to satisfy employee tax withholding obligations |
(10.7 | ) | (4.9 | ) | ||||
Proceeds from stock options exercised and other |
11.2 | 17.5 | ||||||
Excess tax benefit from share-based compensation expense |
2.9 | 1.7 | ||||||
Repayments of borrowings and capital lease obligations |
(3.0 | ) | (3.7 | ) | ||||
Net cash used in financing activities |
(148.6 | ) | (39.4 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(9.8 | ) | 15.8 | |||||
Net change in cash and cash equivalents |
41.4 | (26.3 | ) | |||||
Cash and cash equivalents, beginning of period |
1,368.6 | 1,023.3 | ||||||
Cash and cash equivalents, end of period |
$ | 1,410.0 | $ | 997.0 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 11.2 | $ | 11.2 | ||||
Cash paid for income taxes, net of amounts refunded |
$ | 38.6 | $ | 49.7 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
BMC SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
BMC Software, Inc. and its subsidiaries (collectively, we, us, our or BMC). All significant
intercompany balances and transactions have been eliminated in consolidation. These financial
statements reflect all normal recurring adjustments necessary to fairly present our financial
position and results of operations as of and for the periods presented herein. We have evaluated
subsequent events through the date the financial statements were issued. These financial statements
have been prepared in accordance with United States generally accepted accounting principles (GAAP)
for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in accordance with GAAP
have been condensed or omitted pursuant to such rules and regulations. Certain reclassifications
have been made to the prior periods financial statements to conform to the current periods
presentation.
Interim results are not necessarily indicative of results for a full year. Our results
generally tend to be stronger in the third and fourth quarters of our fiscal year, as compared to
the first and second quarters of our fiscal year. These financial statements should be read in
conjunction with our annual audited consolidated financial statements for the fiscal year ended
March 31, 2010, as filed with the SEC on Form 10-K.
(2) Financial Instruments
We measure certain financial instruments at fair value on a recurring basis using the
following valuation techniques:
(A) Market approach Uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities.
(B) Income approach Uses valuation techniques to convert future estimated cash flows to a single
present amount based on current market expectations about those future amounts, using present value
techniques.
The fair values of our financial instruments were determined using the following input levels
and valuation techniques:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||
Quoted Prices in Active | Significant | |||||||||||||||||
Markets for Identical | Significant Other | Unobservable | ||||||||||||||||
Assets | Observable Inputs | Inputs | Valuation | |||||||||||||||
June 30, 2010 | Total | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||
(In millions) | ||||||||||||||||||
Assets |
||||||||||||||||||
Cash equivalents |
||||||||||||||||||
Money-market funds |
$ | 481.8 | $ | 481.8 | $ | | $ | | A | |||||||||
United States Treasury securities |
600.0 | 600.0 | | | A | |||||||||||||
Certificates of deposit |
68.7 | 68.7 | | | A | |||||||||||||
Short-term and long-term investments |
||||||||||||||||||
Auction rate securities |
45.2 | | | 45.2 | B | |||||||||||||
Mutual funds |
16.1 | 16.1 | | | A | |||||||||||||
Foreign currency forward contracts |
2.0 | | 2.0 | | A | |||||||||||||
Auction rate securities put option |
0.9 | | | 0.9 | B | |||||||||||||
Total |
$ | 1,214.7 | $ | 1,166.6 | $ | 2.0 | $ | 46.1 | ||||||||||
Liabilities |
||||||||||||||||||
Foreign currency forward contracts |
$ | (2.1 | ) | $ | | $ | (2.1 | ) | $ | | A | |||||||
Total |
$ | (2.1 | ) | $ | | $ | (2.1 | ) | $ | | ||||||||
Level 1 classification is applied to any asset or liability that has a readily available
quoted market price from an active market where there is significant transparency in the
executed/quoted price.
Level 2 classification is applied to assets and liabilities that have evaluated prices where
the data inputs to these valuations are observable either directly or indirectly, but do not
represent quoted market prices from an active market.
6
Table of Contents
Level 3 classification is applied to assets and liabilities when prices are not derived from
existing market data and requires us to develop our own assumptions about how market participants
would price the asset or liability.
The following table summarizes the activity in Level 3 financial instruments:
Quarter Ended June 30, 2010 | Quarter Ended June 30, 2009 | |||||||||||||||||||||||
Auction | Auction | |||||||||||||||||||||||
Rate | Rate | Put | ||||||||||||||||||||||
Securities | Put Option | Total | Securities | Option | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance at the beginning of the period |
$ | 60.5 | $ | 1.1 | $ | 61.6 | $ | 60.0 | $ | 2.0 | $ | 62.0 | ||||||||||||
Redemption of auction rate securities |
(16.2 | ) | | (16.2 | ) | | | | ||||||||||||||||
Change in unrealized gain (loss)
included in interest and other income,
net |
0.2 | (0.2 | ) | | (0.6 | ) | 0.6 | | ||||||||||||||||
Change in unrealized gain included in
other comprehensive income |
0.7 | | 0.7 | 1.0 | | 1.0 | ||||||||||||||||||
Balance at the end of the period |
$ | 45.2 | $ | 0.9 | $ | 46.1 | $ | 60.4 | $ | 2.6 | $ | 63.0 | ||||||||||||
Investments
Our cash, cash equivalents and investments were comprised of the following:
June 30, 2010 | March 31, 2010 | |||||||||||||||||||||||
Cash and Cash | Short-term | Long-term | Cash and Cash | Short-term | Long-term | |||||||||||||||||||
Equivalents | Investments | Investments | Equivalents | Investments | Investments | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Measured at fair value: |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
United States Treasury securities |
$ | 600.0 | $ | | $ | | $ | 200.0 | $ | 50.0 | $ | | ||||||||||||
Certificates of deposit |
68.7 | | | 12.6 | | | ||||||||||||||||||
Auction rate securities |
| | 34.9 | | | 45.0 | ||||||||||||||||||
Trading |
||||||||||||||||||||||||
Mutual funds |
| | 16.1 | | | 17.4 | ||||||||||||||||||
Auction rate securities |
| 10.3 | | | 15.5 | | ||||||||||||||||||
Total debt and equity investments measured at
fair value |
668.7 | 10.3 | 51.0 | 212.6 | 65.5 | 62.4 | ||||||||||||||||||
Cash on hand |
259.5 | | | 398.4 | | | ||||||||||||||||||
Money-market funds |
481.8 | | | 757.6 | | | ||||||||||||||||||
Total cash, cash equivalents and investments |
$ | 1,410.0 | $ | 10.3 | $ | 51.0 | $ | 1,368.6 | $ | 65.5 | $ | 62.4 | ||||||||||||
Amounts included in accumulated other
comprehensive income (loss) from
available-for-sale securities (pre-tax): |
||||||||||||||||||||||||
Unrealized losses * |
$ | | $ | | $ | 5.0 | $ | | $ | | $ | 5.7 | ||||||||||||
* | The unrealized losses on available-for-sale securities at June 30, 2010 and March 31, 2010 relate to the auction rate securities. |
7
Table of Contents
The following summarizes the contractual underlying maturities of our available-for-sale
investments in debt securities at June 30, 2010:
Cost | Fair Value | |||||||
(In millions) | ||||||||
Due in one year or less |
$ | 668.7 | $ | 668.7 | ||||
Due after ten years |
39.9 | 34.9 | ||||||
$ | 708.6 | $ | 703.6 | |||||
At June 30, 2010, we held auction rate securities with a par value of $51.1 million, of which
securities with a par value of $39.9 million were classified as available-for-sale and a par value
of $11.2 million were classified as trading. The total estimated fair value of our auction rate
securities was $45.2 million and $60.5 million at June 30, 2010 and March 31, 2010, respectively.
Our auction rate securities consist entirely of bonds issued by public agencies that are backed by
student loans with at least a 97% guarantee by the federal government under the United States
Department of Educations Federal Family Education Loan Program. All of these bonds are currently
rated investment grade by Moodys or Standard and Poors. Auctions for these securities began
failing in early 2008 and have continued to fail, resulting in our continuing to hold such
securities and the issuers paying interest at the maximum contractual rates. We do not believe that
any of the underlying issuers of these auction rate securities are presently at risk of default or
that the underlying credit quality of the assets backing the auction rate security investments has
been impacted by the reduced liquidity of these investments. Due to the illiquidity in the auction
rate securities market caused by failed auctions, we estimated the fair value of these securities
and the put option discussed below using internally developed models of the expected cash flows of
the securities which incorporate assumptions about the expected cash flows of the underlying
student loans and estimates of the rate of return required by investors, which includes an
adjustment to reflect a lack of liquidity in the market for these securities.
In November 2008, we entered into a put agreement with a bank from which we have acquired
certain auction rate securities with a remaining par value of $11.2 million and an estimated fair
value of $10.3 million at June 30, 2010. On July 1, 2010, we exercised our right under this
agreement to put the remaining securities of $11.2 million to the bank at par value. These auction
rate securities are classified as short-term investments and trading securities and, accordingly,
any changes in the fair value of these securities are recognized in earnings. In addition, we
elected the option under GAAP to record the put option at fair value. The fair value adjustments to
these auction rate securities and the related put option resulted in minimal net impact to the
condensed consolidated statements of operations for the quarters ended June 30, 2010 and 2009.
