Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - BMC SOFTWARE INC | c21981exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - BMC SOFTWARE INC | c21981exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - BMC SOFTWARE INC | c21981exv32w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - BMC SOFTWARE INC | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - BMC SOFTWARE INC | c21981exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 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 | 77042-2827 | |
(Address of principal executive offices) | (Zip Code) |
(713) 918-8800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | 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 October 21, 2011, there were 170,198,000 outstanding shares of Common Stock, par value
$.01, of the registrant.
BMC SOFTWARE, INC.
QUARTER ENDED SEPTEMBER 30, 2011
QUARTER ENDED SEPTEMBER 30, 2011
INDEX
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value data)
September 30, | March 31, | |||||||
2011 | 2011 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,459.7 | $ | 1,660.9 | ||||
Short-term investments |
30.9 | 27.8 | ||||||
Trade accounts receivable, net |
219.6 | 284.1 | ||||||
Trade finance receivables, net |
52.5 | 112.6 | ||||||
Deferred tax assets |
58.1 | 65.1 | ||||||
Other current assets |
112.3 | 116.9 | ||||||
Total current assets |
1,933.1 | 2,267.4 | ||||||
Property and equipment, net |
86.3 | 94.2 | ||||||
Software development costs, net |
214.1 | 193.8 | ||||||
Long-term investments |
61.9 | 67.8 | ||||||
Long-term trade finance receivables, net |
59.0 | 110.8 | ||||||
Intangible assets, net |
109.1 | 100.9 | ||||||
Goodwill |
1,503.3 | 1,407.0 | ||||||
Other long-term assets |
222.8 | 243.5 | ||||||
Total assets |
$ | 4,189.6 | $ | 4,485.4 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 32.1 | $ | 30.8 | ||||
Finance payables |
0.4 | 16.6 | ||||||
Accrued liabilities |
256.6 | 316.0 | ||||||
Deferred revenue |
990.5 | 1,026.9 | ||||||
Total current liabilities |
1,279.6 | 1,390.3 | ||||||
Long-term deferred revenue |
903.7 | 928.6 | ||||||
Long-term borrowings |
336.9 | 335.6 | ||||||
Other long-term liabilities |
146.2 | 168.0 | ||||||
Total liabilities |
2,666.4 | 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 |
1,131.8 | 1,077.4 | ||||||
Retained earnings |
3,055.4 | 2,845.2 | ||||||
Accumulated other comprehensive income (loss) |
(2.1 | ) | 32.0 | |||||
4,187.6 | 3,957.1 | |||||||
Treasury stock, at cost (78.5 and 71.9 shares) |
(2,664.4 | ) | (2,294.2 | ) | ||||
Total stockholders equity |
1,523.2 | 1,662.9 | ||||||
Total liabilities and stockholders equity |
$ | 4,189.6 | $ | 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)
(Unaudited)
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
License |
$ | 229.7 | $ | 208.1 | $ | 419.2 | $ | 379.3 | ||||||||
Maintenance |
270.5 | 252.5 | 535.1 | 506.3 | ||||||||||||
Professional services |
56.5 | 41.7 | 104.8 | 77.6 | ||||||||||||
Total revenue |
556.7 | 502.3 | 1,059.1 | 963.2 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of license revenue |
39.3 | 30.8 | 77.6 | 62.7 | ||||||||||||
Cost of maintenance revenue |
49.5 | 39.9 | 93.3 | 80.6 | ||||||||||||
Cost of professional services revenue |
53.2 | 40.3 | 100.6 | 77.3 | ||||||||||||
Selling and marketing expenses |
153.5 | 143.2 | 298.2 | 285.3 | ||||||||||||
Research and development expenses |
38.3 | 43.4 | 83.0 | 81.9 | ||||||||||||
General and administrative expenses |
51.0 | 52.8 | 109.6 | 107.0 | ||||||||||||
Amortization of intangible assets |
10.9 | 8.4 | 20.7 | 16.8 | ||||||||||||
Total operating expenses |
395.7 | 358.8 | 783.0 | 711.6 | ||||||||||||
Operating income |
161.0 | 143.5 | 276.1 | 251.6 | ||||||||||||
Other income (loss), net: |
||||||||||||||||
Interest and other income, net |
2.6 | 3.8 | 6.4 | 4.4 | ||||||||||||
Interest expense |
(5.2 | ) | (4.7 | ) | (10.7 | ) | (9.8 | ) | ||||||||
Gain (loss) on investments, net |
(2.2 | ) | 1.2 | (2.1 | ) | 0.2 | ||||||||||
Total other income (loss), net |
(4.8 | ) | 0.3 | (6.4 | ) | (5.2 | ) | |||||||||
Earnings before income taxes |
156.2 | 143.8 | 269.7 | 246.4 | ||||||||||||
Provision for income taxes |
41.5 | 12.0 | 59.3 | 21.8 | ||||||||||||
Net earnings |
$ | 114.7 | $ | 131.8 | $ | 210.4 | $ | 224.6 | ||||||||
Basic earnings per share |
$ | 0.66 | $ | 0.74 | $ | 1.20 | $ | 1.26 | ||||||||
Diluted earnings per share |
$ | 0.65 | $ | 0.73 | $ | 1.18 | $ | 1.24 | ||||||||
Shares used in computing basic earnings per share |
173.0 | 178.3 | 174.7 | 177.9 | ||||||||||||
Shares used in computing diluted earnings per share |
176.0 | 181.4 | 178.3 | 181.2 | ||||||||||||
Net earnings |
$ | 114.7 | $ | 131.8 | $ | 210.4 | $ | 224.6 | ||||||||
Other comprehensive income (net of tax): |
||||||||||||||||
Foreign currency translation adjustment |
(41.5 | ) | 25.5 | (33.3 | ) | 6.8 | ||||||||||
Unrealized loss on available-for-sale securities |
(0.7 | ) | (0.7 | ) | (0.8 | ) | (0.1 | ) | ||||||||
Total other comprehensive income (loss) |
(42.2 | ) | 24.8 | (34.1 | ) | 6.7 | ||||||||||
Total comprehensive income |
$ | 72.5 | $ | 156.6 | $ | 176.3 | $ | 231.3 | ||||||||
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)
Six Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 210.4 | $ | 224.6 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
111.4 | 92.8 | ||||||
Deferred income tax provision (benefit) |
(3.5 | ) | 7.6 | |||||
Share-based compensation expense |
61.6 | 51.0 | ||||||
Loss (gain) on investments, net and other |
3.9 | (0.2 | ) | |||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||
Trade accounts receivable |
65.7 | (3.0 | ) | |||||
Trade finance receivables |
109.7 | 91.4 | ||||||
Prepaid and other current assets |
0.7 | (6.9 | ) | |||||
Other long-term assets |
12.7 | 1.9 | ||||||
Accrued and other current liabilities |
(63.7 | ) | (67.1 | ) | ||||
Deferred revenue |
(64.5 | ) | (67.5 | ) | ||||
Other long-term liabilities |
(9.0 | ) | (28.8 | ) | ||||
Other operating assets and liabilities |
(12.3 | ) | (1.3 | ) | ||||
Net cash provided by operating activities |
423.1 | 294.5 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of investments |
15.5 | 50.0 | ||||||
Proceeds from sales of investments |
3.3 | 31.6 | ||||||
Purchases of investments |
(18.9 | ) | (3.8 | ) | ||||
Cash paid for acquisitions, net of cash acquired |
(148.9 | ) | | |||||
Capitalization of software development costs |
(62.8 | ) | (57.8 | ) | ||||
Purchases of property and equipment |
(10.0 | ) | (13.1 | ) | ||||
Other investing activities |
| 1.0 | ||||||
Net cash provided by (used in) investing activities |
(221.8 | ) | 7.9 | |||||
Cash flows from financing activities: |
||||||||
Treasury stock acquired |
(405.5 | ) | (224.0 | ) | ||||
Repurchases of stock to satisfy employee tax withholding obligations |
(23.0 | ) | (11.8 | ) | ||||
Proceeds from stock options exercised and other |
37.1 | 38.2 | ||||||
Excess tax benefit from share-based compensation expense |
12.6 | 5.9 | ||||||
Repayments of borrowings and capital lease obligations |
(4.7 | ) | (6.0 | ) | ||||
Net cash used in financing activities |
(383.5 | ) | (197.7 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(19.0 | ) | 4.2 | |||||
Net change in cash and cash equivalents |
(201.2 | ) | 108.9 | |||||
Cash and cash equivalents, beginning of period |
1,660.9 | 1,368.6 | ||||||
Cash and cash equivalents, end of period |
$ | 1,459.7 | $ | 1,477.5 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 11.6 | $ | 11.5 | ||||
Cash paid for income taxes, net of amounts refunded |
$ | 13.5 | $ | 42.6 |
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 periods financial statements to conform to
the current periods presentation.
Interim results are not necessarily indicative of results for a full year. Our
results generally tend to be stronger in the third and fourth quarters of our fiscal
year, as compared to the first and second quarters of our fiscal year. These financial
statements should be read in conjunction with our annual audited consolidated financial
statements for the fiscal year ended March 31, 2011, as filed with the SEC on Form 10-K.
Recently Adopted Accounting Pronouncements
In December 2010 and in September 2011, the Financial Accounting Standards Board
(FASB) issued updated guidance relating to the annual goodwill impairment test. This new
guidance incorporates additional qualitative assessments at two discrete points in the
goodwill impairment evaluation. First, entities are now permitted to perform an initial
qualitative assessment of whether it is more likely than not that goodwill is impaired in
order to determine the need to perform the previously required two-step impairment test.
