Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - BMC SOFTWARE INCFinancial_Report.xls
EX-31.2 - EXHIBIT 31.2 - BMC SOFTWARE INCc18446exv31w2.htm
EX-32.2 - EXHIBIT 32.2 - BMC SOFTWARE INCc18446exv32w2.htm
EX-31.1 - EXHIBIT 31.1 - BMC SOFTWARE INCc18446exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - BMC SOFTWARE INCc18446exv32w1.htm
Table of Contents

 
 
UNITED STATES
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, 2011
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
(State or other jurisdiction of
incorporation or organization)
  74-2126120
(IRS Employer
Identification No.)
     
2101 CityWest Boulevard    
Houston, Texas
(Address of principal executive offices)
  77042-2827
(Zip Code)
(713) 918-8800
(Registrant’s 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   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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 25, 2011, there were 175,521,000 outstanding shares of Common Stock, par value $.01, of the registrant.
 
 

 

 


 

BMC SOFTWARE, INC.
QUARTER ENDED JUNE 30, 2011
INDEX
         
    PAGE  
 
       
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    16  
 
       
    28  
 
       
    29  
 
       
       
 
       
    30  
 
       
    30  
 
       
    30  
 
       
    31  
 
       
    32  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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)
                 
    June 30, 2011     March 31, 2011  
    (Unaudited)        
 
               
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 1,582.9     $ 1,660.9  
Short-term investments
    31.9       27.8  
Trade accounts receivable, net
    176.2       284.1  
Trade finance receivables, net
    99.0       112.6  
Deferred tax assets
    64.1       65.1  
Other current assets
    109.2       116.9  
 
           
Total current assets
    2,063.3       2,267.4  
Property and equipment, net
    90.9       94.2  
Software development costs, net
    201.9       193.8  
Long-term investments
    64.1       67.8  
Long-term trade finance receivables, net
    132.8       110.8  
Intangible assets, net
    136.6       100.9  
Goodwill
    1,511.6       1,407.0  
Other long-term assets
    236.5       243.5  
 
           
Total assets
  $ 4,437.7     $ 4,485.4  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Trade accounts payable
  $ 33.3     $ 30.8  
Finance payables
    1.0       16.6  
Accrued liabilities
    204.0       316.0  
Deferred revenue
    1,065.8       1,026.9  
 
           
Total current liabilities
    1,304.1       1,390.3  
Long-term deferred revenue
    1,002.7       928.6  
Long-term borrowings
    333.9       335.6  
Other long-term liabilities
    163.3       168.0  
 
           
Total liabilities
    2,804.0       2,822.5  
 
           
Commitments and contingencies (Note 8)
               
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
    1,099.2       1,077.4  
Retained earnings
    2,940.9       2,845.2  
Accumulated other comprehensive income
    40.1       32.0  
 
           
 
    4,082.7       3,957.1  
Treasury stock, at cost (73.6 and 71.9 shares)
    (2,449.0 )     (2,294.2 )
 
           
Total stockholders’ equity
    1,633.7       1,662.9  
 
           
Total liabilities and stockholders’ equity
  $ 4,437.7     $ 4,485.4  
 
           
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)
                 
    Quarter Ended June 30,  
    2011     2010  
Revenue:
               
License
  $ 189.5     $ 171.2  
Maintenance
    264.6       253.8  
Professional services
    48.3       35.9  
 
           
Total revenue
    502.4       460.9  
 
           
Operating expenses:
               
Cost of license revenue
    38.3       31.9  
Cost of maintenance revenue
    43.8       40.7  
Cost of professional services revenue
    47.4       37.0  
Selling and marketing expenses
    144.7       142.1  
Research and development expenses
    44.7       38.5  
General and administrative expenses
    58.6       54.2  
Amortization of intangible assets
    9.8       8.4  
 
           
Total operating expenses
    387.3       352.8  
 
           
Operating income
    115.1       108.1  
 
           
Other income (loss), net:
               
Interest and other income, net
    3.8       0.6  
Interest expense
    (5.5 )     (5.1 )
Gain (loss) on investments, net
    0.1       (1.0 )
 
           
Total other income (loss), net
    (1.6 )     (5.5 )
 
           
Earnings before income taxes
    113.5       102.6  
Provision for income taxes
    17.8       9.8  
 
           
Net earnings
  $ 95.7     $ 92.8  
 
           
Basic earnings per share
  $ 0.54     $ 0.51  
 
           
Diluted earnings per share
  $ 0.53     $ 0.50  
 
           
Shares used in computing basic earnings per share
    176.3       180.3  
 
           
Shares used in computing diluted earnings per share
    180.6       183.8  
 
           
Comprehensive income:
               
Net earnings
  $ 95.7     $ 92.8  
Net changes in accumulated comprehensive income (net of tax):
               
Foreign currency translation adjustment
    8.3       (18.8 )
Unrealized gain (loss) on available-for-sale securities
    (0.2 )     0.7  
 
           
Total comprehensive income
  $ 103.8     $ 74.7  
 
           
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)
                 
    Quarter Ended June 30,  
    2011     2010  
Cash flows from operating activities:
               
Net earnings
  $ 95.7     $ 92.8  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    53.5       44.7  
Deferred income tax provision (benefit)
    (3.2 )     6.1  
Share-based compensation expense
    30.8       25.1  
Loss (gain) on investments, net and other
    (0.2 )     1.0  
Changes in operating assets and liabilities, net of acquisitions:
               
Trade accounts receivable
    111.1       43.3  
Trade finance receivables
    (7.7 )     95.6  
Prepaid and other current assets
    4.0        
Other long-term assets
    3.3       2.0  
Accrued and other current liabilities
    (116.2 )     (107.9 )
Deferred revenue
    109.8       (18.0 )
Other long-term liabilities
    (4.1 )     (18.8 )
Other operating assets and liabilities
    (15.4 )     1.5  
 
           
Net cash provided by operating activities
    261.4       167.4  
 
           
Cash flows from investing activities:
               
Proceeds from maturities of investments
    5.0       50.0  
Proceeds from sales of investments
    1.2       18.4  
Purchases of investments
    (6.7 )     (1.9 )
Cash paid for acquisitions, net of cash acquired
    (145.9 )      
Capitalization of software development costs
    (28.8 )     (30.1 )
Purchases of property and equipment
    (3.0 )     (5.0 )
Other investing activities
          1.0  
 
           
Net cash provided by (used in) investing activities
    (178.2 )     32.4  
 
           
Cash flows from financing activities:
               
Treasury stock acquired
    (180.5 )     (149.0 )
Repurchases of stock to satisfy employee tax withholding obligations
    (21.7 )     (10.7 )
Proceeds from stock options exercised and other
    26.4       11.2  
Excess tax benefit from share-based compensation expense
    11.6       2.9  
Repayments of borrowings and capital lease obligations
    (2.6 )     (3.0 )
 
           
Net cash used in financing activities
    (166.8 )     (148.6 )
 
           
Effect of exchange rate changes on cash and cash equivalents
    5.6       (9.8 )
 
           
Net change in cash and cash equivalents
    (78.0 )     41.4  
Cash and cash equivalents, beginning of period
    1,660.9       1,368.6  
 