The unrealized loss on our available-for-sale auction rate securities, which have a fair value
of $34.9 million at June 30, 2010, was $5.0 million at June 30, 2010 and was recorded in
accumulated other comprehensive income (loss) as we believe the decline in fair value of these
auction rate securities is temporary. In making this determination, we primarily considered the
financial condition and near-term prospects of the issuers, the probability scheduled cash flows
will continue to be made and the likelihood we would be required to sell the investments before
recovery of our cost basis. These available-for-sale auction rate securities have been in an
unrealized loss position for greater than twelve months. Because of the uncertainty related to the
timing of liquidity associated with these auction rate securities, these securities are classified
as long-term investments at June 30, 2010 and March 31, 2010.
Derivative Financial Instruments
We operate globally and transact business in various foreign currencies. Our foreign currency
exposures relate primarily to certain foreign currency denominated assets and liabilities,
primarily non-U.S. dollar denominated accounts receivable, cash and intercompany balances held by
U.S. dollar functional currency entities. To minimize the risk from changes in foreign currency
exchange rates, we have established a program that utilizes foreign currency forward contracts to
offset the risks associated with the effects of certain foreign currency exposures. Gains or losses
on our foreign currency exposures are offset by gains or losses on the foreign currency forward
contracts entered into under this program. These foreign currency forward contracts generally have
terms of one month or less and are generally entered into at the prevailing market exchange rate at
the end of each month. We do not use forward contracts for speculative purposes. While these
foreign currency forward contracts are utilized to hedge foreign currency exposures, they are not
formally designated as hedges, and therefore, the changes in the fair values of these derivatives
are recognized currently in earnings. We record these foreign currency forward contracts at fair
value as either assets or liabilities depending on the net settlement position of the foreign
currency forward contracts with each respective counterparty at the balance sheet date.
8
Table of Contents
The fair value of our outstanding foreign currency forward contracts that closed in a gain
position at June 30, 2010 and March 31, 2010 was $2.0 million and $3.5 million, respectively, and
was recorded as other current assets in our condensed
consolidated balance sheets. The fair value of our outstanding foreign currency forward
contracts that closed in a loss position at June 30, 2010 and March 31, 2010 was $2.1 million and
$1.0 million, respectively, and was recorded as an accrued liability in our condensed consolidated
balance sheets.
The notional amounts at contract exchange rates of our foreign currency forward
contracts outstanding were:
Notional Amount | ||||||||
June 30, 2010 | March 31, 2010 | |||||||
(In millions) | ||||||||
Foreign Currency Forward Contracts
(receive United States dollar/pay
foreign currency) |
||||||||
Euro |
$ | 118.5 | $ | 98.2 | ||||
Australian dollar |
8.7 | 15.4 | ||||||
South Korean won |
5.6 | 6.0 | ||||||
Chinese yuan renminbi |
5.3 | 4.6 | ||||||
Brazilian real |
5.2 | 24.9 | ||||||
New Zealand dollar |
4.4 | 4.5 | ||||||
Swiss franc |
1.6 | 2.6 | ||||||
Other |
11.8 | 14.7 | ||||||
Total |
$ | 161.1 | $ | 170.9 | ||||
Foreign Currency Forward Contracts (pay
United States dollar/receive foreign
currency) |
||||||||
Israeli shekel |
$ | 89.7 | $ | 78.0 | ||||
Indian rupee |
9.7 | 11.5 | ||||||
Mexican peso |
1.4 | 1.5 | ||||||
Other |
4.2 | 4.5 | ||||||
Total |
$ | 105.0 | $ | 95.5 | ||||
The effect of the foreign currency forward contracts during the quarters ended June 30, 2010
and 2009, was a gain of $11.5 million and a loss of $14.1 million, respectively, which, after
including gains and losses on our foreign currency exposure, resulted in a loss of $2.2 million and
$0.5 million, respectively, recorded in interest and other income, net.
We are exposed to credit-related losses in the event of non-performance by counterparties to
derivative financial instruments, but we do not expect any counterparties to fail to meet their
obligations given their high credit ratings. In addition, we diversify this risk across several
counterparties and utilize netting agreements to mitigate the counterparty credit risk.
Other Financial Instruments
The fair value of the senior unsecured notes due 2018 at June 30, 2010 and March 31, 2010,
based on market prices, was $348.9 million and $338.1 million, respectively, compared to the
carrying value of $298.6 million and $298.5 million, respectively.
The carrying values of all other financial instruments, consisting primarily of trade and
finance receivables, accounts payable and other borrowings, approximate their respective fair
values.
A substantial portion of our trade finance receivables are transferred to financial
institutions on a non-recourse basis. We utilize wholly-owned finance subsidiaries in these
finance receivables transfers. These entities are consolidated into our financial position and
results of operations. We account for such transfers as sales in accordance with applicable
accounting rules pertaining to the transfer of financial assets and the sale of future revenue when
we have surrendered control of such receivables (including determining that such assets have been
isolated beyond our reach and the reach of our creditors) and when we do not have significant
continuing involvement in the generation of cash flows due the financial institutions. During the
quarters ended June 30, 2010 and 2009, we transferred $109.0 million and $56.9 million,
respectively, of such receivables through these programs. Finance receivables are typically
transferred within three months after origination and the outstanding principle balance at the time
of transfer typically approximates fair value.
9
Table of Contents
(3) Long-Term Borrowings
Long-term borrowings consist of the following:
June 30, 2010 | March 31, 2010 | |||||||
(In millions) | ||||||||
Senior unsecured notes due 2018 (net of $1.4 million and $1.5 million of unamortized
discount at June 30, 2010 and March 31, 2010, respectively) |
$ | 298.6 | $ | 298.5 | ||||
Capital leases and other obligations |
69.3 | 62.6 | ||||||
Total |
367.9 | 361.1 | ||||||
Less current maturities of capital leases and other obligations (included in accrued liabilities) |
(19.5 | ) | (20.2 | ) | ||||
Long-term borrowings |
$ | 348.4 | $ | 340.9 | ||||
At June 30, 2010, we were in compliance with all debt covenants.
(4) Income Taxes
Income tax expense was $9.8 million and $25.1 million for the quarters ended June 30, 2010 and
2009, respectively, resulting in effective tax rates of 9.6% and 23.3%, respectively. The effective
tax rate is impacted primarily by the worldwide mix of consolidated earnings before taxes and our
policy of indefinitely re-investing earnings from certain low tax jurisdictions, additional
accruals and changes in estimates related to our uncertain tax positions, benefits associated with
income attributable to both domestic production activities and the extraterritorial income
exclusion. During the quarter ended June 30, 2010, we recorded a net tax benefit of $14.0 million
associated with a settlement with a taxing authority related to prior years tax matters, resulting
in a decrease in the effective tax rate compared to the quarter ended June 30, 2009.
We file a federal income tax return in the United States as well as income tax returns in
various local, state and foreign jurisdictions. Our tax years are closed with the United States
Internal Revenue Service (IRS) through the tax year ended March 31, 2003, except to the extent of
net operating loss carryforwards from fiscal 2003 to later years. During fiscal 2010 and early
fiscal 2011, we settled all open issues with the IRS resulting from the audit of our tax years
ended March 31, 2004 and 2005. During fiscal 2009, the IRS completed its examination of our federal
income tax returns for the tax years ended March 31, 2006 and 2007 and issued a Revenue Agent
Report (RAR) thereon. We have filed a protest letter contesting certain adjustments included in the
RAR and are having settlement discussions with the IRS Office of Appeals. The IRS has also
initiated an examination of our federal income tax return for the tax year ended March 31, 2008. In
addition, certain tax years related to local, state, and foreign jurisdictions remain subject to
examination. To provide for potential tax exposures, we maintain a liability for unrecognized tax
benefits which we believe is adequate.
(5) Share-Based Compensation
During the quarter ended June 30, 2010, we granted 1.3 million nonvested stock units to our
executive officers and non-executive employees. The time-based nonvested stock units vest in annual
increments over 1 or 3 years.
At June 30, 2010, we had approximately $210.3 million of total unrecognized compensation costs
related to share-based awards that are expected to be recognized as expense over a remaining
weighted-average period of 2 years.
10
Table of Contents
Share-based compensation expense as recorded in our condensed consolidated statements of
operations is summarized as follows:
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Cost of license revenue |
$ | 0.8 | $ | 0.5 | ||||
Cost of maintenance revenue |
2.3 | 1.7 | ||||||
Cost of professional services revenue |
0.9 | 0.9 | ||||||
Selling and marketing expenses |
8.7 | 7.1 | ||||||
Research and development expenses |
2.1 | 2.4 | ||||||
General and administrative expenses |
10.3 | 8.0 | ||||||
Total share-based compensation expense |
$ | 25.1 | $ | 20.6 | ||||
(6) Stockholders Equity
Earnings Per Share
The two-class method is utilized for the computation of earnings per share (EPS). The
two-class method requires a portion of net income be allocated to participating securities, which
are unvested awards of share-based payments with nonforfeitable rights to receive dividends or
dividend equivalents, if declared. Income allocated to these participating securities is excluded
from net earnings allocated to common shares, as shown in the table below.