This new guidance has been early adopted by us and will be applied
for our fiscal 2012 annual goodwill impairment
test. Additionally, as part of step one of the two-step impairment test, entities are
required to perform a qualitative assessment 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 that it is more likely than
not that goodwill is impaired, step two of the goodwill impairment test is required to be
performed to determine the amount of impairment, if any. This guidance is effective for
us beginning with our fiscal 2012 goodwill impairment test. Neither set of guidance is
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. Coradiants operating results have been
included in our condensed consolidated financial statements since the acquisition date.
This acquisition expands BMCs 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 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.
6
Table of Contents
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, LLCs (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 allocated to acquired assets and assumed
liabilities consisting primarily of $11.2 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 an allocation of $7.7 million to goodwill
assigned to our ESM segment and $6.0 million assigned to our MSM segment.
We are in the process of finalizing our assessment of the fair value of certain
acquired assets and assumed liabilities for the above acquisitions, principally related to tax loss carryforwards
and other deferred tax attributes, 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 | |||||||||||||||||
September 30, 2011 | Total | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||||
(In millions) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Cash equivalents |
||||||||||||||||||||
Money-market funds |
$ | 503.1 | $ | 503.1 | $ | | $ | | A | |||||||||||
Certificates of deposit |
61.5 | 61.5 | | | A | |||||||||||||||
Short-term and long-term investments |
||||||||||||||||||||
United States Treasury securities |
50.0 | 50.0 | | | A | |||||||||||||||
Auction rate securities |
25.6 | | | 25.6 | B | |||||||||||||||
Mutual funds |
17.2 | 17.2 | | | A | |||||||||||||||
Foreign currency forward contracts |
11.8 | | 11.8 | | A | |||||||||||||||
Total |
$ | 669.2 | $ | 631.8 | $ | 11.8 | $ | 25.6 | ||||||||||||
Liabilities |
||||||||||||||||||||
Foreign currency forward contracts |
$ | (8.6 | ) | $ | | $ | (8.6 | ) | $ | | A | |||||||||
Total |
$ | (8.6 | ) | $ | | $ | (8.6 | ) | $ | | ||||||||||
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 tables summarize the activity in Level 3 financial instruments for the
quarters and six months ended September 30, 2011 and 2010, respectively:
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||||||||||
Auction | Auction | |||||||||||||||||||||||
Rate | Put | Rate | Put | |||||||||||||||||||||
Securities | Option | Total | Securities | Option | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance at the beginning of the period |
$ | 26.8 | $ | | $ | 26.8 | $ | 27.2 | $ | | $ | 27.2 | ||||||||||||
Redemption of auction rate securities |
(0.2 | ) | | (0.2 | ) | (0.4 | ) | | (0.4 | ) | ||||||||||||||
Change in unrealized gain (loss) included in
other comprehensive income |
(1.0 | ) | | (1.0 | ) | (1.2 | ) | | (1.2 | ) | ||||||||||||||
Balance at the end of the period |
$ | 25.6 | $ | | $ | 25.6 | $ | 25.6 | $ | | $ | 25.6 | ||||||||||||
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, 2010 | September 30, 2010 | |||||||||||||||||||||||
Auction | Auction | |||||||||||||||||||||||
Rate | Put | Rate | Put | |||||||||||||||||||||
Securities | Option | Total | Securities | Option | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance at the beginning of the period |
$ | 45.2 | $ | 0.9 | $ | 46.1 | $ | 60.5 | $ | 1.1 | $ | 61.6 | ||||||||||||
Redemption of auction rate securities |
(11.4 | ) | | (11.4 | ) | (27.5 | ) | | (27.5 | ) | ||||||||||||||
Change in unrealized gain (loss) included in
interest and other income, net |
0.9 | (0.9 | ) | | 1.1 | (1.1 | ) | | ||||||||||||||||
Change in unrealized gain (loss) included in
other comprehensive income |
(0.8 | ) | | (0.8 | ) | (0.2 | ) | | (0.2 | ) | ||||||||||||||
Balance at the end of the period |
$ | 33.9 | $ | | $ | 33.9 | $ | 33.9 | $ | | $ | 33.9 | ||||||||||||
8
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Investments
Our cash, cash equivalents and investments were comprised of the following:
September 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 |
$ | | $ | 30.9 | $ | 19.1 | $ | 525.0 | $ | 27.8 | $ | 22.1 | ||||||||||||
Certificates of deposit |
61.5 | | | 38.4 | | | ||||||||||||||||||
Auction rate securities |
| | 25.6 | | | 27.2 | ||||||||||||||||||
Trading |
||||||||||||||||||||||||
Mutual funds |
| | 17.2 | | | 18.5 | ||||||||||||||||||
Total debt and equity investments
measured at fair value |
61.5 | 30.9 | 61.9 | 563.4 | 27.8 | 67.8 | ||||||||||||||||||
Cash on hand |
895.1 | | | 412.8 | | | ||||||||||||||||||
Money-market funds |
503.1 | | | 684.7 | | | ||||||||||||||||||
Total cash, cash equivalents and
investments |
$ | 1,459.7 | $ | 30.9 | $ | 61.9 | $ | 1,660.9 | $ | 27.8 | $ | 67.8 | ||||||||||||
Amounts included in accumulated other
comprehensive income from available-
for-sale securities (pre-tax): |
||||||||||||||||||||||||
Unrealized losses* |
$ | | $ | | $ | 3.8 | $ | | $ | | $ | 2.6 | ||||||||||||
* | The unrealized losses on available-for-sale securities at September 30, 2011 and March
31, 2011 relate to the auction rate securities. |
The following summarizes the underlying contractual maturities of our
available-for-sale investments in debt securities at September 30, 2011:
Fair | ||||||||
Cost | Value | |||||||
(In millions) | ||||||||
Due in one year or less |
$ | 92.4 | $ | 92.4 | ||||
Due between one and two years |
19.1 | 19.1 | ||||||
Due after ten years |
29.4 | 25.6 | ||||||
Total |
$ | 140.9 | $ | 137.1 | ||||
At September 30, 2011 and March 31, 2011, we held auction rate securities with a par
value of $29.4 million and $29.8 million, respectively, which were classified as
available-for-sale. The total estimated fair value of our auction rate securities was
$25.6 million and $27.2 million at September 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 Educations Federal Family Education Loan Program. All of
these bonds are currently rated investment grade by Moodys or Standard and Poors.
Auctions for these securities began failing in early 2008 and have continued to fail,
resulting in our continuing to hold such securities and the issuers paying interest at
the maximum contractual rates. We do not believe that any of the underlying issuers of
these auction rate securities are presently at risk of default or that the underlying
credit quality of the assets backing the auction rate security investments has been
impacted by the reduced liquidity of these investments. Due to the illiquidity in the
auction rate securities market caused by failed auctions, we estimated the fair value of
these securities and the put option discussed below using internally developed models of
the expected cash flows of the securities which incorporate assumptions about the
expected cash flows of the underlying student loans and estimates of the rate of return
required by investors, which includes an adjustment to reflect a lack of liquidity in the
market for these securities. Periodically, the issuers of certain of our auction rate
securities have redeemed portions of our holdings at par value plus accrued interest.
During the quarter and six months ended September 30, 2011, issuers redeemed
available-for-sale holdings of $0.2 million and $0.4 million, respectively. During the
quarter and six months ended September 30, 2010, issuers redeemed available-for-sale
holdings of $0.2 million and $10.9 million, respectively, and trading holdings of $5.4
million during the six months ended September 30, 2010.
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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 and six months ended September 30,
2010.
The unrealized loss on our available-for-sale auction rate securities, which have a
fair value of $25.6 million at September 30, 2011, was $3.8 million and was recorded in
accumulated other comprehensive income (loss) as we believe the decline in fair value of
these auction rate securities is temporary. In making this determination, we primarily
considered the financial condition and near-term prospects of the issuers, the
probability scheduled cash flows will continue to be made and the likelihood we would be
required to sell the investments before recovery of our cost basis. These
available-for-sale auction rate securities have been in an unrealized loss position for
greater than twelve months. Because of the uncertainty related to the timing of liquidity
associated with these auction rate securities, these securities are classified as
long-term investments at September 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.