           
Cash and cash equivalents, end of period
  $ 1,582.9     $ 1,410.0  
 
           
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 11.2     $ 11.2  
Cash paid for income taxes, net of amounts refunded
  $ 8.6     $ 38.6  
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)
(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. 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 period’s financial statements to conform to the current period’s 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, 2011, as filed with the SEC on Form 10-K.
Recently Adopted Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued updated guidance for intangible assets, specifically related to the annual goodwill impairment test. This guidance requires entities to perform a qualitative evaluation of whether it is more likely than not that goodwill is impaired in situations where reporting units have a carrying value that is zero or negative. If the qualitative evaluation determines it is more likely than not that goodwill is impaired, step two of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The new guidance is effective for us beginning with our fiscal 2012 goodwill impairment test and is not expected to have a material effect on our financial position, results of operations or cash flows.
In October 2009, the FASB issued new revenue recognition guidance for arrangements that include both software and non-software related deliverables. 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 (VSOE) 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 was effective for us in the first quarter of fiscal 2012 and did not have a material effect on our financial position, results of operations or cash flows.
(2) Business Combinations
In April 2011, we acquired all of the outstanding shares of Coradiant Inc. (Coradiant), a global provider of end-to-end performance management of web applications, for total cash consideration of $130.0 million. Coradiant’s operating results have been included in our condensed consolidated financial statements since the acquisition date. This acquisition expands BMC’s current application performance management offering to provide real-time insight into application performance and its impact on user behavior across enterprise, software-as-a-service (SaaS) and cloud environments. The purchase consideration was preliminarily allocated to acquired assets and assumed liabilities consisting primarily of $18.1 million of acquired technology and $22.7 million of customer relationships, both with a weighted average economic life of three years, in addition to other tangible assets and liabilities. This acquisition resulted in a preliminary allocation of $93.2 million to goodwill assigned to our Enterprise Service Management (ESM) segment. Factors that contributed to a purchase price that resulted in goodwill include, but are not limited to, the retention of research and development personnel with the skills to develop future Coradiant technology, support personnel to provide maintenance services related to Coradiant products and a trained sales force capable of selling current and future Coradiant products and the opportunity to cross-sell our products and Coradiant products to existing customers.
In June 2011, we also completed the acquisitions of Aeroprise, Inc. (Aeroprise), a provider of mobile IT service management solutions, as part of our ESM segment, and Neon Enterprise Software, LLC’s (Neon) portfolio of IMS solution software as part of our Mainframe Service Management (MSM) segment, for combined purchase consideration of $21.0 million. The purchase consideration was preliminarily allocated to acquired assets and assumed liabilities consisting primarily of $17.3 million of acquired technology, with weighted average economic lives of approximately three years, in addition to other tangible assets and liabilities. These acquisitions resulted in a preliminary allocation of $7.6 million to goodwill assigned to our ESM segment.

 

6


Table of Contents

We are in the process of finalizing our assessment of the fair value of acquired intangible assets and will adjust the purchase price allocations when finalized.
(3) 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, 2011   Total     (Level 1)     (Level 2)     (Level 3)     Technique  
    (In millions)  
Assets
                                       
Cash equivalents
                                       
Money-market funds
  $ 783.1     $ 783.1     $     $       A  
Certificates of deposit
    81.5       81.5                   A  
Short-term and long-term investments
                                       
United States Treasury securities
    49.9       49.9                   A  
Auction rate securities
    26.8                   26.8       B  
Mutual funds
    19.3       19.3                   A  
Foreign currency forward contracts
    1.5             1.5             A  
 
                               
Total
  $ 962.1     $ 933.8     $ 1.5     $ 26.8          
 
                               
Liabilities
                                       
Foreign currency forward contracts
  $ (2.7 )   $     $ (2.7 )   $       A  
 
                               
Total
  $ (2.7 )   $     $ (2.7 )   $          
 
                               
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.
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 value the asset or liability.

 

7


Table of Contents

The following table summarizes the activity in Level 3 financial instruments for the quarters ended June 30, 2011 and 2010:
                                                 
    Quarter Ended June 30, 2011     Quarter Ended June 30, 2010  
    Auction                     Auction              
    Rate     Put             Rate     Put        
    Securities     Option     Total     Securities     Option     Total  
    (In millions)  
Balance at the beginning of the period
  $ 27.2     $     $ 27.2     $ 60.5     $ 1.1     $ 61.6  
Redemption of auction rate securities
    (0.2 )           (0.2 )     (16.2 )           (16.2 )
Change in unrealized gain (loss) included in interest and other income, net
                      0.2       (0.2 )      
Change in unrealized gain (loss) included in other comprehensive income
    (0.2 )           (0.2 )     0.7             0.7  
 
                                   
Balance at the end of the period
  $ 26.8     $     $ 26.8     $ 45.2     $ 0.9     $ 46.1  
 
                                   
Investments
Our cash, cash equivalents and investments were comprised of the following:
                                                 
    June 30, 2011     March 31, 2011  
    Cash and                     Cash and              
    Cash     Short-term     Long-term     Cash     Short-term     Long-term  
    Equivalents     Investments     Investments     Equivalents     Investments     Investments  
    (In millions)  
Measured at fair value:
                                               
Available-for-sale
                                               
United States Treasury securities
  $     $ 31.9     $ 18.0     $ 525.0     $ 27.8     $ 22.1  
Certificates of deposit
    81.5                   38.4              
Auction rate securities
                26.8                   27.2  
Trading
                                               
Mutual funds
                19.3                   18.5  
 
                                   
Total debt and equity investments measured at fair value
    81.5       31.9       64.1       563.4       27.8       67.8  
 
                                   
 
                                               
Cash on hand
    718.3                   412.8              
Money-market funds
    783.1                   684.7              
 
                                   
Total cash, cash equivalents and investments
  $ 1,582.9     $ 31.9     $ 64.1     $ 1,660.9     $ 27.8     $ 67.8  
 
                                   
Amounts included in accumulated other comprehensive income from available- for-sale securities (pre-tax):
                                               
Unrealized losses*
  $     $     $ 2.8     $     $     $ 2.6  
 
                                   
     
*  
The unrealized losses on available-for-sale securities at June 30, 2011 and March 31, 2011 relate to the auction rate securities.

 

8


Table of Contents

The following summarizes the underlying contractual maturities of our available-for-sale investments in debt securities at June 30, 2011:
                 
            Fair  
    Cost     Value  
    (In millions)  
Due in one year or less
  $ 113.4     $ 113.4  
Due between one and two years
    18.0       18.0  
Due after ten years
    29.6       26.8  
 
           
Total
  $ 161.0     $ 158.2  
 
           
At June 30, 2011 and March 31, 2011, we held auction rate securities with a par value of $29.6 million and $29.8 million, respectively, which were classified as available-for-sale. The total estimated fair value of our auction rate securities was $26.8 million and $27.2 million at June 30, 2011 and March 31, 2011, 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 Education’s Federal Family Education Loan Program. All of these bonds are currently rated investment grade by Moody’s or Standard and Poor’s. 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. Periodically, the issuers of certain of our auction rate securities have redeemed portions of our holdings at par value plus accrued interest. During the quarters ended June 30, 2011 and 2010, issuers redeemed available-for-sale holdings of $0.2 million and $10.8 million, respectively, and trading holdings of $5.4 million during the quarter ended June 30, 2010.
In November 2008, we entered into a put agreement with a bank from which we acquired certain auction rate securities. On July 1, 2010, we exercised our right under this agreement to put the remaining securities subject to this agreement, with $11.2 million par value, to the bank. The auction rate securities subject to the put were classified as short-term investments and trading securities and, accordingly, any changes in the fair value of these securities were 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, prior to the exercise of the put on July 1, 2010, resulted in minimal net impact to the condensed consolidated statement of operations for the quarter ended June 30, 2010.
The unrealized loss on our available-for-sale auction rate securities, which have a fair value of $26.8 million at June 30, 2011, was $2.8 million and was recorded in accumulated other comprehensive income 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, 2011 and March 31, 2011.
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 their net settlement position with each respective counterparty at the balance sheet date.