Basic earnings per share is computed by dividing net income allocated to common shares by the
weighted average number of common shares outstanding during the period. Diluted earnings per share
is computed by dividing net income allocated to common shares by the weighted average number of
common shares outstanding during the period, plus the dilutive effect of outstanding stock options
and other dilutive securities using the treasury stock method.
The following table summarizes our basic and diluted EPS computations:
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In millions, except per share | ||||||||
data) | ||||||||
Basic earnings per share: |
||||||||
Net earnings |
$ | 92.8 | $ | 82.4 | ||||
Less earnings allocated to participating securities |
(0.1 | ) | (0.2 | ) | ||||
Net earnings allocated to common shares |
$ | 92.7 | $ | 82.2 | ||||
Weighted average number of common shares outstanding |
180.3 | 184.3 | ||||||
Basic earnings per share |
$ | 0.51 | $ | 0.45 | ||||
Diluted earnings per share: |
||||||||
Net earnings |
$ | 92.8 | $ | 82.4 | ||||
Less earnings allocated to participating securities |
(0.1 | ) | (0.2 | ) | ||||
Net earnings allocated to common shares |
$ | 92.7 | $ | 82.2 | ||||
Weighted average number of common shares outstanding |
180.3 | 184.3 | ||||||
Incremental shares from assumed conversions of share-based awards |
3.5 | 3.6 | ||||||
Adjusted weighted average number of common shares outstanding |
183.8 | 187.9 | ||||||
Diluted earnings per share |
$ | 0.50 | $ | 0.44 | ||||
11
Table of Contents
For the quarters ended June 30, 2010 and 2009, 4.0 million and 8.6 million weighted average
potential common shares, respectively, have been excluded from the calculation of diluted EPS as
they were anti-dilutive.
Treasury Stock
Our Board of Directors had previously authorized a total of $3.0 billion to repurchase common
stock. In April 2010, our Board of Directors authorized an additional $1.0 billion to repurchase
stock. During the quarter ended June 30, 2010, we purchased 4.0 million shares for $149.0 million
under these authorizations. At June 30, 2010, approximately $920.8 million remains authorized in
the stock repurchase program, which does not have an expiration date. In addition, during the
quarter ended June 30, 2010, we repurchased 0.3 million shares for $10.7 million to satisfy
employee tax withholding obligations upon the vesting of share-based awards.
(7) Guarantees and Contingencies
Guarantees
Under our standard software license agreements, we agree to indemnify, defend and hold
harmless our licensees from and against certain losses, damages and costs arising from claims
alleging the licensees use of our software infringes the intellectual property rights of a third
party. Also, under these standard license agreements, we represent and warrant to licensees that
our software products operate substantially in accordance with published specifications.
Other guarantees include promises to indemnify, defend and hold harmless each of our executive
officers, non-employee directors and certain key employees from and against losses, damages and
costs incurred by each such individual in administrative, legal or investigative proceedings
arising from alleged wrongdoing by the individual while acting in good faith within the scope of
his or her job duties on our behalf.
We also had outstanding letters of credit, performance bonds and similar instruments related
to various customers, facilities and other obligations at June 30, 2010 of approximately $39.7
million.
Historically, we have not incurred significant costs related to such indemnifications,
warranties and guarantees. As such, and based on other factors, no provision or accrual for these
items has been made.
Contingencies
We are subject to intellectual property claims and legal proceedings, including claims of
alleged infringement of patents asserted by third parties against us in the form of claim letters.
These claims are in various stages, may result in formal legal proceedings against us, and may not
be fully resolved in the near future. We cannot predict the timing and ultimate outcome of such
claims.
We are party to various labor claims brought by certain former international employees
alleging that amounts are due such employees for unpaid commissions and other compensation. The
claims are in various stages and are not expected to be fully resolved in the near future. We
intend to vigorously contest all of the claims. However, the ultimate outcome of all of the claims
cannot be estimated at this time.
In June 2006, we sought clarification from a Brazilian court as to whether a tax applies to
the remittance of software payments from our Brazilian operations. The matter is currently being
litigated in Brazilian courts. In February 2007, a law was enacted that clarified that this
particular tax did not apply to the remittance of software payments, retroactive to January 1,
2006. We continue to pursue a favorable resolution on this matter for years prior to January 1,
2006. While we believe we will ultimately prevail based on the merits of our position, we cannot
predict or estimate the timing or ultimate outcome of this matter.
We
previously disclosed a lawsuit filed against us by Achates Reference
Publishing, Inc. in the United States District Court for the Eastern
District of Texas, Marshall Division alleging patent infringement. In
July 2010, without admitting any liability, we entered into a
confidential settlement agreement with Achates Reference Publishing,
Inc. which permanently resolves for us and our customers all claims
and issues related to the asserted patents.
We are subject to various other legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. We do not believe that the outcome of any of these
matters will have a material adverse effect on our financial position, results of operations or
cash flows.
12
Table of Contents
(8) Segment Reporting
We are organized into two business segments, Enterprise Service Management (ESM) and Mainframe
Service Management (MSM). The ESM segment derives its revenue from our service support, service
assurance and service automation solutions, along with professional services revenue derived from
consulting, implementation, integration and educational services related to our software products.
The MSM segment derives its revenue from products for mainframe database management, monitoring and
automation, enterprise scheduling and output management solutions.
Segment performance is measured based on segment operating income, reflecting segment revenue
less direct and allocated indirect segment operating expenses. Direct segment operating expenses
primarily include cost of revenue, selling and marketing, research and development and general and
administrative expenses that can be specifically identified to a particular segment and are
directly controllable by segment management, while allocated indirect segment operating expenses
primarily include indirect costs within these operating expense categories that are not
specifically identified to a particular segment or controllable by segment management. The indirect
operating expenses are allocated to the segments based on budgeted bookings, revenue and other
allocation methods that management believes to be reasonable. Our measure of segment operating
income does not include the effect of share-based compensation expenses, amortization of acquired
technology and other intangible assets or the costs associated with severance, exit costs and
related charges, which are collectively included in unallocated operating
expenses below. Assets and liabilities are reviewed by management at the consolidated level only.
The table below summarizes segment performance for the quarters ended June 30, 2010 and 2009.
The prior year information has been reclassified to conform to our current segment reporting
presentation.
Enterprise | Mainframe | |||||||||||
Service | Service | |||||||||||
Quarter Ended June 30, 2010 | Management | Management | Consolidated | |||||||||
(In millions) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 113.2 | $ | 58.0 | $ | 171.2 | ||||||
Maintenance |
137.1 | 116.7 | 253.8 | |||||||||
Professional services |
35.9 | | 35.9 | |||||||||
Total revenue |
286.2 | 174.7 | 460.9 | |||||||||
Direct and allocated indirect segment operating expenses |
220.7 | 83.4 | 304.1 | |||||||||
Segment operating income |
65.5 | 91.3 | 156.8 | |||||||||
Unallocated operating expenses |
48.7 | |||||||||||
Other loss, net |
5.5 | |||||||||||
Earnings before income taxes |
$ | 102.6 | ||||||||||
Enterprise | Mainframe | |||||||||||
Service | Service | |||||||||||
Quarter Ended June 30, 2009 | Management | Management | Consolidated | |||||||||
(In millions) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 96.3 | $ | 70.7 | $ | 167.0 | ||||||
Maintenance |
134.9 | 116.3 | 251.2 | |||||||||
Professional services |
31.8 | | 31.8 | |||||||||
Total revenue |
263.0 | 187.0 | 450.0 | |||||||||
Direct and allocated indirect segment operating expenses |
220.8 | 81.4 | 302.2 | |||||||||
Segment operating income |
42.2 | 105.6 | 147.8 | |||||||||
Unallocated operating expenses |
39.6 | |||||||||||
Other loss, net |
0.7 | |||||||||||
Earnings before income taxes |
$ | 107.5 | ||||||||||
13
Table of Contents
(9) Severance, Exit Costs and Related Charges
During the quarters ended June 30, 2010 and 2009, we recorded charges of $3.0 million and $1.0
million, respectively, related to identified workforce reductions and associated cash separation
packages paid or accrued by us. Additionally, we have exited certain leases, reduced the square
footage required to operate certain locations and relocated some operations to lower cost
facilities.
Activity related to the above initiatives during the quarter ended June 30, 2010 is summarized
as follows:
Balance at | Foreign | Cash Payments, | Balance at | |||||||||||||||||||||
March 31, | Charged | Adjustments | Exchange | Net of Sublease | June 30, | |||||||||||||||||||
2010 | to Expense | to Estimates | Adjustments | Income | 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Process and realignment initiatives: |
||||||||||||||||||||||||
Facilities costs |
$ | 1.3 | $ | | $ | 0.1 | $ | | $ | (0.3 | ) | $ | 1.1 | |||||||||||
General workforce reduction: |
||||||||||||||||||||||||
Severance and related costs |
0.9 | 2.9 | | (0.1 | ) | (2.0 | ) | 1.7 | ||||||||||||||||
Total accrued |
$ | 2.2 | $ | 2.9 | $ | 0.1 | $ | (0.1 | ) | $ | (2.3 | ) | $ | 2.8 | ||||||||||
The accruals for severance and related costs as of June 30, 2010 represent the amounts to be
paid to employees that have been terminated or identified for termination as a result of the
initiatives described above. These amounts are expected to be paid during fiscal 2011. We continue
to review the impact of these actions and will determine if, based on future operating results,
additional actions to reduce operating expenses are necessary. The amount of any potential future
charges for such actions will depend upon the nature, timing, and extent of those actions.