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The fair value of our outstanding foreign currency forward contracts that closed in
a gain position at September 30, 2011 and March 31, 2011 was $11.8 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 September 30, 2011 and March 31, 2011 was
$8.6 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 | ||||||||
September 30, | March 31, | |||||||
2011 | 2011 | |||||||
(In millions) | ||||||||
Foreign Currency Forward Contracts (receive United States dollar/pay foreign currency) |
||||||||
Euro |
$ | 140.7 | $ | 158.5 | ||||
Australian dollar |
32.6 | 13.9 | ||||||
British pound |
15.6 | 5.0 | ||||||
Chinese yuan renminbi |
9.8 | 7.6 | ||||||
New Zealand dollar |
5.0 | 2.9 | ||||||
Swiss franc |
4.5 | 1.5 | ||||||
Danish krone |
3.7 | 3.0 | ||||||
South Korean won |
3.0 | 4.6 | ||||||
Norwegian krone |
2.9 | 2.0 | ||||||
Brazilian real |
2.5 | 5.6 | ||||||
Canadian dollar |
| 4.2 | ||||||
Other |
6.3 | 4.2 | ||||||
Total |
$ | 226.6 | $ | 213.0 | ||||
Foreign Currency Forward Contracts (pay United States dollar/receive foreign currency) |
||||||||
Israeli shekel |
$ | 118.4 | $ | 151.6 | ||||
Indian rupee |
11.7 | 9.1 | ||||||
Mexican peso |
4.6 | 9.3 | ||||||
Other |
3.0 | 2.2 | ||||||
Total |
$ | 137.7 | $ | 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 quarter and six months ended
September 30, 2011, was a loss of $2.3 million and $6.0 million, respectively, which,
after including gains and losses on our foreign currency exposures, resulted in net
losses of $0.9 million and $1.9 million, respectively, recorded in interest and other
income, net. The effect of the foreign currency forward contracts for the quarter and six
months ended September 30, 2010, was a loss of $4.9 million and a gain of $6.6 million,
respectively, which, after including gains and losses on our foreign currency exposures,
resulted in net losses of $0.4 million and $2.6 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 quarter and six months ended
September 30, 2011, we transferred $147.8 million and $159.0 million, respectively, of
such receivables through these programs. During the quarter and six months ended
September 30, 2010, we transferred $20.0 million and $129.0 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.
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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 September 30, 2011, we held $111.5 million of
finance receivables, net of $0.3 million of specific receivables which have been fully
reserved.
At September 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 |
$ | 48.0 | $ | 26.9 | $ | 9.9 | $ | | $ | 84.8 | ||||||||||
Class 2 |
11.6 | 7.3 | 2.5 | 1.2 | 22.6 | |||||||||||||||
Class 3 |
1.1 | 0.8 | 0.7 | 1.5 | 4.1 | |||||||||||||||
Balance at the end of the period |
$ | 60.7 | $ | 35.0 | $ | 13.1 | $ | 2.7 | $ | 111.5 | ||||||||||
Other Financial Instruments
The fair value of our senior unsecured notes due 2018 at September 30, 2011 and
March 31, 2011, based on market prices, was $350.2 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 September 30, 2011 and March 31, 2011 consisted of:
September 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 September 30, 2011 and March 31, 2011, respectively) |
$ | 298.8 | $ | 298.7 | ||||
Capital leases and other obligations |
60.3 | 56.2 | ||||||
Total |
359.1 | 354.9 | ||||||
Less current maturities of capital leases and other obligations (included in accrued liabilities) |
(22.2 | ) | (19.3 | ) | ||||
Long-term borrowings |
$ | 336.9 | $ | 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 Companys option, at a rate equal to either (i) the base
rate (as defined) plus a margin based on the credit ratings of BMCs senior unsecured
notes due 2018 (the Senior Notes), or (ii) the LIBOR rate (as defined) plus a margin
based on the credit ratings of BMCs Senior Notes, for interest periods of one, two,
three or six months. As of September 30, 2011 and through October 26, 2011, we have not
borrowed any funds under the Credit Facility.
At September 30, 2011, we were in compliance with all debt covenants.
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(5) Income Taxes
Income tax expense was $41.5 million and $59.3 million for the quarter and six
months ended September 30, 2011, respectively, resulting in effective tax rates of 26.6%
and 22.0%, respectively. Income tax expense was $12.0 million and $21.8 million for the
quarter and six months ended September 30, 2010, respectively, resulting in effective tax
rates of 8.3% and 8.8%, 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
quarter and six months ended September 30, 2011, the overall favorable effects of foreign
tax rates on our effective tax rate were 6.7% and 8.9% of pre-tax earnings, respectively.
During the quarter and six months ended September 30, 2010, the overall favorable effects
of foreign tax rates on our effective tax rate were 13.3% and 12.2% of pre-tax earnings,
respectively. During the six months ended September 30, 2011, we also recorded discrete
net tax benefits of $6.2 million associated with tax authority settlements related to
prior years tax matters which favorably impacted our effective tax rate by 2.3% of
pre-tax earnings. During the quarter and six months ended September 30, 2010, we also
recorded discrete net tax benefits of $18.0 million and $32.0 million, respectively,
associated with tax authority settlements related to prior years tax matters which
favorably impacted our effective tax rate by 12.5% and 13.0% 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, 2007 and
2008 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 initiated an
examination of our federal income tax return for the years ended March 31, 2009 and 2010.
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 and six months ended September 30, 2011, we granted 0.2 million
and 1.6 million nonvested stock units, respectively, at a weighted average grant price of
$45.72 and $52.73, respectively, to our executive officers, non-executive employees and
non-employee board members, consisting of both time-based and market-based awards.
Time-based nonvested stock units vest in annual increments over one or 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 and six months ended September 30, 2011, we issued 0.1 million
and 1.0 million shares of common stock, respectively, related to exercises of stock
options and 0.2 million and 1.4 million shares of common stock, respectively, related to
vesting of restricted stock units.
At September 30, 2011, we had approximately $209.8 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.
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Share-based compensation expense as recorded in our condensed consolidated
statements of operations is summarized as follows:
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Cost of license revenue |
$ | 1.2 | $ | 0.7 | $ | 2.3 | $ | 1.5 | ||||||||
Cost of maintenance revenue |
3.8 | 2.2 | 7.3 | 4.5 | ||||||||||||
Cost of professional services revenue |
1.2 | 1.3 | 2.5 | 2.2 | ||||||||||||
Selling and marketing expenses |
10.0 | 8.8 | 19.1 | 17.5 | ||||||||||||
Research and development expenses |
3.6 | 2.7 | 6.5 | 4.8 | ||||||||||||
General and administrative expenses |
11.0 | 10.2 | 23.9 | 20.5 | ||||||||||||
Total share-based compensation expense |
$ | 30.8 | $ | 25.9 | $ | 61.6 | $ | 51.0 | ||||||||
(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 and six months ended September 30, 2011 and 2010:
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Basic earnings per share: |
||||||||||||||||
Net earnings |
$ | 114.7 | $ | 131.8 | $ | 210.4 | $ | 224.6 | ||||||||
Less earnings allocated to participating securities |
| (0.1 | ) | | (0.2 | ) | ||||||||||
Net earnings allocated to common shares |
$ | 114.7 | $ | 131.7 | $ | 210.4 | $ | 224.4 | ||||||||
Weighted average number of common shares outstanding |
173.0 | 178.3 | 174.7 | 177.9 | ||||||||||||
Basic earnings per share |
$ | 0.66 | $ | 0.74 | $ | 1.20 | $ | 1.26 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Net earnings |
$ | 114.7 | $ | 131.8 | $ | 210.4 | $ | 224.6 | ||||||||
Less earnings allocated to participating securities |
| (0.1 | ) | | (0.2 | ) | ||||||||||
Net earnings allocated to common shares |
$ | 114.7 | $ | 131.7 | $ | 210.4 | $ | 224.4 | ||||||||
Weighted average number of common shares outstanding |
173.0 | 178.3 | 174.7 | 177.9 | ||||||||||||
Incremental shares from assumed conversions of share-based awards |
3.0 | 3.1 | 3.6 | 3.3 | ||||||||||||
Adjusted weighted average number of common shares outstanding |
176.0 | 181.4 | 178.3 | 181.2 | ||||||||||||
Diluted earnings per share |
$ | 0.65 | $ | 0.73 | $ | 1.18 | $ | 1.24 | ||||||||
For the quarter and six months ended September 30, 2011, 1.5 million and 0.9 million
weighted average potential common shares, respectively, have been excluded from the
calculation of diluted EPS as they were anti-dilutive. For the quarter and six months
ended September 30, 2010, 3.6 million and 3.7 million weighted average potential common
shares, respectively, have been excluded from the calculation of diluted EPS as they were
anti-dilutive.
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Treasury Stock
Our Board of Directors previously authorized a total of $4.0 billion to repurchase
common stock. During the quarter and six months ended September 30, 2011, we repurchased
5.4 million and 8.8 million shares, respectively, for $225.0 million and $405.5 million,
respectively, under the stock repurchase program. At September 30, 2011, approximately
$225.3 million remains authorized in the stock repurchase program, which does not have an
expiration date. In addition, during the quarter and six
months ended September 30, 2011, we repurchased a nominal amount and 0.4 million
shares, respectively, for $1.3 million and $23.0 million, respectively, to satisfy
employee tax withholding obligations upon the vesting of share-based awards. In October
2011, our Board of Directors authorized an additional $1.0 billion to repurchase stock.
(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.
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 September 30, 2011 of approximately $35.1 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 previously disclosed a lawsuit 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
sought monetary damages in unspecified amounts and permanent injunction based upon claims
for alleged patent infringement. On September 30, 2011, we entered into a Settlement and
License Agreement with various Uniloc parties completely settling and dismissing the
lawsuit and granting us a permanent license to the intellectual property at issue.
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 believe the likelihood of a material
adverse effect on our financial statements resulting from these claims is remote.
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 $12 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 believe the likelihood of a material adverse effect on our financial
statements resulting from any of these matters is remote.
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(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.