 

9


Table of Contents

The fair value of our outstanding foreign currency forward contracts that closed in a gain position at June 30, 2011 and March 31, 2011 was $1.5 million and $5.8 million, respectively, and was recorded within 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, 2011 and March 31, 2011 was $2.7 million and $3.3 million, respectively, and was recorded within accrued liabilities 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,     March 31,  
    2011     2011  
    (In millions)  
 
               
Foreign Currency Forward Contracts (receive United States dollar/pay foreign currency)
               
 
               
Euro
  $ 197.5     $ 158.5  
Australian dollar
    25.3       13.9  
Brazilian real
    13.2       5.6  
British pound
    9.3       5.0  
Chinese yuan renminbi
    8.8       7.6  
New Zealand dollar
    4.4       2.9  
Swiss franc
    3.9       1.5  
South Korean won
    3.8       4.6  
Norwegian krone
    3.6       2.0  
Danish krone
    3.6       3.0  
Canadian dollar
          4.2  
Other
    5.0       4.2  
 
           
Total
  $ 278.4     $ 213.0  
 
           
 
               
Foreign Currency Forward Contracts (pay United States dollar/receive foreign currency)
               
 
               
Israeli shekel
  $ 161.9     $ 151.6  
Indian rupee
    7.7       9.1  
Mexican peso
    6.2       9.3  
Other
    3.8       2.2  
 
           
Total
  $ 179.6     $ 172.2  
 
           
Our use of foreign currency forward exchange contracts is intended to principally offset gains and losses associated with foreign currency exposures. Therefore, the notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances and currency denomination of monetary assets and liabilities maintained by our global entities. The effect of the foreign currency forward contracts for the quarters ended June 30, 2011 and 2010, was a loss of $3.7 million and a gain of $11.5 million, respectively, which, after including gains and losses on our foreign currency exposures, resulted in a net loss of $1.0 million and $2.2 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.
Trade Finance Receivables
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, 2011 and 2010, we transferred $11.1 million and $109.0 million, respectively, of such receivables through these programs. Finance receivables are typically transferred within several months after origination and the outstanding principal balance at the time of transfer typically approximates fair value.

 

10


Table of Contents

For those finance receivables not transferred, we evaluate the credit risk of finance receivables in our portfolio based on regional characteristics specific to the risk climate in each of our geographic operations as well as based on internal credit quality indicators for individual receivables. We evaluate the credit risk of finance receivables using an internal credit rating system based on whether an individual receivable meets specific internal criteria including counterparty credit rating and receivable maturity date and assign an internal credit rating of 1, 2 or 3, with a credit rating of 1 representing the best credit quality.
For all regions and credit categories, a finance receivable will be specifically reserved once deemed uncollectible. As of June 30, 2011, we held $231.8 million of finance receivables, net of $0.3 million of specific receivables which have been fully reserved.
At June 30, 2011, our finance receivables balance, net of allowance, by region and by class of internal credit rating is as follows:
                                         
    North America     EMEA     Asia Pacific     Latin America     Total  
    (In millions)  
Class 1
  $ 107.2     $ 38.8     $ 17.9     $ 0.5     $ 164.4  
Class 2
    24.1       34.8       2.2       1.5       62.6  
Class 3
    1.2       1.2       0.9       1.5       4.8  
 
                             
Balance at the end of the period
  $ 132.5     $ 74.8     $ 21.0     $ 3.5     $ 231.8  
 
                             
Other Financial Instruments
The fair value of our senior unsecured notes due 2018 at June 30, 2011 and March 31, 2011, based on market prices, was $348.2 million and $348.9 million, respectively, compared to the carrying value of $298.8 million and $298.7 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.
(4) Long-Term Borrowings
Long-term borrowings at June 30, 2011 and March 31, 2011 consisted of:
                 
    June 30,     March 31,  
    2011     2011  
    (In millions)  
Senior unsecured notes due 2018 (net of $1.2 million and $1.3 million of unamortized discount at June 30, 2011 and March 31, 2011, respectively)
  $ 298.8     $ 298.7  
Capital leases and other obligations
    54.4       56.2  
 
           
Total
    353.2       354.9  
Less current maturities of capital leases and other obligations (included in accrued liabilities)
    (19.3 )     (19.3 )
 
           
Long-term borrowings
  $ 333.9     $ 335.6  
 
           
In November 2010, we entered into a credit agreement with certain institutional lenders providing for an unsecured revolving credit facility in an amount up to $400.0 million which is scheduled to expire on November 30, 2014 (the Credit Facility). Subject to certain conditions, at any time prior to maturity, we may invite existing and new lenders to increase the size of the Credit Facility up to a maximum of $600.0 million. The Credit Facility includes provisions for swing line loans of up to $25.0 million and standby letters of credit of up to $50.0 million. Revolving loans under the Credit Facility bear interest, at the Company’s option, at a rate equal to either (i) the base rate (as defined) plus a margin based on the credit ratings of BMC’s senior unsecured notes due 2018 (the Senior Notes), or (ii) the LIBOR rate (as defined) plus a margin based on the credit ratings of BMC’s Senior Notes, for interest periods of one, two, three or six months. As of June 30, 2011 and through July 27, 2011, we have not borrowed any funds under the Credit Facility.
At June 30, 2011, we were in compliance with all debt covenants.

 

11


Table of Contents

(5) Income Taxes
Income tax expense was $17.8 million and $9.8 million for the quarters ended June 30, 2011 and 2010, respectively, resulting in effective tax rates of 15.7% and 9.6%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with earnings from lower tax rate jurisdictions throughout the world and our policy of indefinitely reinvesting earnings from certain jurisdictions (primarily in Europe), as well as due to additional accruals, changes in estimates, releases and settlements with taxing authorities related to our uncertain tax positions and benefits associated with income attributable to both domestic production activities and the extraterritorial income exclusion. During the quarters ended June 30, 2011 and 2010, the overall favorable effect of foreign tax rates on our effective tax rate was 12.0% and 10.7% of pre-tax earnings, respectively. During the quarters ended June 30, 2011 and 2010, we also recorded discrete net tax benefits of $6.2 million and $14.0 million, respectively, associated with tax authority settlements related to prior years’ tax matters which favorably impacted our effective tax rate by 5.5% and 13.7% of pre-tax earnings, respectively. Our effective tax rate could fluctuate on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries with lower statutory rates and higher than anticipated in countries with higher statutory rates.
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, 2005. The IRS has completed the audit of our tax years ended March 31, 2006 and 2007 and all issues except one related to the year ended March 31, 2006 have been resolved. We received a Notice of Deficiency from the IRS related to this issue and in July 2011 filed a petition for hearing with the U.S. Tax Court. The IRS has completed its examination of our federal income tax return for the tax year ended March 31, 2008, and there were no un-agreed issues. 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.
(6) Share-Based Compensation
During the quarter ended June 30, 2011, we granted 1.4 million nonvested stock units at a weighted average grant price of $53.64 to our executive officers and non-executive employees, consisting of both time-based and market-based awards. Time-based nonvested stock units vest in annual increments over three years. Market-based nonvested stock units vest in 50% increments over two- and three-year periods upon achievement of certain targets related to our relative shareholder return as compared to the NASDAQ-100 Index over each performance period.
During the quarter ended June 30, 2011, we issued 0.9 million shares of common stock related to exercises of stock options and 1.2 million shares of common stock related to vesting of restricted stock units.
At June 30, 2011, we had approximately $244.6 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 two years.
Share-based compensation expense as recorded in our condensed consolidated statements of operations is summarized as follows:
                 