The accruals for facilities costs at June 30, 2010 represent the remaining fair value of lease
obligations for exited locations, as determined at the cease-use dates or lease modification dates
of those facilities, net of estimated sublease income that could be reasonably obtained in the
future, and will be paid out over the remaining lease terms, the last of which ends in fiscal 2015.
Projected sublease income is based on managements estimates, which are subject to change. We may
incur additional facilities charges subsequent to June 30, 2010 as a result of the initiatives
described above.
(10) New Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued new revenue recognition guidance for arrangements that
include both software and non-software related deliverables, where certain of those deliverables
are non-software related. This guidance requires entities to allocate the overall consideration to
each deliverable by using a best estimate of the selling price of individual deliverables in the
arrangement in the absence of vendor-specific objective evidence or other third party evidence of
the selling price. Additionally, the guidance modifies the manner in which the transaction
consideration is allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. The new guidance is effective for us
in the first quarter of fiscal 2012 interim financial statements, with earlier adoption permitted.
We are currently evaluating the impact of adopting this new guidance on our consolidated financial
statements.
In
July 2010, the FASB issued new disclosure guidance related to finance
receivables and the related allowances for credit losses. This
guidance introduces a greater level of disaggregation based on the
underlying characteristics of the finance receivables. The disclosure
requirements include, based on the related disaggregation criteria, a
rollforward of the allowance for credit losses and the related
balance of the finance receivables, significant purchases and sales
of finance receivables, and various qualitative disclosures including
credit quality, aging, nonaccrual status and impairments. The new
guidance is effective for us in the third quarter of fiscal 2011.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
It is important that this Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) be read in conjunction with: (i) the attached condensed consolidated
financial statements and notes thereto, (ii) the audited financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended March 31, 2010, and (iii) our
discussion of risk and uncertainties included within Risk Factors in our Annual Report on Form 10-K
for the year ended March 31, 2010.
This MD&A contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which are identified by the use of the words believe, expect, anticipate,
estimate, will, contemplate, would and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties, including but not limited to those summarized
under Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2010, affect our
operating results and could cause our actual results, levels of activity, performance or
achievement to differ materially from the results expressed or implied by these or any other
forward-looking statements made by us or on our behalf. There can be no assurance that future
results will meet expectations.
BMC, BMC Software and the BMC Software logo are the exclusive properties of BMC Software,
Inc., are registered with the U.S. Patent and Trademark Office, and may be registered or pending
registration in other countries. All other BMC trademarks, service marks and logos may be
registered or pending registration in the U.S. or in other countries. All other trademarks or
registered trademarks are the property of their respective owners.
14
Table of Contents
Overview
We executed a solid first quarter of fiscal 2011 and believe that we are positioned well to
meet our full year financial expectations. Select operating metrics for the first quarter ended
June 30, 2010 included:
| Total bookings, which represents the contract value of new transactions that we closed
and recorded, were $442.9 million, representing an increase of $52.9 million, or 13.6%, over
the prior year quarter. This increase was attributable to a bookings increase in our ESM
segment of $72.2 million, or 30.9%, partially offset by a bookings decrease in our MSM
segment of $19.3 million, or 12.3%. Within the ESM segment, we are particularly pleased
with our year over year license bookings growth of $28.9 million, or 39.9%. |
| Total revenue was $460.9 million, representing an increase of $10.9 million, or 2.4%,
over the prior year quarter. This increase was reflective of license, maintenance and
professional services revenue increases of $4.2 million, or 2.5%, $2.6 million, or 1.0%, and
$4.1 million, or 12.9%, respectively. On a segment basis, total ESM revenue increased by
$23.2 million, or 8.8% and total MSM revenue decreased by $12.3 million, or 6.6%, over the
prior year quarter. |
| Operating income was $108.1 million, representing a decrease of $0.1 million, or 0.1%,
over the prior year quarter. Non-GAAP operating income was $156.8 million, representing an
increase of $9.0 million, or 6.1%, over the prior year quarter. |
| Net earnings was $92.8 million, representing an increase of $10.4 million, or 12.6%, over
the prior year quarter. Non-GAAP net earnings was $113.6 million, representing an increase
of $3.0 million, or 2.7%, over the prior year quarter. |
| Diluted earnings per share was $0.50, representing an increase of $0.06, or 13.6%, over
the prior year quarter. Non-GAAP diluted earnings per share was $0.62, representing an
increase of $0.03, or 5.1%, over the prior year quarter. |
| Cash flows from operations were $167.4 million, representing an increase of $12.1
million, or 7.8%, over the prior year quarter. |
| We closed out the quarter with a strong balance sheet at June 30, 2010, including $1.5
billion in cash, cash equivalents and investments and $1.8 billion in deferred revenue. |
We continued to invest in our technology leadership, including in the areas of cloud
computing, virtualization and software-as-a-service, as we continue to strengthen our technology
platform through ongoing product development efforts in each of our businesses.
We also continued to enhance shareholder value by returning cash to shareholders through our
stock repurchase program. During the quarter ended June 30, 2010, our Board of Directors authorized
an additional $1.0 billion to repurchase stock and we repurchased approximately 4.0 million shares
for a total value of $149.0 million.
It is important for our investors to understand that a significant portion of our operating
expenses is fixed in the short-term and we plan a portion of our expense run-rate based on our
expectations of future revenue. In addition, a significant amount of our license transactions are
completed during the final weeks and days of each quarter and, therefore, we generally do not know
whether revenue has met our expectations until after the end of the quarter. If a shortfall in
revenue were to occur in any given quarter, there would be an immediate, and possibly significant,
impact to our overall earnings and, most likely, our stock price.
Because our software solutions are designed for and marketed to companies looking to improve
the management of their IT infrastructure and processes, demand for our products, and therefore our
financial results, are dependent upon corporations continuing to value such solutions and to invest
in such technology. There are a number of trends that have historically influenced demand for IT
management software, including, among others, business demands placed on IT, computing capacity
within IT departments, complexity of IT systems and IT operational costs. Our financial results are
also influenced by many economic and industry conditions, including, but not limited to, general
economic and market conditions in the United States and other economies in which we market
products, changes in foreign currency exchange rates, general levels of corporate spending, IT
budgets, the competitiveness of the IT management software and solutions industry, the adoption
rate for Business Service Management and the stability of the mainframe market.
15
Table of Contents
Results of Operations and Financial Condition
The following table sets forth, for the periods indicated, the percentages that selected items
in the condensed consolidated statements of operations and comprehensive income represent of total
revenue. These financial results are not necessarily indicative of future results.
Percentage of Total Revenue for the | ||||||||
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
License |
37.1 | % | 37.1 | % | ||||
Maintenance |
55.1 | % | 55.8 | % | ||||
Professional services |
7.8 | % | 7.1 | % | ||||
Total revenue |
100.0 | % | 100.0 | % | ||||
Operating expenses: |
||||||||
Cost of license revenue |
6.9 | % | 6.2 | % | ||||
Cost of maintenance revenue |
8.8 | % | 8.3 | % | ||||
Cost of professional services revenue |
7.7 | % | 7.4 | % | ||||
Selling and marketing expenses |
30.7 | % | 28.0 | % | ||||
Research and development expenses |
8.2 | % | 11.9 | % | ||||
General and administrative expenses |
11.7 | % | 12.1 | % | ||||
Amortization of intangible assets |
1.8 | % | 1.8 | % | ||||
Severance, exit costs and related charges |
0.7 | % | 0.2 | % | ||||
Total operating expenses |
76.5 | % | 76.0 | % | ||||
Operating income |
23.5 | % | 24.0 | % | ||||
Other loss, net |
(1.2 | )% | (0.2 | )% | ||||
Earnings before income taxes |
22.3 | % | 23.9 | % | ||||
Provision for income taxes |
2.1 | % | 5.6 | % | ||||
Net earnings |
20.1 | % | 18.3 | % |
16
Table of Contents
Revenue
The following table provides information regarding software license and software maintenance
revenue for the quarters ended June 30, 2010 and 2009:
Quarter Ended June 30, | ||||||||||||
Software License Revenue | 2010 | 2009 | % Change | |||||||||
(In millions) | ||||||||||||
Enterprise Service Management |
$ | 113.2 | $ | 96.3 | 17.5 | % | ||||||
Mainframe Service Management |
58.0 | 70.7 | (18.0 | )% | ||||||||
Total software license revenue |
$ | 171.2 | $ | 167.0 | 2.5 | % | ||||||
Quarter Ended June 30, | ||||||||||||
Software Maintenance Revenue | 2010 | 2009 | % Change | |||||||||
(In millions) | ||||||||||||
Enterprise Service Management |
$ | 137.1 | $ | 134.9 | 1.6 | % | ||||||
Mainframe Service Management |
116.7 | 116.3 | 0.3 | % | ||||||||
Total software maintenance revenue |
$ | 253.8 | $ | 251.2 | 1.0 | % | ||||||
Quarter Ended June 30, | ||||||||||||
Total Software Revenue | 2010 | 2009 | % Change | |||||||||
(In millions) | ||||||||||||
Enterprise Service Management |
$ | 250.3 | $ | 231.2 | 8.3 | % | ||||||
Mainframe Service Management |
174.7 | 187.0 | (6.6 | )% | ||||||||
Total software revenue |
$ | 425.0 | $ | 418.2 | 1.6 | % | ||||||
Software License Revenue
License revenue was $171.2 million and $167.0 million for the quarters ended June 30, 2010 and
2009, respectively.