The following tables summarize segment performance for the quarters and six months ended
September 30, 2011 and 2010:
Enterprise | Mainframe | |||||||||||
Service | Service | |||||||||||
Quarter Ended September 30, 2011 | Management | Management | Consolidated | |||||||||
(In millions) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 146.0 | $ | 83.7 | $ | 229.7 | ||||||
Maintenance |
145.6 | 124.9 | 270.5 | |||||||||
Professional services |
56.5 | | 56.5 | |||||||||
Total revenue |
348.1 | 208.6 | 556.7 | |||||||||
Direct and allocated indirect segment operating expenses: |
259.1 | 81.2 | 340.3 | |||||||||
Segment operating income |
89.0 | 127.4 | 216.4 | |||||||||
Unallocated operating expenses |
(55.4 | ) | ||||||||||
Other loss, net |
(4.8 | ) | ||||||||||
Earnings before income taxes |
$ | 156.2 | ||||||||||
Enterprise | Mainframe | |||||||||||
Service | Service | |||||||||||
Quarter Ended September 30, 2010 | Management | Management | Consolidated | |||||||||
(In millions) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 131.3 | $ | 76.8 | $ | 208.1 | ||||||
Maintenance |
136.4 | 116.1 | 252.5 | |||||||||
Professional services |
41.7 | | 41.7 | |||||||||
Total revenue |
309.4 | 192.9 | 502.3 | |||||||||
Direct and allocated indirect segment operating expenses: |
233.2 | 77.7 | 310.9 | |||||||||
Segment operating income |
76.2 | 115.2 | 191.4 | |||||||||
Unallocated operating expenses |
(47.9 | ) | ||||||||||
Other income, net |
0.3 | |||||||||||
Earnings before income taxes |
$ | 143.8 | ||||||||||
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Enterprise | Mainframe | |||||||||||
Service | Service | |||||||||||
Six Months Ended September 30, 2011 | Management | Management | Consolidated | |||||||||
(In millions) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 264.5 | $ | 154.7 | $ | 419.2 | ||||||
Maintenance |
286.8 | 248.3 | 535.1 | |||||||||
Professional services |
104.8 | | 104.8 | |||||||||
Total revenue |
656.1 | 403.0 | 1,059.1 | |||||||||
Direct and allocated indirect segment operating expenses: |
507.7 | 164.5 | 672.2 | |||||||||
Segment operating income |
148.4 | 238.5 | 386.9 | |||||||||
Unallocated operating expenses |
(110.8 | ) | ||||||||||
Other loss, net |
(6.4 | ) | ||||||||||
Earnings before income taxes |
$ | 269.7 | ||||||||||
Enterprise | Mainframe | |||||||||||
Service | Service | |||||||||||
Six Months Ended September 30, 2010 | Management | Management | Consolidated | |||||||||
(In millions) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 244.5 | $ | 134.8 | $ | 379.3 | ||||||
Maintenance |
273.5 | 232.8 | 506.3 | |||||||||
Professional services |
77.6 | | 77.6 | |||||||||
Total revenue |
595.6 | 367.6 | 963.2 | |||||||||
Direct and allocated indirect segment operating expenses: |
453.8 | 161.2 | 615.0 | |||||||||
Segment operating income |
141.8 | 206.4 | 348.2 | |||||||||
Unallocated operating expenses |
(96.6 | ) | ||||||||||
Other loss, net |
(5.2 | ) | ||||||||||
Earnings before income taxes |
$ | 246.4 | ||||||||||
(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.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
It is important that this Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) be read in conjunction with: (i) the attached
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
managements 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.
18
Table of Contents
Overview
For the quarter and six months ended September 30, 2011, our year over year
financial performance was strong in terms of revenue, non-GAAP operating income, non-GAAP
diluted earnings per share and cash flows from operations, as well as total and
annualized MSM bookings for the trailing twelve months ended September 30, 2011. However,
year over year ESM license bookings declined in both the quarter and six month periods
and were below our expectations; refer to the additional discussion regarding ESM license
bookings below. Select operating metrics for the quarter and six months ended September
30, 2011 include:
| Total bookings, which represent the contract value of new transactions
that we closed and recorded, were $382.4 million for the quarter,
representing a decrease of $70.5 million, or 15.6%, from the prior
year quarter, and for the first half of fiscal 2012 were $997.8
million, representing an increase of $102.0 million, or 11.4%, over
the prior year period. Within the first half of fiscal 2012, one large
transaction generated total bookings of over $100 million, principally
related to our MSM business. |
||
| Total license bookings were $187.5 million for the quarter,
representing a decrease of $33.5 million, or 15.2%, from the prior
year quarter, and for the first half of fiscal 2012 were $380.0
million, representing an increase of $24.1 million, or 6.8%, over the
prior year period. During the quarter, we closed 37 transactions with
license bookings over $1 million (with total license bookings of $96.4
million) compared to 43 transactions with license bookings over $1
million (with total license bookings of $134.4 million) in the prior
year quarter. During the first half of fiscal 2012, we closed 68
transactions with license bookings over $1 million (with total license
bookings of $218.5 million) compared to 62 transactions with license
bookings over $1 million (with total license bookings of $198.6
million) in the prior year period. |
||
| Within our ESM segment, where we believe performance is best evaluated
on the basis of license bookings, total license bookings for the
quarter decreased by $18.3 million, or 12.7%, from the prior year
quarter, and for the first half of fiscal 2012 decreased by $18.8
million, or 7.7%, from the prior year period. We attribute these
decreases principally to sales-related execution, including a
decline in productive sales capacity caused by sales force attrition as well as a
decrease in productivity associated with a reduction in average sales
force tenure and experience levels. To a lesser
degree, we also believe that ESM license bookings in the current year
have been adversely impacted by challenging economic and financial
conditions in key geographic areas and market segments, particularly
within certain European regions and the U.S. public sector. |
||
| 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 September
30, 2011 increased by $185.3 million, or 24.6%, and on an annualized
basis, after normalizing for contract length, increased by $33.2
million, or 12.9%, as compared to the prior year period. |
||
| Total revenue for the quarter was $556.7 million, representing an
increase of $54.4 million, or 10.8%, over the prior year quarter, and
for the first half of fiscal 2012 was $1,059.1 million, representing
an increase of $95.9 million, or 10.0%, over the prior year period.
The increase for the quarter was reflective of license, maintenance
and professional services revenue increases of $21.6 million, or
10.4%, $18.0 million, or 7.1%, and $14.8 million, or 35.5%,
respectively. The increase for the first half of fiscal 2012 was
reflective of license, maintenance and professional services revenue
increases of $39.9 million, or 10.5%, $28.8 million, or 5.7%, and
$27.2 million, or 35.1%, respectively. On a segment basis, total ESM
revenue for the quarter increased by $38.7 million, or 12.5%, and
total MSM revenue increased by $15.7 million, or 8.1%, over the prior
year quarter, and for the first half of fiscal 2012 total ESM revenue
increased by $60.5 million, or 10.2%, and total MSM revenue increased
by $35.4 million, or 9.6%, over the prior year period. |
||
| Operating income for the quarter was $161.0 million, representing an
increase of $17.5 million, or 12.2%, over the prior year quarter, and
for the first half of fiscal 2012 was $276.1 million, representing an
increase of $24.5 million, or 9.7%, over the prior year period.
Non-GAAP operating income for the quarter was $216.4 million,
representing an increase of $25.0 million, or 13.1%, over the prior
year quarter, and for the first half of fiscal 2012 was $386.9
million, representing an increase of $38.7 million, or 11.1%, over the
prior year period. |
||
| Net earnings for the quarter were $114.7 million, representing a
decrease of $17.1 million, or 13.0%, from the prior year quarter, and
for the first half of fiscal 2012 were $210.4 million, representing a
decrease of $14.2 million, or 6.3%, from the prior year period.
These period over period decreases were due to discrete tax benefits
recorded by us in the prior year periods in connection with tax
authority settlements. Non-GAAP net earnings for the quarter were $153.4 million,
representing an increase of $5.3 million, or 3.6%, over the prior year
quarter, and for the first half of fiscal 2012 were $282.7 million,
representing an increase of $21.0 million, or 8.0%, over the prior
year period. |
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Table of Contents
| Diluted earnings per share for the quarter was $0.65, representing a
decrease of $0.08 per share, or 11.0%, from the prior year quarter,
and for the first half of fiscal 2012 was $1.18, representing a
decrease of $0.06 per share, or 4.8%, from the prior year period.
These period over period decreases were due to discrete net tax
benefits recorded by us in the prior year periods in connection with
tax authority settlements. Non-GAAP diluted earnings per share was $0.87, representing an
increase of $0.05 per share, or 6.1%, over the prior year quarter, and
for the first half of fiscal 2012 was $1.59, representing an increase
of $0.15 per share, or 10.4%, over the prior year period. |
||
| Cash flows from operations for the six months ended September 30, 2011
were $423.1 million, representing an increase of $128.6 million, or
43.7%, over the prior year period. We closed out the quarter with a
strong balance sheet at September 30, 2011, including $1.6 billion in
cash, cash equivalents and investments and $1.9 billion in deferred
revenue. |
We continue to invest in our technology leadership, including in the areas of cloud
computing and software-as-a-service (SaaS). In addition to our ongoing
product development efforts, we consummated several strategic acquisitions across both
our ESM and MSM segments during the six months ended September 30, 2011. In our ESM
segment, we acquired Coradiant Inc., Aeroprise, Inc. and StreamStep, Inc. In our MSM
segment, we completed the purchase of Neon Enterprise Software, LLCs IMS software
portfolio.
We also continue to enhance shareholder value by returning cash to shareholders
through our stock repurchase program. During the quarter and six months ended September
30, 2011, we repurchased 5.4 million and 8.8 million shares, respectively, for a total
value of $225.0 million and $405.5 million, respectively. In October 2011,
our Board of Directors authorized an additional $1.0 billion to repurchase stock.