    Quarter Ended June 30,  
    2011     2010  
    (In millions)  
Cost of license revenue
  $ 1.1     $ 0.8  
Cost of maintenance revenue
    3.5       2.3  
Cost of professional services revenue
    1.3       0.9  
Selling and marketing expenses
    9.1       8.7  
Research and development expenses
    2.9       2.1  
General and administrative expenses
    12.9       10.3  
 
           
Total share-based compensation expense
  $ 30.8     $ 25.1  
 
           

 

12


Table of Contents

(7) 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 to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable 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 for the quarters ended June 30, 2011 and 2010:
                 
    Quarter Ended June 30,  
    2011     2010  
    (In millions, except per share data)  
Basic earnings per share:
               
Net earnings
  $ 95.7     $ 92.8  
Less earnings allocated to participating securities
          (0.1 )
 
           
Net earnings allocated to common shares
  $ 95.7     $ 92.7  
 
           
Weighted average number of common shares outstanding
    176.3       180.3  
 
           
Basic earnings per share
  $ 0.54     $ 0.51  
 
           
 
               
Diluted earnings per share:
               
Net earnings
  $ 95.7     $ 92.8  
Less earnings allocated to participating securities
          (0.1 )
 
           
Net earnings allocated to common shares
  $ 95.7     $ 92.7  
 
           
Weighted average number of common shares outstanding
    176.3       180.3  
Incremental shares from assumed conversions of share-based awards
    4.3       3.5  
 
           
Adjusted weighted average number of common shares outstanding
    180.6       183.8  
 
           
Diluted earnings per share
  $ 0.53     $ 0.50  
 
           
For the quarters ended June 30, 2011 and 2010, 0.3 million and 4.0 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 has authorized a total of $4.0 billion to repurchase common stock. During the quarter ended June 30, 2011, we repurchased 3.4 million shares for $180.5 million under the stock repurchase program. At June 30, 2011, approximately $450.2 million remains authorized in the stock repurchase program, which does not have an expiration date. In addition, during the quarter ended June 30, 2011, we repurchased 0.4 million shares for $21.7 million to satisfy employee tax withholding obligations upon the vesting of share-based awards.
(8) 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.

 

13


Table of Contents

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 at June 30, 2011 of approximately $37.1 million primarily in support of performance obligations to various customers, but also related to facilities and other obligations.
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 currently predict the timing or ultimate outcome, nor estimate a range of loss, if any, for such claims.
In December 2010, a lawsuit was filed against a number of software companies, including us, by Uniloc USA, Inc. and Uniloc Singapore Private Limited in the United States District Court for the Eastern District of Texas, Tyler Division. The complaint seeks monetary damages in unspecified amounts and permanent injunction based upon claims for alleged patent infringement. While we intend to vigorously defend this matter, because it is in the early stages of discovery and involves a number of parties, we cannot predict the timing or ultimate outcome, nor estimate a range of loss, if any, for this matter.
We are party to various labor claims brought by certain former international employees alleging that amounts are due to 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; however, we intend to vigorously contest all of the claims. Taking into account accruals recorded by us, we do not believe the resolution of these claims will have a material adverse effect on our financial position or results of operations. However, we cannot predict the timing or ultimate outcome of these matters.
We are currently litigating a matter in Brazilian courts as to whether a tax applies to the remittance of software payments from our Brazilian operations. 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, if we do not, we could incur a charge of up to approximately $14 million; however, we cannot predict the timing or ultimate outcome of this matter.
We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Taking into account accruals recorded by us, we do not believe that the outcome of any of these matters will have a material adverse effect on our financial position or results of operations.
(9) 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, middleware management, 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.

 

14


Table of Contents

The following tables summarize segment performance for the quarters ended June 30, 2011 and 2010:
                         
    Enterprise     Mainframe        
    Service     Service        
Quarter Ended June 30, 2011   Management     Management     Consolidated  
    (In millions)  
 
                       
Revenue:
                       
License
  $ 118.5     $ 71.0     $ 189.5  
Maintenance
    141.2       123.4       264.6  
Professional services
    48.3             48.3  
 
                 
Total revenue
    308.0       194.4       502.4  
Direct and allocated indirect segment operating expenses:
    248.6       83.3       331.9  
 
                 
Segment operating income
    59.4       111.1       170.5  
 
                 
Unallocated operating expenses
                    (55.4 )
Other loss, net
                    (1.6 )
 
                     
Earnings before income taxes
                  $ 113.5  
 
                     
                         
    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  
 
                     
(10) New Accounting Pronouncements Not Yet Adopted
In May 2011, the FASB issued updated guidance for fair value measurements, primarily clarifying existing guidance and adding new disclosure requirements for Level 3 fair value measurements. This guidance requires entities to disclose quantitative information about the significant unobservable inputs used in Level 3 measurements, and to provide additional qualitative information regarding the valuation process in place for Level 3 measurements and the sensitivity of recurring Level 3 fair value measurements to changes in unobservable inputs used. This new guidance is effective for us beginning with our fourth quarter of fiscal 2012 and is not expected to have a material effect on our financial position, results of operations or cash flows.

 

15


Table of Contents

Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
It is important that this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with: (i) the attached unaudited condensed consolidated financial statements and notes thereto, (ii) the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2011, and (iii) our discussion of risks and uncertainties included within the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2011.
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. Such forward-looking statements are based on management’s reasonable current assumptions and expectations. 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, 2011, 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.
Unless indicated otherwise, results of operations data in this MD&A are presented in accordance with United States generally accepted accounting principles (GAAP). Additionally, in an effort to provide investors with additional information regarding our results of operations, certain non-GAAP financial measures including non-GAAP operating income, non-GAAP net earnings and non-GAAP diluted earnings per share are provided in this MD&A. See Non-GAAP Financial Measures and Reconciliations below for an explanation of our use of non-GAAP financial measures and reconciliations to their corresponding measures calculated in accordance with GAAP.

 

16


Table of Contents

Overview
We delivered solid year over year results in the first quarter of fiscal 2012. Most of our key financial measures increased year over year with the exception of ESM license bookings which remained relatively flat year over year and came in below our expectations. Select operating metrics for the quarter ended June 30, 2011 include:
   
Total bookings, which represent the contract value of new transactions that we closed and recorded during the quarter, were $615.4 million for the quarter, representing an increase of $172.5 million, or 38.9%, over the prior year quarter. Within the quarter, one large transaction generated total bookings of over $100 million, principally related to our MSM business.
 