License revenue increased by $4.2 million, or 2.5%, over the prior year quarter. This increase
was attributable to an increase in our ESM segment license revenue, partially offset by a decrease
in our MSM segment license revenue, as further discussed below. Recognition of license revenue that
was deferred in prior periods increased $3.9 million for the quarter ended June 30, 2010 as
compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of
license revenue recognized upfront was 56% in the current quarter as compared to 74% in the prior
year quarter. During the quarter ended June 30, 2010, we closed 19 transactions with license values
over $1 million, with a total license value of $64.2 million, compared with 18 transactions with
license values over $1 million, with a total license value of $31.6 million, in the prior year
quarter.
ESM license revenue was $113.2 million, or 66.1%, and $96.3 million, or 57.7%, of our total
license revenue for the quarters ended June 30, 2010 and 2009, respectively. ESM license revenue
for the quarter ended June 30, 2010 increased by $16.9 million, or 17.5%, over the prior year
quarter, primarily due to an increase in the amount of upfront license revenue recognized in
connection with new transactions, along with an increase in the recognition of previously deferred
license revenue.
MSM license revenue was $58.0 million, or 33.9%, and $70.7 million, or 42.3%, of our total
license revenue for the quarters ended June 30, 2010 and 2009, respectively. MSM license revenue
for the quarter ended June 30, 2010 decreased by $12.7 million, or 18.0%, from the prior year
quarter, primarily due to a decrease in the amount of upfront license revenue recognized in
connection with new transactions, partially offset by a slight increase in the recognition of
previously deferred license revenue.
17
Table of Contents
Deferred License Revenue
For the quarters ended June 30, 2010 and 2009, our recognized license revenue was impacted by
the changes in our deferred license revenue balance as follows:
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Deferrals of license revenue |
$ | 58.8 | $ | 27.5 | ||||
Recognition from deferred license revenue |
(94.3 | ) | (90.4 | ) | ||||
Impact of foreign currency exchange rate changes |
(0.8 | ) | 2.2 | |||||
Net decrease in deferred license revenue |
$ | (36.3 | ) | $ | (60.7 | ) | ||
Deferred license revenue balance at end of period |
$ | 587.9 | $ | 550.2 |
The primary reasons for license revenue deferrals include, but are not limited to, customer
transactions that include products for which the maintenance pricing is based on a combination of
undiscounted license list prices, net license fees or discounted license list prices, certain
arrangements that include unlimited licensing rights, time-based licenses that are recognized over
the term of the arrangement, customer transactions that include products with differing maintenance
periods and other transactions for which we do not have or are not able to determine
vendor-specific objective evidence of the fair value of the maintenance and/or professional
services. The contract terms and conditions that result in deferral of revenue recognition for a
given transaction result from arms length negotiations between us and our customers. We anticipate
our transactions will continue to include such contract terms that result in deferral of the
related license revenue as we expand our offerings to meet customers product, pricing and
licensing needs.
Once it is determined that license revenue for a particular contract must be deferred, based
on the contractual terms and application of revenue recognition policies to those terms, we
recognize such license revenue either ratably over the term of the contract or when the revenue
recognition criteria are met. Because of this, we generally know the timing of the subsequent
recognition of license revenue at the time of deferral. Therefore, the amount of license revenue to
be recognized out of the deferred revenue balance in each future quarter is generally predictable.
At June 30, 2010, the deferred license revenue balance was $587.9 million. As additional license
revenue is deferred in future periods, the amounts to be recognized in future periods will
increase. Estimated deferred license revenue that we expect to recognize in future periods at June
30, 2010 is (in millions):
Remainder of fiscal 2011 |
$ | 252.5 | ||
Fiscal 2012 |
183.4 | |||
Fiscal 2013 and thereafter |
152.0 | |||
$ | 587.9 | |||
Software Maintenance Revenue
Maintenance revenue was $253.8 million and $251.2 million for the quarters ended June 30, 2010
and 2009, respectively. Maintenance revenue increased by $2.6 million, or 1.0%, over the prior year
quarter. This increase was attributable to increases in both ESM and MSM maintenance revenue, as
discussed below.
ESM maintenance revenue was $137.1 million, or 54.0%, and $134.9 million, or 53.7%, of our
total maintenance revenue for the quarters ended June 30, 2010 and 2009, respectively, reflective
of a $2.2 million, or 1.6%, quarter over quarter increase that was primarily attributable to the
expansion of our installed ESM customer license base.
MSM maintenance revenue was $116.7 million, or 46.0%, and $116.3 million, or 46.3%, of our
total maintenance revenue for the quarters ended June 30, 2010 and 2009, respectively, reflective
of a $0.4 million, or 0.3%, quarter over quarter increase.
18
Table of Contents
Deferred Maintenance Revenue
At June 30, 2010, the deferred maintenance revenue balance was $1,190.3 million. As new
customers are added and/or current contracts are renewed and additional maintenance revenue is
deferred in future periods, the amounts to be recognized
in future periods will increase. Estimated deferred maintenance revenue that we expect to
recognize in future periods at June 30, 2010 is (in millions):
Remainder of fiscal 2011 |
$ | 546.6 | ||
Fiscal 2012 |
348.8 | |||
Fiscal 2013 and thereafter |
294.9 | |||
$ | 1,190.3 | |||
Domestic vs. International Revenue
Quarter Ended June 30, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(In millions) | ||||||||||||
License: |
||||||||||||
Domestic |
$ | 87.6 | $ | 86.1 | 1.7 | % | ||||||
International |
83.6 | 80.9 | 3.3 | % | ||||||||
Total license revenue |
$ | 171.2 | $ | 167.0 | 2.5 | % | ||||||
Maintenance: |
||||||||||||
Domestic |
$ | 139.8 | $ | 138.4 | 1.0 | % | ||||||
International |
114.0 | 112.8 | 1.1 | % | ||||||||
Total maintenance revenue |
$ | 253.8 | $ | 251.2 | 1.0 | % | ||||||
Professional services: |
||||||||||||
Domestic |
$ | 17.7 | $ | 15.9 | 11.3 | % | ||||||
International |
18.2 | 15.9 | 14.5 | % | ||||||||
Total professional services revenue |
$ | 35.9 | $ | 31.8 | 12.9 | % | ||||||
Total domestic revenue |
$ | 245.1 | $ | 240.4 | 2.0 | % | ||||||
Total international revenue |
215.8 | 209.6 | 3.0 | % | ||||||||
Total revenue |
$ | 460.9 | $ | 450.0 | 2.4 | % | ||||||
We estimate that the effect of foreign currency exchange rate fluctuations on our
international revenue resulted in an approximate $3.0 million increase in revenue for the quarter
ended June 30, 2010 as compared to the prior year quarter, on a constant currency basis.
Domestic License Revenue
Domestic license revenue was $87.6 million, or 51.2%, and $86.1 million, or 51.6%, of our
total license revenue for the quarters ended June 30, 2010 and 2009, respectively. Domestic
license revenue for the quarter ended June 30, 2010 increased by $1.5 million, or 1.7%, over the
prior year quarter, due to a $7.8 million increase in ESM license revenue, partially offset by a
$6.3 million decrease in MSM license revenue.
International License Revenue
International license revenue was $83.6 million, or 48.8%, and $80.9 million, or 48.4%, of our
total license revenue for the quarters ended June 30, 2010 and 2009, respectively. International
license revenue for the quarter ended June 30, 2010 increased by $2.7 million, or 3.3%, over the
prior year quarter, due to a $9.0 million increase in ESM license revenue, partially offset by a
$6.3 million decrease in MSM license revenue. The ESM license revenue increase was attributable
primarily to increases of $2.9 million, $2.7 million and $2.7 million in our Asia Pacific, Latin
America and Europe, Middle East and Africa (EMEA) markets, respectively. The MSM license revenue
decrease was attributable to decreases of $6.2 million and $1.7 million in our Latin America and
EMEA markets, respectively, partially offset by a net increase of $1.6 million in our other
international markets.
19
Table of Contents
Domestic Maintenance Revenue
Domestic maintenance revenue was $139.8 million, or 55.1%, and $138.4 million, or 55.1%, of
our total maintenance revenue for the quarters ended June 30, 2010 and 2009, respectively.
Domestic maintenance revenue for the quarter ended June 30, 2010 increased by $1.4 million, or
1.0%, over the prior year quarter, due to a $2.1 million increase in MSM maintenance revenue,
partially offset by a $0.7 million decrease in ESM maintenance revenue.