Our
earnings are subject to volatility as 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 customers 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
customer 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.
20
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 | ||||||||||||||||
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
License |
41.3 | % | 41.4 | % | 39.6 | % | 39.4 | % | ||||||||
Maintenance |
48.6 | % | 50.3 | % | 50.5 | % | 52.6 | % | ||||||||
Professional services |
10.1 | % | 8.3 | % | 9.9 | % | 8.0 | % | ||||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of license revenue |
7.1 | % | 6.1 | % | 7.3 | % | 6.5 | % | ||||||||
Cost of maintenance revenue |
8.9 | % | 7.9 | % | 8.8 | % | 8.4 | % | ||||||||
Cost of professional services revenue |
9.6 | % | 8.0 | % | 9.5 | % | 8.0 | % | ||||||||
Selling and marketing expenses |
27.6 | % | 28.5 | % | 28.2 | % | 29.6 | % | ||||||||
Research and development expenses |
6.9 | % | 8.6 | % | 7.8 | % | 8.5 | % | ||||||||
General and administrative expenses |
9.2 | % | 10.5 | % | 10.3 | % | 11.1 | % | ||||||||
Amortization of intangible assets |
2.0 | % | 1.7 | % | 2.0 | % | 1.7 | % | ||||||||
Total operating expenses |
71.1 | % | 71.4 | % | 73.9 | % | 73.9 | % | ||||||||
Operating income |
28.9 | % | 28.6 | % | 26.1 | % | 26.1 | % | ||||||||
Other income (loss), net |
(0.9 | )% | 0.1 | % | (0.6 | )% | (0.5 | )% | ||||||||
Earnings before income taxes |
28.1 | % | 28.6 | % | 25.5 | % | 25.6 | % | ||||||||
Provision for income taxes |
7.5 | % | 2.4 | % | 5.6 | % | 2.3 | % | ||||||||
Net earnings |
20.6 | % | 26.2 | % | 19.9 | % | 23.3 | % |
21
Table of Contents
Revenue
The following table provides information regarding software license and software
maintenance revenue for the quarters and six months ended September 30, 2011 and 2010:
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Software License Revenue | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Enterprise Service Management |
$ | 146.0 | $ | 131.3 | 11.2 | % | $ | 264.5 | $ | 244.5 | 8.2 | % | ||||||||||||
Mainframe Service Management |
83.7 | 76.8 | 9.0 | % | 154.7 | 134.8 | 14.8 | % | ||||||||||||||||
Total software license revenue |
$ | 229.7 | $ | 208.1 | 10.4 | % | $ | 419.2 | $ | 379.3 | 10.5 | % | ||||||||||||
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Software Maintenance Revenue | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Enterprise Service Management |
$ | 145.6 | $ | 136.4 | 6.7 | % | $ | 286.8 | $ | 273.5 | 4.9 | % | ||||||||||||
Mainframe Service Management |
124.9 | 116.1 | 7.6 | % | 248.3 | 232.8 | 6.7 | % | ||||||||||||||||
Total software maintenance revenue |
$ | 270.5 | $ | 252.5 | 7.1 | % | $ | 535.1 | $ | 506.3 | 5.7 | % | ||||||||||||
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Total Software Revenue | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Enterprise Service Management |
$ | 291.6 | $ | 267.7 | 8.9 | % | $ | 551.3 | $ | 518.0 | 6.4 | % | ||||||||||||
Mainframe Service Management |
208.6 | 192.9 | 8.1 | % | 403.0 | 367.6 | 9.6 | % | ||||||||||||||||
Total software revenue |
$ | 500.2 | $ | 460.6 | 8.6 | % | $ | 954.3 | $ | 885.6 | 7.8 | % | ||||||||||||
Software License Revenue
License revenue for the quarter ended September 30, 2011 was $229.7 million, an
increase of $21.6 million, or 10.4%, 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 $10.8 million for the quarter ended September 30, 2011 as compared to the prior
year quarter. Of the license revenue transactions recorded, the percentage of license
revenue recognized upfront was 64% in the current quarter as compared to 51% in the prior
year quarter.
License revenue for the six months ended September 30, 2011 was $419.2 million, an
increase of $39.9 million, or 10.5%, over the prior year period. 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 $20.8 million for the six months ended September 30, 2011 as compared to the
prior year period. Of the license revenue transactions recorded, the percentage of
license revenue recognized upfront was 54% in the current period as compared to 53% in
the prior year period.
ESM license revenue was $146.0 million, or 63.6%, and $264.5 million, or 63.1%, of
our total license revenue for the quarter and six months ended September 30, 2011,
respectively, and $131.3 million, or 63.1%, and $244.5 million, or 64.5%, of
our total license revenue for the quarter and six months ended September 30, 2010,
respectively. ESM license revenue for the quarter ended September 30, 2011 increased by
$14.7 million, or 11.2%, over the prior year quarter. ESM license revenue for the six
months ended September 30, 2011 increased by $20.0 million, or 8.2%, over the prior year
period. These increases were primarily due to an increase in the amount of upfront
license revenue recognized in connection with new transactions along with an increase in
the recognition of previously deferred license revenue.
MSM license revenue was $83.7 million, or 36.4%, and $154.7 million, or 36.9%, of
our total license revenue for the quarter and six months ended September 30, 2011, and
$76.8 million, or 36.9%, and $134.8 million, or 35.5%, of our total license revenue for
the quarter and six months ended September 30, 2010. MSM license revenue for the quarter
ended September 30, 2011 increased by $6.9 million, or 9.0%, over the prior year quarter.
This increase was primarily due to an increase in the recognition of previously deferred
license revenue, partially offset by a nominal decrease in the amount of upfront license
revenue recognized in connection with new transactions. MSM license revenue for the six
months ended September 30, 2011
increased by $19.9 million, or 14.8%, over the prior year
period. This increase was 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.
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Table of Contents
Deferred License Revenue
For the quarters and six months ended September 30, 2011 and 2010, our recognized
license revenue was impacted by the changes in our deferred license revenue balance as
follows:
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Deferrals of license revenue |
$ | 67.9 | $ | 107.2 | $ | 174.0 | $ | 166.0 | ||||||||
Recognition from deferred license revenue |
(106.9 | ) | (96.1 | ) | (211.2 | ) | (190.4 | ) | ||||||||
Impact of foreign currency exchange rate changes |
(3.2 | ) | 1.8 | (2.0 | ) | 1.0 | ||||||||||
Net increase (decrease) in deferred license revenue |
$ | (42.2 | ) | $ | 12.9 | $ | (39.2 | ) | $ | (23.4 | ) | |||||
Deferred license revenue balance at end of period |
$ | 646.9 | $ | 600.8 | $ | 646.9 | $ | 600.8 |
The primary reasons for license revenue deferrals include, but are not limited to,
customer transactions that include products for which the maintenance pricing is based on
a combination of undiscounted license list prices, net license fees or discounted license
list prices, certain arrangements that include unlimited licensing rights, time-based
licenses that are recognized over the term of the arrangement, customer transactions that
include products with differing maintenance periods and other transactions for which we
do not have or are not able to determine vendor-specific objective evidence of the fair
value of the maintenance and/or professional services. The contract terms and conditions
that result in deferral of revenue recognition for a given transaction result from arms
length negotiations between us and our customers. We anticipate our transactions will
continue to include such contract terms that result in deferral of the related license
revenue as we expand our offerings to meet customers product, pricing and licensing
needs.
Once it is determined that license revenue for a particular contract must be
deferred, based on the contractual terms and application of revenue recognition policies
to those terms, we recognize such license revenue either ratably over the term of the
contract or when the revenue recognition criteria are met. Because of this, we generally
know the timing of the subsequent recognition of license revenue at the time of deferral.
Therefore, the amount of license revenue to be recognized out of the deferred revenue
balance in each future quarter is generally predictable. At September 30, 2011, the
deferred license revenue balance was $646.9 million. Estimated future recognition from
deferred license revenue at September 30, 2011 is (in millions):
Remainder of fiscal 2012 |
$ | 177.6 | ||
Fiscal 2013 |
235.2 | |||
Fiscal 2014 and thereafter |
234.1 | |||
$ | 646.9 | |||
Software Maintenance Revenue
Maintenance revenue for the quarter ended September 30, 2011 was $270.5 million, an
increase of $18.0 million, or 7.1%, over the prior year quarter, due to increases in both
ESM and MSM maintenance revenue, as discussed below. Maintenance revenue for the six
months ended September 30, 2011 was $535.1 million, an increase of $28.8 million, or
5.7%, over the prior year period, due to increases in both ESM and MSM maintenance
revenue, as discussed below.
ESM maintenance revenue was $145.6 million, or 53.8%, and $286.8 million, or 53.6%,
of our total maintenance revenue for the quarter and six months ended September 30,
2011, respectively, and $136.4 million, or 54.0%, and $273.5 million, or 54.0%, of our
total maintenance revenue for the quarter and six months ended September 30, 2010,
respectively. ESM maintenance revenue for the quarter ended September 30, 2011 increased
by $9.2 million, or 6.7%, over the prior year quarter. ESM maintenance revenue for the
six months ended September 30, 2011 increased by $13.3 million, or 4.9%, over the prior
year period. These increases were attributable primarily to the expansion of our
installed ESM customer license base.