   
Total license bookings were $192.5 million for the quarter, representing an increase of $57.6 million, or 42.7%, over the prior year quarter. During the quarter, we closed 31 transactions with license bookings over $1 million (with total license bookings of $122.1 million) compared to 19 transactions with license bookings over $1 million (with total license bookings of $64.2 million ) in the prior year quarter.
 
   
Within our ESM segment, where we believe performance is best evaluated on the basis of license bookings, total license bookings for the quarter were relatively flat as compared to the prior year quarter. Within our MSM segment, where we believe performance is best evaluated based on total and annualized bookings over a trailing twelve months basis, total bookings for the trailing twelve months ended on June 30, 2011 increased by $195.5 million, or 24.6%, and on an annualized basis, after normalizing for contract length, increased by $38.9 million, or 14.8%, as compared to the prior year period.
 
   
Total revenue for the quarter was $502.4 million, representing an increase of $41.5 million, or 9.0%, over the prior year quarter. The increase for the quarter was reflective of license, maintenance and professional services revenue increases of $18.3 million, or 10.7%, $10.8 million, or 4.3%, and $12.4 million, or 34.5%, respectively. On a segment basis, total ESM revenue for the quarter increased by $21.8 million, or 7.6%, and total MSM revenue increased by $19.7 million, or 11.3%, over the prior year quarter.
 
   
Operating income for the quarter was $115.1 million, representing an increase of $7.0 million, or 6.5%, over the prior year quarter. Non-GAAP operating income for the quarter was $170.5 million, representing an increase of $13.7 million, or 8.7%, over the prior year quarter.
 
   
Net earnings for the quarter were $95.7 million, representing an increase of $2.9 million, or 3.1%, over the prior year quarter. Non-GAAP net earnings for the quarter were $129.3 million, representing an increase of $15.7 million, or 13.8%, over the prior year quarter.
 
   
Diluted earnings per share for the quarter was $0.53, representing an increase of $0.03 per share, or 6.0%, over the prior year quarter. Non-GAAP diluted earnings per share was $0.72, representing an increase of $0.10 per share, or 16.1%, over the prior year quarter.
 
   
Cash flows from operations for the quarter ended June 30, 2011 were $261.4 million, representing an increase of $94.0 million, or 56.2%, over the prior year quarter. We closed out the quarter with a strong balance sheet at June 30, 2011, including $1.7 billion in cash, cash equivalents and investments and $2.1 billion in deferred revenue.
We continue to invest in our technology leadership, including in the areas of cloud computing, virtualization and software-as-a-service (SaaS). In addition to our ongoing product development efforts, we consummated three strategic acquisitions across both our ESM and MSM segments during the quarter ended June 30, 2011. In our ESM segment, we acquired Coradiant Inc. (Coradiant), which enhances our capabilities in application performance management across enterprise, SaaS and cloud environments, and Aeroprise, Inc. (Aeroprise), which expands our on-premise and SaaS IT Service Management offerings by adding mobility capabilities. Lastly, we completed the purchase of Neon Enterprise Software, LLC’s (Neon) IMS software portfolio which will be integrated with our current IMS offerings to enhance our customer value proposition within our MSM segment.
We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter ended June 30, 2011, we repurchased 3.4 million shares for a total value of $180.5 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.

 

17


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,  
    2011     2010  
Revenue:
               
License
    37.7 %     37.1 %
Maintenance
    52.7 %     55.1 %
Professional services
    9.6 %     7.8 %
Total revenue
    100.0 %     100.0 %
Operating expenses:
               
Cost of license revenue
    7.6 %     6.9 %
Cost of maintenance revenue
    8.7 %     8.8 %
Cost of professional services revenue
    9.4 %     8.0 %
Selling and marketing expenses
    28.8 %     30.8 %
Research and development expenses
    8.9 %     8.4 %
General and administrative expenses
    11.7 %     11.8 %
Amortization of intangible assets
    2.0 %     1.8 %
Total operating expenses
    77.1 %     76.5 %
Operating income
    22.9 %     23.5 %
Other loss, net
    (0.3 )%     (1.2 )%
Earnings before income taxes
    22.6 %     22.3 %
Provision for income taxes
    3.5 %     2.1 %
Net earnings
    19.0 %     20.1 %
Revenue
The following table provides information regarding software license and software maintenance revenue for the quarters ended June 30, 2011 and 2010:
                         
    Quarter Ended June 30,        
Software License Revenue   2011     2010     % Change  
    (In millions)          
Enterprise Service Management
  $ 118.5     $ 113.2       4.7 %
Mainframe Service Management
    71.0       58.0       22.4 %
 
                   
Total software license revenue
  $ 189.5     $ 171.2       10.7 %
 
                   
                         
    Quarter Ended June 30,        
Software Maintenance Revenue   2011     2010     % Change  
    (In millions)          
Enterprise Service Management
  $ 141.2     $ 137.1       3.0 %
Mainframe Service Management
    123.4       116.7       5.7 %
 
                   
Total software maintenance revenue
  $ 264.6     $ 253.8       4.3 %
 
                   

 

18


Table of Contents

                         
    Quarter Ended June 30,        
Total Software Revenue   2011     2010     % Change  
    (In millions)          
Enterprise Service Management
  $ 259.7     $ 250.3       3.8 %
Mainframe Service Management
    194.4       174.7       11.3 %
 
                   
Total software revenue
  $ 454.1     $ 425.0       6.8 %
 
                   
Software License Revenue
License revenue for the quarter ended June 30, 2011 was $189.5 million, an increase of $18.3 million, or 10.7%, over the prior year quarter. This increase was attributable to increases in our ESM and MSM segment license revenues, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $10.0 million for the quarter ended June 30, 2011 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 45% in the current quarter as compared to 56% in the prior year quarter.
ESM license revenue was $118.5 million, or 62.5%, of our total license revenue for the quarter ended June 30, 2011, and $113.2 million, or 66.1%, of our total license revenue for the quarter ended June 30, 2010. ESM license revenue for the quarter ended June 30, 2011 increased by $5.3 million, or 4.7%, over the prior year quarter. This increase is primarily due to an increase in the recognition of previously deferred license revenue, along with an increase in the amount of upfront license revenue recognized in connection with new transactions.
MSM license revenue was $71.0 million, or 37.5%, of our total license revenue for the quarter ended June 30, 2011, and $58.0 million, or 33.9%, of our total license revenue for the quarter ended June 30, 2010. MSM license revenue for the quarter ended June 30, 2011 increased by $13.0 million, or 22.4%, over the prior year quarter. This increase is 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.
Deferred License Revenue
For the quarters ended June 30, 2011 and 2010, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows:
                 
    Quarter Ended June 30,  
    2011     2010  
    (In millions)  
Deferrals of license revenue
  $ 106.1     $ 58.8  
Recognition from deferred license revenue
    (104.3 )     (94.3 )
Impact of foreign currency exchange rate changes
    1.2       (0.8 )
 
           
Net increase (decrease) in deferred license revenue
  $ 3.0     $ (36.3 )
 
           
Deferred license revenue balance at end of period
  $ 689.1     $ 587.9  
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 arm’s 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.