International Maintenance Revenue
International maintenance revenue was $114.0 million, or 44.9%, and $112.8 million, or 44.9%,
of our total maintenance revenue for the quarters ended June 30, 2010 and 2009, respectively.
International maintenance revenue for the quarter ended June 30, 2010 increased by $1.2 million, or
1.1%, over the prior year quarter, due to a $2.9 million increase in ESM maintenance revenue,
partially offset by a $1.7 million decrease in MSM maintenance revenue. The ESM maintenance revenue
increase was attributable to an increase of $1.3 million in our EMEA market and a net increase of
$1.6 million in our other international markets. The MSM maintenance revenue decrease was
attributable to a decrease of $3.6 million in our EMEA market, partially offset by increases of
$1.0 million and $0.9 million in our Asia Pacific and other international markets, respectively.
Professional Services Revenue
Professional services revenue for the quarter ended June 30, 2010 increased by $4.1 million,
or 12.9%, over the prior year quarter, which is reflective of a $1.8 million, or 11.3%, increase in
domestic professional services revenue and a $2.3 million, or 14.5%, increase in international
professional services revenue. These increases were attributable to increases in implementation,
consulting and education services revenue quarter over quarter.
Operating Expenses
Quarter Ended June 30, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(In millions) | ||||||||||||
Cost of license revenue |
$ | 31.9 | $ | 28.1 | 13.5 | % | ||||||
Cost of maintenance revenue |
40.7 | 37.3 | 9.1 | % | ||||||||
Cost of professional services revenue |
35.7 | 33.2 | 7.5 | % | ||||||||
Selling and marketing expenses |
141.3 | 125.9 | 12.2 | % | ||||||||
Research and development expenses |
38.0 | 53.7 | (29.2 | )% | ||||||||
General and administrative expenses |
53.8 | 54.6 | (1.5 | )% | ||||||||
Amortization of intangible assets |
8.4 | 8.0 | 5.0 | % | ||||||||
Severance, exit costs and related charges |
3.0 | 1.0 | 200.0 | % | ||||||||
Total operating expenses |
$ | 352.8 | $ | 341.8 | 3.2 | % | ||||||
We estimate that the effect of foreign currency exchange rate fluctuations on our
international operating expenses resulted in an approximate $1.2 million reduction in operating
expenses for the quarter ended June 30, 2010 as compared to the prior year quarter, on a constant
currency basis.
Cost of License Revenue
Cost of license revenue consists primarily of the amortization of capitalized software costs
for internally developed products, the amortization of acquired technology for products acquired
through business combinations, license-based royalties to third parties and production and
distribution costs for initial product licenses. For the quarters ended June 30, 2010 and 2009,
cost of license revenue was $31.9 million, or 6.9%, and $28.1 million, or 6.2%, of total revenue,
respectively, and 18.6% and 16.8% of license revenue, respectively.
20
Table of Contents
Cost of license revenue for the quarter ended June 30, 2010 increased by $3.8 million, or
13.5%, over the prior year quarter. This increase was attributable to a $2.2 million net increase
in amortization of acquired technology, principally resulting from fiscal 2010 acquisitions, and a
$2.0 million increase in amortization of capitalized software development costs, partially offset
by a net $0.4 million reduction in other expenses.
Cost of Maintenance Revenue
Cost of maintenance revenue consists primarily of the costs associated with customer support
and research and development personnel that provide maintenance, enhancement and support services
to our customers. For the quarters ended June 30, 2010 and 2009, cost of maintenance revenue was
$40.7 million, or 8.8%, and $37.3 million, or 8.3%, of total revenue, respectively, and 16.0% and
14.8% of maintenance revenue, respectively.
Cost of maintenance revenue for the quarter ended June 30, 2010 increased by $3.4 million, or
9.1%, over the prior year quarter. This increase was attributable to a $1.9 million increase in
personnel and related costs, including third party subcontracting fees, and a net $1.5 million
increase in other expenses.
Cost of Professional Services Revenue
Cost of professional services revenue consists primarily of salaries, related personnel costs
and third party fees associated with implementation, integration and education services that we
provide to our customers and the related infrastructure to support this business. For the quarters
ended June 30, 2010 and 2009, cost of professional services revenue was $35.7 million, or 7.7%, and
$33.2 million, or 7.4%, of total revenue, respectively, and 99.4% and 104.4% of professional
services revenue, respectively.
Cost of professional services revenue for the quarter ended June 30, 2010 increased by $2.5
million, or 7.5%, over the prior year quarter. This increase was attributable primarily to a $1.3
million increase in professional services enablement personnel costs and a $1.0 million increase in
third party subcontracting fees associated with an increase in implementation and consulting
services.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries, related personnel costs, sales
commissions and costs associated with advertising, marketing, industry trade shows and sales
seminars. For the quarters ended June 30, 2010 and 2009, selling and marketing expenses were $141.3
million, or 30.7%, and $125.9 million, or 28.0%, of total revenue, respectively.
Selling and marketing expenses for the quarter ended June 30, 2010 increased by $15.4 million,
or 12.2%, over the prior year quarter. This increase was attributable to a $10.3 million increase
in sales personnel costs, primarily due to an increase in sales personnel headcount and related
variable compensation expense, a $1.6 million increase in share-based compensation expense, a $1.2
million increase in marketing campaign expenditures and a net $2.3 million increase in other
expenses.
Research and Development Expenses
Research and development expenses consist primarily of salaries and personnel costs related to
software developers and development support personnel, including software programmers, testing and
quality assurance personnel and writers of technical documentation, such as product manuals and
installation guides. These expenses also include computer hardware and software costs,
telecommunications costs and personnel costs associated with our development and production labs.
For the quarters ended June 30, 2010 and 2009, research and development expenses were $38.0
million, or 8.2%, and $53.7 million, or 11.9%, of total revenue, respectively.
Research and development expenses for the quarter ended June 30, 2010 decreased by $15.7
million, or 29.2%, from the prior year quarter. This decrease was attributable to an $18.4 million
quarter over quarter increase in capitalized research and development costs related to software
development projects offset by a net $2.7 million increase in other
expenses. The increase in capitalization was driven by the scope and
timing of several key future product releases.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related personnel costs
of executive management, finance and accounting, facilities management, legal and human resources.
Other costs included in general and administrative expenses include fees paid for outside
accounting and legal services, consulting projects and insurance. For the quarters
ended June 30, 2010 and 2009, general and administrative expenses were $53.8 million, or
11.7%, and $54.6 million, or 12.1%, of total revenue, respectively.
21
Table of Contents
General and administrative expenses for the quarter ended June 30, 2010 decreased by $0.8
million, or 1.5%, from the prior year quarter. This decrease was attributable to a net $3.1 million
decrease in various administrative expenses, partially offset by a $2.3 million increase in
share-based compensation expense.
Amortization of Intangible Assets
Amortization of intangible assets consists primarily of the amortization of finite-lived
acquired technology and customer relationships in connection with acquisitions consummated in prior
years. Amortization of intangible assets for the quarter ended June 30, 2010 increased by $0.4
million, or 5.0%, over the prior year quarter. This increase was attributable primarily to
amortization associated with intangible assets acquired in connection with our fiscal 2010
acquisitions.
Severance, Exit Costs and Related Charges
During the quarters ended June 30, 2010 and 2009, we recorded charges of $3.0 million and $1.0
million, respectively, related to identified workforce reductions and associated cash separation
packages paid or accrued by us. While we will reduce future operating expenses as a result of
these actions, we anticipate that these reductions will be substantially offset by incremental
personnel-related expenses due to headcount growth in strategic areas. We will continue to evaluate
additional actions that may be necessary in the future to achieve our business goals.
Other Income (Loss), Net
Other income (loss), net, consists primarily of interest expense on our senior unsecured notes
due 2018 and capital leases, interest earned, realized gains and losses on investments, and net
foreign currency impacts.
Other income (loss), net, for the quarters ended June 30, 2010 and 2009, was a loss of $5.5
million and $0.7 million, respectively. This change was attributable primarily to a net change of
$2.3 million in the value of our deferred compensation program,
a $1.8 million increase in net
foreign currency losses and a $0.6 million decrease in interest
income.
Income Taxes
We recorded income tax expense of $9.8 million and $25.1 million for the quarters ended June
30, 2010 and 2009, respectively, resulting in an effective tax rate of 9.6% and 23.3%,
respectively. The effective tax rate is impacted primarily by the worldwide mix of consolidated
earnings before taxes and our policy of indefinitely re-investing earnings from certain low tax
jurisdictions, additional accruals and changes in estimates related to our uncertain tax positions,
benefits associated with income attributable to both domestic production activities and the
extraterritorial income exclusion. During the quarter ended June 30, 2010, we recorded a net tax
benefit of $14.0 million associated with a settlement with a
taxing authority related to prior years
tax matters, resulting in a decrease in the effective tax rate compared to the quarter ended June
30, 2009.