MSM maintenance revenue was $124.9 million, or 46.2%, and $248.3 million, or 46.4%,
of our total maintenance revenue for the quarter and six months ended September 30, 2011,
respectively, and $116.1 million, or 46.0%, and $232.8 million, or
46.0%, of our total
maintenance revenue for the quarter and six months ended September 30, 2010,
respectively. MSM maintenance revenue for the quarter ended September 30, 2011 increased
by $8.8 million, or 7.6%, over the prior year quarter. MSM maintenance revenue for the
six months ended September 30, 2011 increased by $15.5 million, or 6.7%, over the prior
year period. These increases were attributable primarily to the expansion of our
installed MSM customer license base and increased capacities of the current installed
base.
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Table of Contents
Deferred Maintenance Revenue
At September 30, 2011, the deferred maintenance revenue balance was $1.2 billion.
Estimated future recognition from deferred maintenance revenue at September 30, 2011 is
(in millions):
Remainder of fiscal 2012 |
$ | 394.8 | ||
Fiscal 2013 |
440.8 | |||
Fiscal 2014 and thereafter |
377.8 | |||
$ | 1,213.4 | |||
Domestic vs. International Revenue
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
License: |
||||||||||||||||||||||||
Domestic |
$ | 122.2 | $ | 97.9 | 24.8 | % | $ | 207.5 | $ | 185.5 | 11.9 | % | ||||||||||||
International |
107.5 | 110.2 | (2.5 | )% | 211.7 | 193.8 | 9.2 | % | ||||||||||||||||
Total license revenue |
229.7 | 208.1 | 10.4 | % | 419.2 | 379.3 | 10.5 | % | ||||||||||||||||
Maintenance: |
||||||||||||||||||||||||
Domestic |
146.3 | 137.5 | 6.4 | % | 287.9 | 277.3 | 3.8 | % | ||||||||||||||||
International |
124.2 | 115.0 | 8.0 | % | 247.2 | 229.0 | 7.9 | % | ||||||||||||||||
Total maintenance revenue |
270.5 | 252.5 | 7.1 | % | 535.1 | 506.3 | 5.7 | % | ||||||||||||||||
Professional services: |
||||||||||||||||||||||||
Domestic |
29.6 | 20.2 | 46.5 | % | 51.4 | 37.9 | 35.6 | % | ||||||||||||||||
International |
26.9 | 21.5 | 25.1 | % | 53.4 | 39.7 | 34.5 | % | ||||||||||||||||
Total professional services revenue |
56.5 | 41.7 | 35.5 | % | 104.8 | 77.6 | 35.1 | % | ||||||||||||||||
Total domestic revenue |
298.1 | 255.6 | 16.6 | % | 546.8 | 500.7 | 9.2 | % | ||||||||||||||||
Total international revenue |
258.6 | 246.7 | 4.8 | % | 512.3 | 462.5 | 10.8 | % | ||||||||||||||||
Total revenue |
$ | 556.7 | $ | 502.3 | 10.8 | % | $ | 1,059.1 | $ | 963.2 | 10.0 | % | ||||||||||||
We estimate that the effect of foreign currency exchange rate fluctuations on our
international revenue resulted in an approximate $6 million increase in revenue for the
quarter ended September 30, 2011, and an approximate $15 million increase in revenue for
the six months ended September 30, 2011, respectively, as compared to the respective
prior year periods, on a constant currency basis.
Domestic License Revenue
Domestic license revenue was $122.2 million, or 53.2%, and $207.5 million, or 49.5%,
of our total license revenue for the quarter and six months ended September 30, 2011,
respectively, and $97.9 million, or 47.0%, and $185.5 million, or 48.9%, of our total
license revenue for the quarter and six months ended September 30, 2010, respectively.
Domestic license revenue for the quarter ended September 30, 2011 increased by $24.3
million, or 24.8%, over the prior year quarter, due to a $16.8 million increase in ESM
license revenue and a $7.5 million increase in MSM license revenue. Domestic license
revenue for the six months ended September 30, 2011 increased by $22.0 million, or 11.9%,
over the prior year period, due to a $11.8 million increase in ESM license revenue and a
$10.2 million increase in MSM license revenue.
24
Table of Contents
International License Revenue
International license revenue was $107.5 million, or 46.8%, and $211.7 million, or
50.5%, of our total license revenue for the quarter and six months ended September 30,
2011, respectively, and $110.2 million or 53.0%, and $193.8 million, or 51.1%, of our
total license revenue for the quarter and six months ended September 30, 2010,
respectively.
International license revenue for the quarter ended September 30, 2011 decreased by
$2.7 million, or 2.5%, from the prior year quarter, due to a $2.1 million decrease in ESM
license revenue and a $0.6 million decrease in MSM license revenue. The ESM license
revenue decrease was attributable primarily to a decrease of $9.9 million in our Europe,
Middle East and Africa (EMEA) market, partially offset by an increase of $7.5 million in
our Asia Pacific market. The MSM license revenue decrease was attributable primarily to a
decrease of $8.9 million in our Canada market, partially offset by increases of $5.2
million and $2.7 million in our EMEA and Latin America markets, respectively.
International license revenue for the six months ended September 30, 2011 increased
by $17.9 million, or 9.2%, over the prior year period, due to an $8.2 million increase in
ESM license revenue and a $9.7 million increase in MSM license revenue. The ESM license
revenue increase was attributable to increases of $10.9 million and $2.3 million in our
Asia Pacific and Canada markets, respectively, partially offset by a combined net
decrease of $5.0 million in our other international markets. The MSM license revenue
increase was attributable to increases of $10.8 million, $6.4 million and $1.2 million in
our EMEA, Latin America and Asia Pacific markets, respectively, partially offset by a
decrease of $8.7 million in our Canada market.
Domestic Maintenance Revenue
Domestic maintenance revenue was $146.3 million, or 54.1%, and $287.9 million, or
53.8%, of our total maintenance revenue for the quarter and six months ended September
30, 2011, respectively, and $137.5 million, or 54.5%, and $277.3 million, or 54.8%, of
our total maintenance revenue for the quarter and six months ended September 30, 2010,
respectively. Domestic maintenance revenue for the quarter ended September 30, 2011
increased by $8.8 million, or 6.4%, over the prior year
quarter, due to a $6.2 million increase in ESM maintenance revenue and a $2.6
million increase in MSM maintenance revenue. Domestic maintenance revenue for the six
months ended September 30, 2011 increased by $10.6 million, or 3.8%, over the prior year
period, due to an $8.0 million increase in ESM maintenance revenue and a $2.6 million
increase in MSM maintenance revenue.
International Maintenance Revenue
International maintenance revenue was $124.2 million, or 45.9%, and $247.2 million,
or 46.2%, of our total maintenance revenue for the quarter and six months ended September
30, 2011, respectively, and $115.0 million, or 45.5%, and $229.0 million, or 45.2%, of
our total maintenance revenue for the quarter and six months ended September 30, 2010,
respectively.
International maintenance revenue for the quarter ended September 30, 2011 increased
by $9.2 million, or 8.0%, over the prior year quarter, due to a $3.1 million increase in
ESM maintenance revenue and a $6.1 million increase in MSM maintenance revenue. The ESM
maintenance revenue increase was attributable to an increase of $1.5 million in our Asia
Pacific market and a combined net increase of $1.6 million in other international
markets. The MSM maintenance revenue increase was attributable to increases of $2.8
million and $2.0 million in our Latin America and EMEA markets, respectively, and a
combined net increase of $1.3 million in our other international markets.
International maintenance revenue for the six months ended September 30, 2011
increased by $18.2 million, or 7.9%, over the prior year period, due to a $5.4 million
increase in ESM maintenance revenue and a $12.8 million increase in MSM maintenance
revenue. The ESM maintenance revenue increase was attributable to an increase of $3.2
million in our Asia Pacific market and a combined net increase of $2.2 million in our
other international markets. The MSM maintenance revenue increase was attributable to
increases of $5.5 million and $5.0 million in our Latin America and EMEA markets,
respectively, and a combined net increase of $2.3 million in our other international
markets.
Professional Services Revenue
Professional services revenue for the quarter ended September 30, 2011 increased by
$14.8 million, or 35.5%, over the prior year quarter, which is reflective of a $9.4
million, or 46.5%, increase in domestic professional services revenue and a $5.4 million,
or 25.1%, increase in international professional services revenue. Professional services
revenue for the six months ended September 30, 2011 increased by $27.2 million, or 35.1%,
over the prior year period, which is reflective of a $13.5 million, or 35.6%, increase in
domestic professional services revenue and a $13.7 million, or 34.5%, 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 implementations.