 

19


Table of Contents

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, 2011, the deferred license revenue balance was $689.1 million. Estimated future recognition from deferred license revenue at June 30, 2011 is (in millions):
         
Remainder of fiscal 2012
  $ 264.4  
Fiscal 2013
    211.5  
Fiscal 2014 and thereafter
    213.2  
 
     
 
  $ 689.1  
 
     
Software Maintenance Revenue
Maintenance revenue for the quarter ended June 30, 2011 was $264.6 million, an increase of $10.8 million, or 4.3%, over the prior year quarter, due to increases in both ESM and MSM maintenance revenue, as discussed below.
ESM maintenance revenue was $141.2 million, or 53.4%, of our total maintenance revenue for the quarter ended June 30, 2011 and $137.1 million, or 54.0%, of our total maintenance revenue for the quarter ended June 30, 2010. ESM maintenance revenue for the quarter ended June 30, 2011 increased by $4.1 million, or 3.0%, over the prior year quarter.
MSM maintenance revenue was $123.4 million, or 46.6%, of our total maintenance revenue for the quarter ended June 30, 2011 and $116.7 million, or 46.0%, of our total maintenance revenue for the quarter ended June 30, 2010. MSM maintenance revenue for the quarter ended June 30, 2011 increased by $6.7 million, or 5.7%, over the prior year quarter.
Deferred Maintenance Revenue
At June 30, 2011, the deferred maintenance revenue balance was $1.3 billion. Estimated future recognition from deferred maintenance revenue at June 30, 2011 is (in millions):
         
Remainder of fiscal 2012
  $ 590.3  
Fiscal 2013
    402.6  
Fiscal 2014 and thereafter
    350.9  
 
     
 
  $ 1,343.8  
 
     
Domestic vs. International Revenue
                         
    Quarter Ended June 30,        
    2011     2010     % Change  
    (In millions)          
License:
                       
Domestic
  $ 85.3     $ 87.6       (2.6 )%
International
    104.2       83.6       24.6 %
 
                   
Total license revenue
    189.5       171.2       10.7 %
 
                   
Maintenance:
                       
Domestic
    141.6       139.8       1.3 %
International
    123.0       114.0       7.9 %
 
                   
Total maintenance revenue
    264.6       253.8       4.3 %
 
                   
Professional services:
                       
Domestic
    21.8       17.7       23.2 %
International
    26.5       18.2       45.6 %
 
                   
Total professional services revenue
    48.3       35.9       34.5 %
 
                   
 
                       
Total domestic revenue
    248.7       245.1       1.5 %
Total international revenue
    253.7       215.8       17.6 %
 
                   
Total revenue
  $ 502.4     $ 460.9       9.0 %
 
                   

 

20


Table of Contents

We estimate that the effect of foreign currency exchange rate fluctuations on our international revenue resulted in an approximate $9.1 million increase in revenue for the quarter ended June 30, 2011 as compared to the prior year quarter, on a constant currency basis.
Domestic License Revenue
Domestic license revenue was $85.3 million, or 45.0%, of our total license revenue for the quarter ended June 30, 2011, and $87.6 million, or 51.2%, of our total license revenue for the quarter ended June 30, 2010. Domestic license revenue for the quarter ended June 30, 2011 decreased by $2.3 million, or 2.6%, from the prior year quarter, due to a $5.0 million decrease in ESM license revenue, offset by a $2.7 million increase in MSM license revenue.
International License Revenue
International license revenue was $104.2 million, or 55.0%, of our total license revenue for the quarter ended June 30, 2011 and $83.6 million or 48.8%, of our total license revenue for the quarter ended June 30, 2010.
International license revenue for the quarter ended June 30, 2011 increased by $20.6 million, or 24.6%, over the prior year quarter, due to a $10.3 million increase in ESM license revenue and a $10.3 million increase in MSM license revenue. The ESM license revenue increase was attributable to increases of $6.2 million and $3.4 million in our Europe, Middle East and Africa (EMEA) and Asia Pacific markets, respectively, and a combined net increase of $0.7 million in our other international markets. The MSM license revenue increase was attributable to increases of $5.5 million and $3.6 million in our EMEA and Latin America markets, respectively, and a combined net increase of $1.2 million in our other international markets.
Domestic Maintenance Revenue
Domestic maintenance revenue was $141.6 million, or 53.5%, of our total maintenance revenue for the quarter ended June 30, 2011 and $139.8 million, or 55.1%, of our total maintenance revenue for the quarter ended June 30, 2010. Domestic maintenance revenue for the quarter ended June 30, 2011 increased by $1.8 million, or 1.3%, over the prior year quarter, due to a $1.8 million increase in ESM maintenance revenue. MSM maintenance revenue remained relatively flat as compared to the prior year quarter.
International Maintenance Revenue
International maintenance revenue was $123.0 million, or 46.5%, of our total maintenance revenue for the quarter ended June 30, 2011 and $114.0 million, or 44.9%, of our total maintenance revenue for the quarter ended June 30, 2010.
International maintenance revenue for the quarter ended June 30, 2011 increased by $9.0 million, or 7.9%, over the prior year quarter, due to a $2.3 million increase in ESM maintenance revenue and a $6.7 million increase in MSM maintenance revenue. The ESM maintenance revenue increase was attributable to an increase of $1.6 million in our Asia Pacific market and a combined net increase of $0.7 million in our other international markets. The MSM maintenance revenue increase was attributable to increases of $3.0 million and $2.7 million in our EMEA and Latin America markets, respectively, and a combined net increase of $1.0 million in our other international markets.
Professional Services Revenue
Professional services revenue for the quarter ended June 30, 2011 increased by $12.4 million, or 34.5%, over the prior year quarter, which is reflective of a $4.1 million, or 23.2%, increase in domestic professional services revenue and an $8.3 million, or 45.6%, increase in international professional services revenue. These increases were attributable primarily to increases in implementation, consulting and education services revenue period over period, principally due to the expansion of our ESM business including increased demand for cloud implementation.

 

21


Table of Contents

Operating Expenses
                         
    Quarter Ended June 30,        
    2011     2010     % Change  
    (In millions)          
Cost of license revenue
  $ 38.3     $ 31.9       20.1 %
Cost of maintenance revenue
    43.8       40.7       7.6 %
Cost of professional services revenue
    47.4       37.0       28.1 %
Selling and marketing expenses
    144.7       142.1       1.8 %
Research and development expenses
    44.7       38.5       16.1 %
General and administrative expenses
    58.6       54.2       8.1 %
Amortization of intangible assets
    9.8       8.4       16.7 %
 