Non-GAAP Financial Measures and Reconciliations
In an effort to provide investors with additional information regarding our results as
determined by GAAP, we disclose various non-GAAP financial measures in our quarterly earnings press
releases and other public disclosures. The primary non-GAAP financial measures we focus on are: (i)
non-GAAP operating income, (ii) non-GAAP net earnings, and (iii) non-GAAP diluted earnings per
share. Each of these financial measures excludes the impact of certain items and therefore has not
been calculated in accordance with GAAP. These non-GAAP financial measures exclude share-based
compensation expense; the amortization of intangible assets; severance, exit costs and related
charges; as well as the related tax impacts of these items; and certain discrete tax items. Each of
the non-GAAP adjustments is described in more detail below. A reconciliation of each of these
non-GAAP financial measures to its most comparable GAAP financial measure is also included below.
We believe that these non-GAAP financial measures provide meaningful supplemental information
regarding our operating results because they exclude amounts that BMC management and the Board of
Directors do not consider part of core operating results when assessing the performance of the
organization. In addition, we have historically reported similar
non-GAAP financial measures and we believe that inclusion of
these non-GAAP financial measures provides consistency and comparability with
past reports of financial results. Accordingly, we believe these non-GAAP financial measures are
useful to investors in allowing for greater transparency of supplemental information used by
management.
22
Table of Contents
While we believe that these non-GAAP financial measures provide useful supplemental
information, there are limitations associated with the use of these non-GAAP financial measures.
These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a
comprehensive system of accounting and may not be completely comparable to similarly titled
measures of other companies due to potential differences in the exact method of calculation between
companies. Items such as share-based compensation expense; the
amortization of intangible assets; severance, exit costs and related
charges; as well as the related tax impacts of these items; and
certain discrete tax items that are excluded from our non-GAAP financial
measures can have a material impact on net earnings. As a result, these non-GAAP financial measures
have limitations and should not be considered in isolation from, or as a substitute for, net
earnings, cash flow from operations or other measures of performance prepared in accordance with
GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements
to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures
to their most comparable GAAP financial measure. Investors are encouraged to review the
reconciliations of these non-GAAP financial measures to their most comparable GAAP financial
measures below.
For a detailed explanation of the adjustments made to comparable GAAP financial measures, the
reasons why management uses these measures and the usefulness of these measures, see items (1) -
(5) below.
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Operating income: |
||||||||
GAAP operating income |
$ | 108.1 | $ | 108.2 | ||||
Share-based compensation expense (1) |
25.1 | 20.6 | ||||||
Amortization of intangible assets (2) |
20.6 | 18.0 | ||||||
Severance, exit costs and related charges (3) |
3.0 | 1.0 | ||||||
Non-GAAP operating income |
$ | 156.8 | $ | 147.8 | ||||
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net earnings: |
||||||||
GAAP net earnings |
$ | 92.8 | $ | 82.4 | ||||
Share-based compensation expense (1) |
25.1 | 20.6 | ||||||
Amortization of intangible assets (2) |
20.6 | 18.0 | ||||||
Severance, exit costs and related charges (3) |
3.0 | 1.0 | ||||||
Provision for income taxes on above pre-tax non-GAAP adjustments (4) |
(13.9 | ) | (11.4 | ) | ||||
Certain discrete tax items (5) |
(14.0 | ) | | |||||
Non-GAAP net earnings |
$ | 113.6 | $ | 110.6 | ||||
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
Diluted earnings per share*: |
||||||||
GAAP diluted earnings per share |
$ | 0.50 | $ | 0.44 | ||||
Share-based compensation expense (1) |
0.14 | 0.11 | ||||||
Amortization of intangible assets (2) |
0.11 | 0.10 | ||||||
Severance, exit costs and related charges (3) |
0.02 | 0.01 | ||||||
Provision for income taxes on above pre-tax non-GAAP adjustments (4) |
(0.08 | ) | (0.06 | ) | ||||
Certain discrete tax items (5) |
(0.08 | ) | | |||||
Non-GAAP diluted earnings per share * |
$ | 0.62 | $ | 0.59 | ||||
* | Non-GAAP diluted earnings per share is computed independently for each period presented. The sum
of GAAP diluted earnings per share and non-GAAP adjustments per share may not equal non-GAAP
diluted earnings per share due to rounding differences. |
23
Table of Contents
(1) | Share-based compensation expense. Our non-GAAP financial measures exclude the compensation
expenses required to be recorded by GAAP for equity awards to employees and directors.
Management and the Board of Directors believe it is useful in evaluating
corporate performance during a particular time period to review
the supplemental non-GAAP financial measures, excluding expenses related to share-based
compensation, because these costs are generally fixed at the time an award is granted, are
then expensed over several years and generally cannot be changed or influenced by management
once granted. |
|
(2) | Amortization of intangible assets. Our non-GAAP financial measures exclude costs associated
with the amortization of intangible assets, which are included in cost of license revenue and
amortization of intangible assets in our condensed consolidated statements of operations and
comprehensive income. Management and the Board of Directors believe it is useful in evaluating
corporate performance during a particular time period to review the supplemental non-GAAP financial measures,
excluding amortization of intangible assets, because these costs are fixed at the time of an acquisition, are then
amortized over a period of several years after the acquisition and generally cannot be changed
or influenced by management after the acquisition. |
|
(3) | Severance, exit costs and related charges. Our non-GAAP financial measures exclude severance,
exit costs and related charges, and any subsequent changes in
estimates, as they relate to our corporate restructuring activities.
Management and the Board of Directors believe it is useful in evaluating corporate
performance during a particular time period to review the
supplemental non-GAAP financial measures,
excluding restructuring costs, in order to provide comparability and
consistency with historical operating results. |
|
(4) | Provision for income taxes on above pre-tax non-GAAP adjustments. Our non-GAAP financial
measures exclude the tax impact of the above pre-tax non-GAAP adjustments. This amount is
calculated using the tax rates of each country to which these pre-tax non-GAAP adjustments
relate. Management excludes the non-GAAP measures on a net-of-tax basis in evaluating our
performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP
financial measures. |
|
(5) | Certain discrete tax items. Our non-GAAP financial measures exclude a net tax benefit of
$14.0 million in the quarter ended June 30, 2010 associated with a settlement with a taxing
authority related to prior years tax matters. Management excludes the impact of this item when
evaluating the performance of the Company, our business units and management teams, including
the determination of management incentive compensation, and when making decisions to allocate
resources. Therefore, we exclude this item when presenting non-GAAP financial measures. |
Liquidity and Capital Resources
At June 30, 2010, we had $1.5 billion in cash, cash equivalents and investments, approximately
47% of which was held by our international subsidiaries and was largely generated from our
international operations. Our international operations have generated $347.1 million of earnings
that we have determined will be invested indefinitely in those operations. Were such earnings to be
repatriated, we would incur a United States federal income tax liability that is not currently
accrued in our financial statements. We also had outstanding letters of credit, performance bonds
and similar instruments related to various customers, facilities and other obligations at June 30,
2010 of approximately $39.7 million.
At June 30, 2010, we held auction rate securities with a par value of $51.1 million, of which
securities with a par value of $39.9 million were classified as available-for-sale and a par value
of $11.2 million were classified as trading. The total estimated fair value was $45.2 million and
$60.5 million at June 30, 2010 and March 31, 2010, respectively. Our auction rate securities
consist entirely of bonds issued by public agencies that are backed by student loans with at least
a 97% guarantee by the federal government under the United States Department of Educations Federal
Family Education Loan Program. All of these bonds are currently rated investment grade by Moodys
or Standard and Poors. Auctions for these securities began
failing in early 2008 and have continued to fail, resulting in our continuing to hold such
securities and the issuers paying interest at the maximum contractual rates. We do not believe that
any of the underlying issuers of these auction rate securities are presently at risk of default or
that the underlying credit quality of the assets backing the auction rate security investments has
been impacted by the reduced liquidity of these investments. Based on our current ability to access
cash and other short-term investments, our expected operating cash flows, and other sources of cash
that we expect to be available, we do not anticipate the recent lack of liquidity of these
investments to have a material impact on our business strategy, financial condition, results of
operations or cash flows. Additionally, in November 2008, we entered into a put agreement with a
bank from which we have acquired certain auction rate securities with a remaining par value of
$11.2 million and an estimated fair value of $10.3 million at June 30, 2010. On July 1, 2010, we
exercised our right under this agreement to put the remaining securities of $11.2 million to the
bank at par value.
24
Table of Contents
We believe that our existing cash and investment balances and funds generated from operating
activities will be sufficient to meet our working and other capital requirements for the
foreseeable future. In the normal course of business, we evaluate the merits of acquiring
technology or businesses, or establishing strategic relationships with or investing in these
businesses. We may elect to use available cash and investments to fund such activities in the
future. In the event additional needs for cash arise, we might find it advantageous to utilize
third party financing sources based on factors such as our then available cash and its source
(i.e., cash held in the United States versus international locations), the cost of financing and
our internal cost of capital.
We may from time to time seek to repurchase or retire securities, including outstanding
borrowings and equity securities, in open market repurchases, unsolicited or solicited privately
negotiated transactions or in such other manner as will comply with the provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder. Such repurchases or
exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing
market conditions, our liquidity requirements and contractual restrictions, if applicable. The
amount of repurchases, which is subject to management discretion, may be material and may change
from period to period.