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Operating Expenses
Quarter Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Cost of license revenue |
$ | 39.3 | $ | 30.8 | 27.6 | % | $ | 77.6 | $ | 62.7 | 23.8 | % | ||||||||||||
Cost of maintenance revenue |
49.5 | 39.9 | 24.1 | % | 93.3 | 80.6 | 15.8 | % | ||||||||||||||||
Cost of professional services revenue |
53.2 | 40.3 | 32.0 | % | 100.6 | 77.3 | 30.1 | % | ||||||||||||||||
Selling and marketing expenses |
153.5 | 143.2 | 7.2 | % | 298.2 | 285.3 | 4.5 | % | ||||||||||||||||
Research and development expenses |
38.3 | 43.4 | (11.8 | )% | 83.0 | 81.9 | 1.3 | % | ||||||||||||||||
General and administrative expenses |
51.0 | 52.8 | (3.4 | )% | 109.6 | 107.0 | 2.4 | % | ||||||||||||||||
Amortization of intangible assets |
10.9 | 8.4 | 29.8 | % | 20.7 | 16.8 | 23.2 | % | ||||||||||||||||
Total operating expenses |
$ | 395.7 | $ | 358.8 | 10.3 | % | $ | 783.0 | $ | 711.6 | 10.0 | % | ||||||||||||
We estimate that the effect of foreign currency exchange rate fluctuations on our
international operating expenses resulted in an approximate $8 million and $20 million
reduction in operating expenses for the quarter and six months ended September 30, 2011,
respectively, as compared to the prior year periods, 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
quarter and six months ended September 30, 2011, cost of license revenue was $39.3
million, or 7.1%, and $77.6 million, or 7.3%, of total revenue, respectively, and 17.1%
and 18.5% of license revenue, respectively. For the quarter and six months ended
September 30, 2010, cost of license revenue was $30.8 million, or 6.1%, and $62.7
million, or 6.5%, of total revenue, respectively, and 14.8% and 16.5% of license revenue,
respectively.
Cost of license revenue for the quarter ended September 30, 2011 increased by $8.5
million, or 27.6%, over the prior year quarter. This increase was primarily attributable
to a $5.8 million increase in the amortization of capitalized software development costs
and a $2.6 million increase in the amortization of acquired technology.
Cost of license revenue for the six months ended September 30, 2011 increased by
$14.9 million, or 23.8%, over the prior year period. This increase was primarily
attributable to an $11.7 million increase in the amortization of capitalized software
development costs and a $2.9 million increase in the amortization of acquired technology.
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 quarter and six months ended September 30,
2011, cost of maintenance revenue was $49.5 million, or 8.9%, and $93.3 million, or 8.8%,
of total revenue, respectively, and 18.3% and 17.4% of maintenance revenue, respectively.
For the quarter and six months ended September 30, 2010, cost of maintenance revenue was
$39.9 million, or 7.9%, and $80.6 million, or 8.4%, of total revenue, respectively, and
15.8% and 15.9% of maintenance revenue, respectively.
Cost of maintenance revenue for the quarter ended September 30, 2011 increased by
$9.6 million, or 24.1%, over the prior year quarter. This increase was attributable to a
$3.6 million increase in personnel costs, a $2.3 million increase in third party
maintenance outsourcing costs, a $1.6 million increase in share-based compensation
expense and a $2.1 million net increase in other expenses.
Cost of maintenance revenue for the six months ended September 30, 2011 increased by
$12.7 million, or 15.8%, over the prior year period. This increase was attributable to a
$4.1 million increase in personnel costs, a $3.9 million increase in third party
maintenance outsourcing costs, a $2.8 million increase in share-based compensation
expense and a $1.9 million net increase in other expenses.
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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 quarter and six months ended September 30, 2011, cost of
professional services revenue was $53.2 million, or 9.6%, and $100.6 million, or 9.5%, of
total revenue, respectively, and 94.2% and 96.0% of professional services revenue,
respectively. For the quarter and six months ended September 30, 2010, cost of
professional services revenue was $40.3 million, or 8.0%, and $77.3 million, or 8.0%, of
total revenue, respectively, and 96.6% and 99.6% of professional services revenue,
respectively.
Cost of professional services revenue for the quarter ended September 30, 2011
increased by $12.9 million, or 32.0%, over the prior year quarter. This increase was
attributable primarily to a $6.5 million increase in personnel and related costs and a
$5.5 million increase in third party subcontracting fees, both principally due to
increases in implementation and consulting services.
Cost of professional services revenue for the six months ended September 30, 2011
increased by $23.3 million, or 30.1%, over the prior year period. This increase was
attributable to an $11.4 million increase in third party subcontracting fees, a $10.1
million increase in personnel and related costs and a $1.8 million net increase in other
expenses, both principally due to increases in implementation and consulting services.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries, related personnel
costs, sales commissions and costs associated with advertising, marketing, industry trade
shows and sales seminars. For the quarter and six months ended September 30, 2011,
selling and marketing expenses were $153.5 million, or 27.6%, and $298.2 million, or
28.2%, of total revenue, respectively. For the quarter and six months ended September 30,
2010, selling and marketing expenses were $143.2 million, or 28.5%, and $285.3 million,
or 29.6%, of total revenue, respectively.
Selling and marketing expenses for the quarter ended September 30, 2011 increased by
$10.3 million, or 7.2%, over the prior year quarter. This
increase was attributable to a $5.6 million increase in sales personnel and related costs, principally
due to an increase in sales personnel headcount, a $1.2 million
increase in share-based compensation expense and a $3.5 million net
increase in other expenses.
Selling and marketing expenses for the six months ended September 30, 2011 increased
by $12.9 million, or 4.5%, over the prior year period. This increase was attributable to
an $8.1 million increase in sales personnel and related costs, principally due to an
increase in sales personnel headcount, a $1.6 million increase
in share-based compensation expense and a $3.2 million net increase 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 quarter and six months ended September 30, 2011,
research and development expenses were $38.3 million, or 6.9%, and $83.0 million, or
7.8%, of total revenue, respectively. For the quarter and six months ended September 30,
2010, research and development expenses were $43.4 million, or 8.6%, and $81.9 million,
or 8.5%, of total revenue, respectively.
Research and development expenses for the quarter ended September 30, 2011 decreased
by $5.1 million, or 11.8%, over the prior year quarter. This decrease was attributable
primarily to a $6.6 million increase in capitalized research and development costs
related to software development projects, partially offset by a $1.2 million increase in
research and development personnel and related costs, including third party
subcontracting fees.
Research and development expenses for the six months ended September 30, 2011
increased by $1.1 million, or 1.3%, over the prior year period. This increase was
attributable primarily to a $6.1 million increase in research and development personnel
and related costs, including third party subcontracting fees, and a $1.7 million increase
in share-based compensation expense, partially offset by a $6.0 million increase in
capitalized research and development costs related to software development projects.
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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 quarter and six
months ended September 30, 2011, general and administrative expenses were $51.0
million, or 9.2%, and $109.6 million, or 10.3%, of total revenue, respectively. For the
quarter and six months ended September 30, 2010, general and administrative expenses were
$52.8 million, or 10.5%, and $107.0 million, or 11.1%, of total revenue, respectively.
General and administrative expenses for the quarter ended September 30, 2011
decreased by $1.8 million, or 3.4%, over the prior year quarter. This decrease was
attributable to a $1.6 million decrease in facilities expenses and a $1.7 million net
decrease in other expenses, partially offset by a $1.5 million increase in depreciation
expense.
General and administrative expenses for the six months ended September 30, 2011
increased by $2.6 million, or 2.4%, over the prior year period. This increase was
attributable to a $3.4 million increase in share-based compensation expense, a $1.3
million increase in depreciation expense and a $1.7 million net increase in other
expenses, partially offset by a $2.3 million decrease in personnel costs and a $1.5
million decrease in facilities 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 quarter and six months ended September 30, 2011, amortization of
intangible assets was $10.9 million and $20.7 million, respectively. For the quarter and
six months ended September 30, 2010, amortization of intangible assets was $8.4 million
and $16.8 million, respectively.
Amortization of intangible assets for the quarter ended September 30, 2011 increased
by $2.5 million, or 29.8%, 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, partially offset by a reduction in amortization
associated with intangible assets acquired in connection with past acquisitions that
became fully amortized.
Amortization of intangible assets for the six months ended September 30, 2011
increased by $3.9 million, or 23.2%, over the prior year period. This increase was
attributable primarily to amortization associated with intangible assets acquired in
connection with our fiscal 2011 and 2012 acquisitions, partially 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 quarter and six months ended September
30, 2011, was a loss of $4.8 million and $6.4 million, respectively. Other income (loss),
net, for the quarter and six months ended September 30, 2010, was income of $0.3 million
and a loss of $5.2 million, respectively.
The change in other income (loss), net for the quarter ended September 30, 2011 was
attributable primarily to a $3.5 million reduction in net gains on investments.
The change in other income (loss), net for the six months ended September 30, 2011
was attributable primarily to a $2.3 million reduction in net gains on investments, a
$1.2 million increase in interest income and a $1.0 million increase in interest expense
as compared to the prior year period.
Income Taxes
Income tax expense was $41.5 million and $59.3 million for the quarter and six
months ended September 30, 2011, respectively, resulting in effective tax rates of 26.6%
and 22.0%, respectively. Income tax expense was $12.0 million and $21.8 million for the
quarter and six months ended September 30, 2010, respectively, resulting in effective tax
rates of 8.3% and 8.8%, 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 quarter and six months ended September 30, 2011, the overall favorable effect of
foreign tax rates on
our effective tax rate was 6.7% and 8.9% of pre-tax earnings,
respectively. During the quarter and six months ended September 30, 2010, the overall
favorable effect of foreign tax rates on our effective tax rate was
13.3% and 12.2% of
pre-tax earnings, respectively. During the six months ended September 30, 2011, we also
recorded discrete net tax benefits of $6.2 million associated with tax authority
settlements related to prior years tax matters which favorably impacted our effective
tax rate by 2.3% of pre-tax earnings. During the quarter and six months ended September
30, 2010, we also recorded discrete net tax benefits of $18.0 million and $32.0 million,
respectively, associated with tax authority settlements related to prior years tax
matters which favorably impacted our effective tax rate by 12.5% and 13.0% 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.
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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.