                   
Total operating expenses
  $ 387.3     $ 352.8       9.8 %
 
                   
We estimate that the effect of foreign currency exchange rate fluctuations on our international operating expenses resulted in an approximate $12.3 million reduction in operating expenses for the quarter ended June 30, 2011 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, 2011 and 2010, cost of license revenue was $38.3 million, or 7.6%, and $31.9 million, or 6.9%, of total revenue, respectively, and 20.2% and 18.6% of license revenue, respectively.
Cost of license revenue for the quarter ended June 30, 2011 increased by $6.4 million, or 20.1%, over the prior year quarter. This increase was attributable primarily to a $5.8 million increase in the amortization of capitalized software development costs.
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, 2011 and 2010, cost of maintenance revenue was $43.8 million, or 8.7%, and $40.7 million, or 8.8%, of total revenue, respectively, and 16.6% and 16.0% of maintenance revenue, respectively.
Cost of maintenance revenue for the quarter ended June 30, 2011 increased by $3.1 million, or 7.6%, over the prior year quarter. This increase was attributable primarily to a $1.6 million increase in third party maintenance outsourcing costs and a $1.2 million increase in share-based compensation expense.
Cost of Professional Services Revenue
Cost of professional services revenue consists primarily of salaries, related personnel costs and third party fees associated with implementation, consulting and education services that we provide to our customers and the related infrastructure to support this business. For the quarters ended June 30, 2011 and 2010, cost of professional services revenue was $47.4 million, or 9.4%, and $37.0 million, or 8.0%, of total revenue, respectively, and 98.1% and 103.1% of professional services revenue, respectively.
Cost of professional services revenue for the quarter ended June 30, 2011 increased by $10.4 million, or 28.1%, over the prior year quarter. This increase was attributable to a $6.1 million increase in third party subcontracting fees, a $3.0 million increase in professional services enablement personnel costs and a $1.3 million net increase in other expenses, commensurate with increases in professional services revenue.

 

22


Table of Contents

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, 2011 and 2010, selling and marketing expenses were $144.7 million, or 28.8%, and $142.1 million, or 30.8%, of total revenue, respectively.
Selling and marketing expenses for the quarter ended June 30, 2011 increased by $2.6 million, or 1.8%, over the prior year quarter. This increase was attributable to a $2.3 million increase in sales personnel costs, principally due to an increase in variable compensation expense as a result of increased revenue, and a $2.1 million increase in marketing campaign expenditures, offset by a $1.8 million net decrease in other expenses.
Research and Development Expenses
Research and development expenses consist primarily of salaries and personnel costs (including third party subcontracting fees) related to software developers and development support personnel, including product management, 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, 2011 and 2010, research and development expenses were $44.7 million, or 8.9%, and $38.5 million, or 8.4%, of total revenue, respectively.
Research and development expenses for the quarter ended June 30, 2011 increased by $6.2 million, or 16.1%, over the prior year quarter. This increase was attributable primarily to a $5.6 million increase in research and development personnel and related costs, including third party subcontracting fees.
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, 2011 and 2010, general and administrative expenses were $58.6 million, or 11.7%, and $54.2 million, or 11.8%, of total revenue, respectively.
General and administrative expenses for the quarter ended June 30, 2011 increased by $4.4 million, or 8.1%, over the prior year quarter. This increase was attributable to a $3.1 million increase in personnel costs and a $1.3 million net increase in other expenses.
Amortization of Intangible Assets
Amortization of intangible assets consists of the amortization of customer relationships and other intangible assets recorded in connection with our business combinations. For the quarters ended June 30, 2011 and 2010, amortization of intangible assets was $9.8 million and $8.4 million, respectively.
Amortization of intangible assets for the quarter ended June 30, 2011 increased by $1.4 million, or 16.7%, over the prior year quarter. This increase was attributable primarily to amortization associated with intangible assets acquired in connection with our fiscal 2011 and 2012 acquisitions, offset by a reduction in amortization associated with intangible assets acquired in connection with past acquisitions that became fully amortized.
Other Income (Loss), Net
Other income (loss), net, consists primarily of interest earned, realized gains and losses on investments and interest expense on our senior unsecured notes due 2018 and capital leases.
Other income (loss), net, for the quarters ended June 30, 2011 and 2010, was a loss of $1.6 million and $5.5 million, respectively. This change was attributable primarily to a $1.7 million increase in interest income, a $1.1 million improvement in net gains (losses) on investments and a $1.2 million decrease in net foreign currency losses as compared to the prior year quarter.

 

23


Table of Contents

Income Taxes
Income tax expense was $17.8 million and $9.8 million for the quarters ended June 30, 2011 and 2010, respectively, resulting in effective tax rates of 15.7% and 9.6%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with earnings from lower tax rate jurisdictions throughout the world and our policy of indefinitely reinvesting earnings from certain jurisdictions (primarily in Europe), as well as due to additional accruals, changes in estimates, releases and settlements with taxing authorities related to our uncertain tax positions and benefits associated with income attributable to both domestic production activities and the extraterritorial income exclusion. During the quarters ended June 30, 2011 and 2010, the overall favorable effect of foreign tax rates on our effective tax rate was 12.0% and 10.7% of pre-tax earnings, respectively. During the quarters ended June 30, 2011 and 2010, we also recorded discrete net tax benefits of $6.2 million and $14.0 million, respectively, associated with tax authority settlements related to prior years’ tax matters which favorably impacted our effective tax rate by 5.5% and 13.7% of pre-tax earnings, respectively. Our effective tax rate could fluctuate on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries with lower statutory rates and higher than anticipated in countries with higher statutory rates.
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.
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 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 reconciling 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.

 

24


Table of Contents

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,  
    2011     2010  
    (In millions)  
Operating income:
               
GAAP operating income
  $ 115.1     $ 108.1  
Share-based compensation expense (1)
    30.8       25.1  
Amortization of intangible assets (2)
    22.5       20.6  
Severance, exit costs and related charges (3)
    2.1       3.0  
 
           
Non-GAAP operating income
  $ 170.5     $ 156.8  
 
           
                 
    Quarter Ended June 30,  
    2011     2010  
    (In millions)  
Net earnings:
               
GAAP net earnings
  $ 95.7     $ 92.8  
Share-based compensation expense (1)
    30.8       25.1  
Amortization of intangible assets (2)
    22.5       20.6  
Severance, exit costs and related charges (3)
    2.1       3.0  
Provision for income taxes on above pre-tax non-GAAP adjustments (4)
    (15.6 )     (13.9 )
Certain discrete tax items (5)
    (6.2 )     (14.0 )
 
           
Non-GAAP net earnings
  $ 129.3     $ 113.6  
 
           
                 
    Quarter Ended June 30,  
    2011     2010  
Diluted earnings per share*:
               
GAAP diluted earnings per share
  $ 0.53     $ 0.50  
Share-based compensation expense (1)
    0.17       0.14  
Amortization of intangible assets (2)
    0.12       0.11  
Severance, exit costs and related charges (3)
    0.01       0.02  
Provision for income taxes on above pre-tax non-GAAP adjustments (4)
    (0.09 )     (0.08 )
Certain discrete tax items (5)
    (0.03 )     (0.08 )
 
           
Non-GAAP diluted earnings per share*
  $ 0.72     $ 0.62  
 
           
     
*  
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.
 
(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 severance, exit costs and related charges, in order to provide comparability and consistency with historical operating results.