Our cash flows for the quarters ended June 30, 2010 and 2009 were:
Quarter Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net cash provided by operating activities |
$ | 167.4 | $ | 155.3 | ||||
Net cash provided by (used in) investing activities |
32.4 | (158.0 | ) | |||||
Net cash used in financing activities |
(148.6 | ) | (39.4 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(9.8 | ) | 15.8 | |||||
Net change in cash and cash equivalents |
$ | 41.4 | $ | (26.3 | ) | |||
Cash Flows from Operating Activities
Our primary method for funding operations and growth has been through cash flows generated
from operating activities. Net cash provided by operating activities for the quarter ended June 30,
2010 increased by $12.1 million over the prior year quarter, attributable primarily to an increase
in net earnings before non-cash expenses (principally depreciation, amortization and share-based
compensation expense), partially offset by the net impact of working capital changes.
Cash Flows from Investing Activities
Net cash provided by investing activities for the quarter ended June 30, 2010 was $32.4
million as compared to net cash used in investing activities of $158.0 million for the quarter
ended June 30, 2009. This difference was attributable primarily to a decrease in investment
purchases and an increase in proceeds from the maturities and sales of investments.
Cash Flows from Financing Activities
Net cash used in financing activities for the quarter ended June 30, 2010 increased by $109.2
million over the prior year quarter. This increase was attributable primarily to an increase in
treasury stock acquired, and an increase in stock repurchases to satisfy employee tax withholding
obligations.
25
Table of Contents
Treasury Stock Purchases
Our Board of Directors had previously authorized a total of $3.0 billion to repurchase common
stock. In April 2010, our Board of Directors authorized an additional $1.0 billion to repurchase
stock. During the quarter ended June 30, 2010, we purchased 4.0 million shares for $149.0 million.
From the inception of the stock repurchase authorization through June 30, 2010, we have purchased
126.3 million shares for $3.1 billion. At June 30, 2010, there was $920.8 million remaining in the
stock repurchase program, which does not have an expiration date. In addition, during the quarter
ended June 30, 2010, we repurchased 0.3 million shares for $10.7 million to satisfy employee tax
withholding obligations upon the vesting of share-based awards. The repurchase of
stock will continue to be funded primarily with cash generated from domestic operations and,
therefore, affects our overall domestic versus international liquidity balances. See PART II.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds below for a monthly detail of
treasury stock purchases for the quarter ended June 30, 2010.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses. On an on-going basis, we make and evaluate estimates and judgments, including those
related to revenue recognition, capitalized software development costs, share-based compensation,
goodwill and intangible assets, valuation of investments and accounting for income taxes. We base
our estimates on historical experience and various other assumptions that are believed to be
reasonable under the circumstances; the results of which form the basis for making judgments about
amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts
of liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates and such estimates may change if the underlying conditions or assumptions change.
We have discussed the development and selection of the critical accounting policies and estimates
with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our
related disclosures. The critical accounting policies related to the estimates and judgments are
discussed in our Annual Report on Form 10-K for the year ended March 31, 2010 under Managements
Discussion and Analysis of Financial Condition and Results of Operations. There have been no
changes to our critical accounting policies and estimates during the quarter ended June 30, 2010.
New Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued new revenue recognition guidance for arrangements that
include both software and non-software related deliverables, where certain of those deliverables
are non-software related. This guidance requires entities to allocate the overall consideration to
each deliverable by using a best estimate of the selling price of individual deliverables in the
arrangement in the absence of vendor-specific objective evidence or other third party evidence of
the selling price. Additionally, the guidance modifies the manner in which the transaction
consideration is allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. The new guidance is effective for us
in the first quarter of fiscal 2012 interim financial statements, with earlier adoption permitted.
We are currently evaluating the impact of adopting this new guidance on our consolidated financial
statements.
In
July 2010, the FASB issued new disclosure guidance related to finance
receivables and the related allowances for credit losses. This
guidance introduces a greater level of disaggregation based on the
underlying characteristics of the finance receivables. The disclosure
requirements include, based on the related disaggregation criteria, a
rollforward of the allowance for credit losses and the related
balance of the finance receivables, significant purchases and sales
of finance receivables, and various qualitative disclosures including
credit quality, aging, nonaccrual status and impairments. The new
guidance is effective for us in the third quarter of fiscal 2011.
Available Information
Our internet website address is http://www.bmc.com. Our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the Exchange Act) are available through the investor relations page of our internet website free
of charge as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (SEC). Our internet website and the
information contained therein or connected thereto are not intended to be incorporated into this
Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a variety of risks, including foreign currency exchange rate fluctuations,
the impact of changes in interest rates on our investments and long-term borrowings and changes in
market prices of our debt and equity securities. In the normal course of business, we employ
established policies and procedures to manage these risks including the use of derivative
instruments. There have been no material changes in our foreign currency exchange rate risk
management strategy or our portfolio management strategy subsequent to March 31, 2010; therefore,
the risk profile of our market risk sensitive
instruments remains substantially unchanged from the description in our Annual Report on Form
10-K for the year ended March 31, 2010.
26
Table of Contents
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and
CFO have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) under the Exchange Act), are effective.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Rule 13a-15 and Rule 15d-15 under the Exchange Act
that occurred during our first fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We
previously disclosed a lawsuit filed against us by Achates Reference
Publishing, Inc. in the United States District Court for the Eastern
District of Texas, Marshall Division alleging patent infringement. In
July 2010, without admitting any liability, we entered into a
confidential settlement agreement with Achates Reference Publishing,
Inc. which permanently resolves for us and our customers all claims
and issues related to the asserted patents.
Item 1A. Risk Factors
There have been no material changes to the risk factors as presented in our Annual Report on
Form 10-K for the year ended March 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Dollar Value | Approximate Dollar | |||||||||||||||||||
Total Number of Shares | of Shares Purchased | Value of Shares that | ||||||||||||||||||
Total Number of | Average Price | Purchased as Part of a | as Part of a | may yet be | ||||||||||||||||
Shares | Paid per | Publicly Announced | Publicly Announced | Purchased Under | ||||||||||||||||
Period | Purchased(1) | Share | Program(2) | Program(2) | the Program(2) | |||||||||||||||
April 1-30, 2010 |
389,432 | $ | 39.70 | 389,200 | $ | 15,452,566 | $ | 1,054,311,718 | ||||||||||||
May 1-31, 2010 |
2,233,841 | $ | 37.21 | 2,181,700 | 81,180,403 | $ | 973,131,315 | |||||||||||||
June 1- 30, 2010 |
1,665,738 | $ | 36.80 | 1,422,800 | 52,358,220 | $ | 920,773,095 | |||||||||||||
Total |
4,289,011 | $ | 37.31 | 3,993,700 | $ | 148,991,189 | $ | 920,773,095 | ||||||||||||
(1) | Includes 295,311 shares of our common stock withheld by us to satisfy employee withholding
obligations. |
|
(2) | Our Board of Directors had previously authorized a total of $3.0 billion to repurchase common
stock. In April 2010, our Board of Directors authorized an additional $1.0 billion to
repurchase stock. At June 30, 2010, approximately $920.8 million remains authorized in this
stock repurchase program and the program does not have an expiration date. |
27
Table of Contents
Item 6. Exhibits
(a) Exhibits.
3.1 | Restated Certificate of Incorporation, as amended, of BMC Software, Inc. |
|||
31.1 | Certification of Chief Executive Officer of BMC Software, Inc. pursuant to
Section 13a-14(a) of the Securities Exchange Act of 1934. |
|||
31.2 | Certification of Chief Financial Officer of BMC Software, Inc. pursuant to
Section 13a-14(a) of the Securities Exchange Act of 1934. |
|||
32.1 | Certification of Chief Executive Officer of BMC Software, Inc. pursuant to
Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. |
|||
32.2 | Certification of Chief Financial Officer of BMC Software, Inc. pursuant to
Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. |
|||
101.INS | XBRL Instance Document. |
|||
101.SCH | XBRL Taxonomy Extension Schema Document. |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
|||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
28
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BMC SOFTWARE, INC. | ||||||
July
29, 2010
|
By: | /s/ ROBERT E. BEAUCHAMP | ||||
Chairman of the Board, President and Chief Executive Officer |
July
29, 2010
|
By: | /s/ STEPHEN B. SOLCHER | ||||
Senior Vice President and Chief Financial Officer |
29
Table of Contents
Exhibits
INDEX
3.1 | Restated Certificate of Incorporation, as amended, of BMC Software, Inc. |
|||
31.1 | Certification of Chief Executive Officer of BMC Software, Inc. pursuant to
Section 13a-14(a) of the Securities Exchange Act of 1934. |
|||
31.2 | Certification of Chief Financial Officer of BMC Software, Inc. pursuant to
Section 13a-14(a) of the Securities Exchange Act of 1934. |
|||
32.1 | Certification of Chief Executive Officer of BMC Software, Inc. pursuant to
Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. |
|||
32.2 | Certification of Chief Financial Officer of BMC Software, Inc. pursuant to
Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. |
|||
101.INS | XBRL Instance Document. |
|||
101.SCH | XBRL Taxonomy Extension Schema Document. |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
|||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
30