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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 | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Operating income: |
||||||||||||||||
GAAP operating income |
$ | 161.0 | $ | 143.5 | $ | 276.1 | $ | 251.6 | ||||||||
Share-based compensation expense (1) |
30.8 | 25.9 | 61.6 | 51.0 | ||||||||||||
Amortization of intangible assets (2) |
24.1 | 19.1 | 46.6 | 39.7 | ||||||||||||
Severance, exit costs and related charges (3) |
0.5 | 2.9 | 2.6 | 5.9 | ||||||||||||
Non-GAAP operating income |
$ | 216.4 | $ | 191.4 | $ | 386.9 | $ | 348.2 | ||||||||
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Net earnings: |
||||||||||||||||
GAAP net earnings |
$ | 114.7 | $ | 131.8 | $ | 210.4 | $ | 224.6 | ||||||||
Share-based compensation expense (1) |
30.8 | 25.9 | 61.6 | 51.0 | ||||||||||||
Amortization of intangible assets (2) |
24.1 | 19.1 | 46.6 | 39.7 | ||||||||||||
Severance, exit costs and related charges (3) |
0.5 | 2.9 | 2.6 | 5.9 | ||||||||||||
Provision for income taxes on above pre-tax non-GAAP adjustments (4) |
(16.7 | ) | (13.6 | ) | (32.3 | ) | (27.5 | ) | ||||||||
Certain discrete tax items (5) |
| (18.0 | ) | (6.2 | ) | (32.0 | ) | |||||||||
Non-GAAP net earnings |
$ | 153.4 | $ | 148.1 | $ | 282.7 | $ | 261.7 | ||||||||
Quarter Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Diluted earnings per share*: |
||||||||||||||||
GAAP diluted earnings per share |
$ | 0.65 | $ | 0.73 | $ | 1.18 | $ | 1.24 | ||||||||
Share-based compensation expense (1) |
0.18 | 0.14 | 0.35 | 0.28 | ||||||||||||
Amortization of intangible assets (2) |
0.14 | 0.11 | 0.26 | 0.22 | ||||||||||||
Severance, exit costs and related charges (3) |
| 0.02 | 0.01 | 0.03 | ||||||||||||
Provision for income taxes on above pre-tax non-GAAP adjustments (4) |
(0.09 | ) | (0.07 | ) | (0.18 | ) | (0.15 | ) | ||||||||
Certain discrete tax items (5) |
| (0.10 | ) | (0.03 | ) | (0.18 | ) | |||||||||
Non-GAAP diluted earnings per share* |
$ | 0.87 | $ | 0.82 | $ | 1.59 | $ | 1.44 | ||||||||
* | 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. |
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(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 in the six months ended September 30, 2011 and $18.0
million and $32.0 million for the quarter and six months ended September 30,
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 September 30, 2011, we had $1.6 billion in cash, cash equivalents and
investments, approximately 55.4% of which was held by our international subsidiaries and
was largely generated from our international operations. Our international operations
have generated $542.3 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 September 30, 2011 of approximately $35.1 million primarily in
support of performance obligations to various customers, but also related to facilities
and other obligations.
At September 30, 2011 and March 31, 2011, we held auction rate securities with a par
value of $29.4 million and $29.8 million, respectively, which were classified as
available-for-sale. The total estimated fair value of our auction rate securities was
$25.6 million and $27.2 million at September 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 Educations Federal Family Education Loan Program. All of
these bonds are currently rated investment grade by Moodys or Standard and Poors.
Auctions for these securities began failing in early 2008 and have continued to fail,
resulting in our continuing to hold such securities and the issuers paying interest at
the maximum contractual rates. We do not believe that any of the underlying issuers of
these auction rate securities are presently at risk of default or that the underlying
credit quality of the assets backing the auction rate security investments has been
impacted by the reduced liquidity of these investments. Due to the illiquidity in the
auction rate securities market caused by failed auctions, we estimated the fair value of
these securities and the put option discussed below using internally developed models of
the expected cash flows of the securities which incorporate assumptions about the
expected cash flows of the underlying student loans and estimates of the rate of return
required by investors, which includes an adjustment to reflect a lack of liquidity in the
market for these securities. Periodically, the issuers of certain of our auction rate
securities have redeemed portions of our holdings at par value plus accrued interest.
During the quarter and six months ended September 30, 2011, issuers redeemed
available-for-sale holdings of $0.2 million and $0.4 million, respectively. During the
quarter and six months ended September 30, 2010, issuers redeemed available-for-sale
holdings of $0.2 million and $10.9 million, respectively, and trading holdings of $5.4
million during the six months ended September 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 Companys option, at a rate equal to either (i) the base
rate (as defined) plus a margin based on the credit ratings of BMCs senior unsecured
notes due 2018 (the Senior Notes), or (ii) the LIBOR rate (as defined) plus a margin
based on the credit ratings of BMCs Senior Notes, for interest periods of one, two,
three or six months. As of September 30, 2011 and through October 26, 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.
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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.
Our cash flows for the quarters ended September 30, 2011 and 2010 were:
Six Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net cash provided by operating activities |
$ | 423.1 | $ | 294.5 | ||||
Net cash provided by (used in) investing activities |
(221.8 | ) | 7.9 | |||||
Net cash used in financing activities |
(383.5 | ) | (197.7 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(19.0 | ) | 4.2 | |||||
Net change in cash and cash equivalents |
$ | (201.2 | ) | $ | 108.9 | |||
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
six months ended September 30, 2011 increased by $128.6 million over the prior year
period, attributable to the net impact of working capital changes and an increase in net
earnings before non-cash expenses (principally depreciation and amortization and
share-based compensation expense).
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended September 30, 2011
was $221.8 million compared to net cash provided by investing activities of $7.9 million
for the six months ended September 30, 2010. This difference was attributable primarily
to an increase in cash expended for our fiscal 2012 acquisitions 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 six months ended September 30, 2011
increased by $185.8 million over the prior year period. This increase was attributable
primarily to an increase in treasury stock acquired.
Treasury Stock Purchases
Our Board of Directors previously authorized a total of $4.0 billion to repurchase
common stock. During the quarter and six months ended September 30, 2011, we purchased
5.4 million and 8.8 million shares, respectively, for $225.0 million and $405.5 million,
respectively. From the inception of the stock repurchase authorization through September
30, 2011, we have purchased 141.6 million shares for $3.8 billion. At September 30, 2011,
there was $225.3 million remaining in the stock repurchase program, which does not have
an expiration date. In addition, during the quarter and six months ended September 30,
2011, we repurchased a nominal amount and 0.4 million shares, respectively, for $1.3
million and $23.0 million, respectively, to satisfy employee tax withholding obligations
upon the vesting of share-based awards. In October 2011, our Board of Directors
authorized an additional $1.0 billion to repurchase stock.
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 September 30, 2011.
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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 Managements Discussion and Analysis of Financial Condition and Results of
Operations. There have been no changes to our critical accounting policies and estimates
during the six months ended September 30, 2011.
Recently Adopted Accounting Pronouncements
In December 2010 and in September 2011, the Financial Accounting Standards Board
(FASB) issued updated guidance relating to the annual goodwill impairment test. This new
guidance incorporates additional qualitative assessments at two discrete points in the
goodwill impairment evaluation. First, entities are now permitted to perform an initial
qualitative assessment of whether it is more likely than not that goodwill is impaired in
order to determine the need to perform the previously required two-step impairment test.
This new guidance has been early adopted by us and will be applied
for our fiscal 2012 annual goodwill impairment
test. Additionally, as part of step one of the two-step impairment test, entities are
required to perform a qualitative assessment 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 that it is more likely than
not that goodwill is impaired, step two of the goodwill impairment test is required to be
performed to determine the amount of impairment, if any. This guidance is effective for
us beginning with our fiscal 2012 goodwill impairment test. Neither set of guidance is
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.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by
this report, our CEO and CFO have concluded that our disclosure controls and procedures
(as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act), are effective.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 and Rule 15d-15
under the Exchange Act that occurred during our second fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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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) | |||||||||||||||
July 1 - 31, 2011 |
382,742 | $ | 53.78 | 379,252 | $ | 20,397,827 | $ | 429,823,324 | ||||||||||||
August 1 - 31, 2011 |
4,414,129 | $ | 40.74 | 4,389,062 | 178,793,877 | $ | 251,029,447 | |||||||||||||
September 1 - 30, 2011 |
649,162 | $ | 40.01 | 643,800 | 25,761,146 | $ | 225,268,301 | |||||||||||||
Total |
5,446,033 | $ | 41.56 | 5,412,114 | $ | 224,952,850 | $ | 225,268,301 | ||||||||||||
(1) | Includes 33,919 shares of our common stock withheld by us to satisfy employee tax withholding obligations. |
|
Our Board of Directors previously authorized a total of $4.0 billion to repurchase common stock. In October 2011, our
Board of Directors authorized an additional $1.0 billion to repurchase stock. At September 30, 2011,
approximately $225.3 million remains authorized in this stock repurchase program and the program does not have an
expiration date. |
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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. |
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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. |
||||
October 26, 2011 | By: | /s/ ROBERT E. BEAUCHAMP | ||
Robert E. Beauchamp | ||||
Chairman of the Board, President
and Chief Executive Officer |
||||
October 26, 2011 | By: | /s/ STEPHEN B. SOLCHER | ||
Stephen B. Solcher | ||||
Senior Vice President and Chief Financial Officer |
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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. |
38