 

25


Table of Contents

     
(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 adjustments 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 net tax benefits of $6.2 million and $14.0 million in the quarters ended June 30, 2011 and 2010, respectively, associated with tax authority settlements related to prior years’ tax matters. Management excludes the impact of these items in evaluating our performance. Therefore, we exclude these items when presenting non-GAAP financial measures.
Liquidity and Capital Resources
At June 30, 2011, we had $1.7 billion in cash, cash equivalents and investments, approximately 52.7% of which was held by our international subsidiaries and was largely generated from our international operations. Our international operations have generated $513.0 million of earnings that we have determined will be invested indefinitely in those operations. If such earnings were 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 at June 30, 2011 of approximately $37.1 million primarily in support of performance obligations to various customers, but also related to facilities and other obligations.
At June 30, 2011 and March 31, 2011, we held auction rate securities with a par value of $29.6 million and $29.8 million, respectively, which were classified as available-for-sale. The total estimated fair value of our auction rate securities was $26.8 million and $27.2 million at June 30, 2011 and March 31, 2011, 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 Education’s Federal Family Education Loan Program. All of these bonds are currently rated investment grade by Moody’s or Standard and Poor’s. 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 that the lack of liquidity of these investments will have a material impact on our business strategy, financial condition, results of operations or cash flows. Periodically, the issuers of certain of our auction rate securities have redeemed portions of our holdings at par value plus accrued interest. During the quarters ended June 30, 2011 and 2010, issuers redeemed available-for-sale holdings of $0.2 million and $10.8 million, respectively, and trading holdings of $5.4 million for the quarter ended June 30, 2010.
In November 2010, we entered into a credit agreement with certain institutional lenders providing for an unsecured revolving credit facility in an amount up to $400.0 million which is scheduled to expire on November 30, 2014 (the Credit Facility). Subject to certain conditions, at any time prior to maturity, we may invite existing and new lenders to increase the size of the Credit Facility up to a maximum of $600.0 million. The Credit Facility includes provisions for swing line loans of up to $25.0 million and standby letters of credit of up to $50.0 million. Revolving loans under the Credit Facility bear interest, at the Company’s option, at a rate equal to either (i) the base rate (as defined) plus a margin based on the credit ratings of BMC’s senior unsecured notes due 2018 (the Senior Notes), or (ii) the LIBOR rate (as defined) plus a margin based on the credit ratings of BMC’s Senior Notes, for interest periods of one, two, three or six months. As of June 30, 2011 and through July 27, 2011, we have not borrowed any funds under the Credit Facility.
We believe that our existing cash and investment balances, funds generated from operating activities and available credit under the Credit Facility 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, as amended (the Exchange Act), 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.

 

26


Table of Contents

Our cash flows for the quarters ended June 30, 2011 and 2010 were:
                 
    Quarter Ended June 30,  
    2011     2010  
    (In millions)  
Net cash provided by operating activities
  $ 261.4     $ 167.4  
Net cash provided by (used in) investing activities
    (178.2 )     32.4  
Net cash used in financing activities
    (166.8 )     (148.6 )
Effect of exchange rate changes on cash and cash equivalents
    5.6       (9.8 )
 
           
Net change in cash and cash equivalents
  $ (78.0 )   $ 41.4  
 
           
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, 2011 increased by $94.0 million over the prior year period, attributable to an increase in net earnings before non-cash expenses (principally depreciation and amortization and share-based compensation expense) and the net impact of working capital changes.
Cash Flows from Investing Activities
Net cash used in investing activities for the quarter ended June 30, 2011 was $178.2 million compared to net cash provided by investing activities of $32.4 million for the quarter ended June 30, 2010. This difference was attributable primarily to an increase in cash expended for our acquisitions of Coradiant, Aeroprise and Neon’s IMS software portfolio and a decrease in proceeds from the sales and maturities of investments.
Cash Flows from Financing Activities
Net cash used in financing activities for the quarter ended June 30, 2011 increased by $18.2 million over the prior year period. This increase was attributable primarily to an increase in treasury stock acquired, offset primarily by an increase in proceeds from stock option exercises.
Treasury Stock Purchases
Our Board of Directors has authorized a total of $4.0 billion to repurchase common stock. During the quarter ended June 30, 2011, we purchased 3.4 million shares for $180.5 million. From the inception of the stock repurchase authorization through June 30, 2011, we have purchased 136.2 million shares for $3.5 billion. At June 30, 2011, there was $450.2 million remaining in the stock repurchase program, which does not have an expiration date. In addition, during the quarter ended June 30, 2011, we repurchased 0.4 million shares for $21.7 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, 2011.
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 we believe are 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, 2011 under Management’s 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, 2011.

 

27


Table of Contents

Recently Adopted Accounting Pronouncements
In December 2010, the FASB issued updated guidance for intangible assets, specifically related to the annual goodwill impairment test. This guidance requires entities to perform a qualitative evaluation of whether it is more likely than not that goodwill is impaired in situations where reporting units have a carrying value that is zero or negative. If the qualitative evaluation determines it is more likely than not that goodwill is impaired, step two of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The new guidance is effective for us beginning with our fiscal 2012 goodwill impairment test and is not expected to have a material effect on our financial position, results of operations or cash flows.
In October 2009, the FASB issued new revenue recognition guidance for arrangements that include both software and non-software related deliverables. 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 VSOE 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 was effective for us in the first quarter of fiscal 2012 and did not have a material effect on our financial position, results of operations or cash flows.
New Accounting Pronouncements Not Yet Adopted
In May 2011, the FASB issued updated guidance for fair value measurements, primarily clarifying existing guidance and adding new disclosure requirements for Level 3 fair value measurements. This guidance requires entities to disclose quantitative information about the significant unobservable inputs used in Level 3 measurements, and to provide additional qualitative information regarding the valuation process in place for Level 3 measurements and the sensitivity of recurring Level 3 fair value measurements to changes in unobservable inputs used. This new guidance is effective for us beginning with our fourth quarter of fiscal 2012 and is not expected to have a material effect on our financial position, results of operations or cash flows.
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 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, 2011; 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, 2011.

 

28


Table of Contents

Item 4.  
Controls and Procedures
Disclosure Controls and Procedures
Based on management’s 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.

 

29


Table of Contents

PART II. OTHER INFORMATION
Item 1.  
Legal Proceedings
There are no items that require disclosure under this item.
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, 2011.
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, 2011
    415,326     $ 50.29       414,760     $ 20,858,333     $ 609,862,770  
May 1 - 31, 2011
    2,058,030     $ 53.55       1,990,172       106,579,590     $ 503,283,180  
June 1 - 30, 2011
    1,340,402     $ 53.23       996,789       53,062,029     $ 450,221,151  
 
                                 
Total
    3,813,758     $ 53.06       3,401,721     $ 180,499,952     $ 450,221,151  
 
                                 
 
     
(1)  
Includes 412,037 shares of our common stock withheld by us to satisfy employee tax withholding obligations.
 
(2)  
Our Board of Directors has authorized a total of $4.0 billion to repurchase common stock. At June 30, 2011, approximately $450.2 million remains authorized in this stock repurchase program and the program does not have an expiration date.

 

30


Table of Contents

Item 6.  
Exhibits
  (a)  
Exhibits.
         
  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.

 

31


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 27, 2011  By:   /s/ ROBERT E. BEAUCHAMP    
    Robert E. Beauchamp   
    Chairman of the Board, President and Chief
Executive Officer
 
 
 
     
July 27, 2011  By:   /s/ STEPHEN B. SOLCHER    
    Stephen B. Solcher   
    Senior Vice President and Chief Financial Officer   
 

 

32


Table of Contents

Exhibits
INDEX
         
  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.

 

33