UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended June 30, 2012
OR
For the transition period from to
Commission File Number: 001-16393
BMC Software, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
2101 CityWest Boulevard
Houston, Texas
(713) 918-8800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 x No ¨
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 27, 2012, there were 159,464,000 outstanding shares of Common Stock, par value $.01, of the registrant.
BMC SOFTWARE, INC.
QUARTER ENDED JUNE 30, 2012
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2012 (Unaudited) and March 31, 2012
Condensed Consolidated Statements of Comprehensive Income for the quarters ended June 30, 2012 and 2011 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the quarters ended June 30, 2012 and 2011 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
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Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Trade accounts receivable, net
Trade finance receivables, net
Deferred tax assets
Other current assets
Total current assets
Property and equipment, net
Software development costs, net
Long-term investments
Long-term trade finance receivables, net
Intangible assets, net
Goodwill
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable
Finance payables
Accrued liabilities
Deferred revenue
Total current liabilities
Long-term deferred revenue
Long-term borrowings
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 7)
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
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost (89.5 and 87.4 shares)
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions, except per share data)
(Unaudited)
Revenue:
License
Maintenance
Professional services
Total revenue
Operating expenses:
Cost of license revenue
Cost of maintenance revenue
Cost of professional services revenue
Selling and marketing expenses
Research and development expenses
General and administrative expenses
Amortization of intangible assets
Total operating expenses
Operating income
Other income (loss), net:
Interest and other income, net
Interest expense
Gain (loss) on investments, net
Total other loss, net
Earnings before income taxes
Provision for income taxes
Net earnings
Basic earnings per share
Diluted earnings per share
Shares used in computing basic earnings per share
Shares used in computing diluted earnings per share
Other comprehensive income (loss), (net of tax):
Foreign currency translation adjustment, net of tax provision (benefit) of $(1.7) and $0.4, respectively
Unrealized loss on available-for-sale securities, net of tax benefit of $0.2 and $0.1, respectively
Total other comprehensive income (loss)
Total comprehensive income
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Deferred income tax provision (benefit)
Share-based compensation expense
Loss (gain) on investments, net and other
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable
Trade finance receivables
Prepaid and other current assets
Accrued and other current liabilities
Other operating assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities of investments
Proceeds from sales of investments
Purchases of investments
Cash paid for acquisitions, net of cash acquired, and other investments
Capitalization of software development costs
Purchases of property and equipment
Other investing activities
Net cash used in investing activities
Cash flows from financing activities:
Treasury stock acquired
Repurchases of stock to satisfy employee tax withholding obligations
Proceeds from stock options exercised and other
Excess tax benefit from share-based compensation expense
Repayments of borrowings and capital lease obligations
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes, net of amounts refunded
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of BMC Software, Inc. and its subsidiaries (collectively, we, us, our or BMC). All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements reflect all normal recurring adjustments necessary to fairly present our financial position and results of operations as of and for the periods presented herein. These financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.
Interim results are not necessarily indicative of results for a full year. Our results reflect the seasonality of our business and 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; however, general economic conditions also have an impact on our business and financial results. These financial statements should be read in conjunction with our annual audited consolidated financial statements for the fiscal year ended March 31, 2012, as filed with the SEC on Form 10-K.
(2) Financial Instruments
We measure certain financial instruments at fair value on a recurring basis using the following valuation techniques:
(A) Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
(B) Income approach — Uses valuation techniques to convert future estimated cash flows to a single present amount based on current market expectations about those future amounts, using present value techniques.
The fair values of our financial instruments were determined using the following input levels and valuation techniques:
June 30, 2012
Assets
Cash equivalents
Money-market funds
United States Treasury securities
Short-term and long-term investments
Auction rate securities
Mutual funds
Foreign currency forward contracts
Total
Liabilities
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.
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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.
The following table summarizes the activity in our Level 3 financial instruments (auction rate securities) for the quarters ended June 30, 2012 and 2011, respectively:
Balance at the beginning of the period
Redemption and sales of auction rate securities
Change in unrealized loss included in other comprehensive income
Balance at the end of the period
Investments
Our cash, cash equivalents and investments were comprised of the following:
Measured at fair value:
Available-for-sale
Trading
Total debt and equity investments measured at fair value
Cash on hand
Certificates of deposit
Total cash, cash equivalents and investments
Amounts included in accumulated other comprehensive income from available-for-sale securities (pre-tax):
Unrealized losses*
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The following summarizes the underlying contractual maturities of our available-for-sale investments in debt securities at June 30, 2012:
Due in one year or less
Due between one and two years
Due after ten years
At June 30, 2012 and March 31, 2012, we held auction rate securities with a par value of $21.7 million and $29.3 million, respectively, which were classified as available-for-sale. The total estimated fair value of our auction rate securities was $18.7 million and $26.9 million at June 30, 2012 and March 31, 2012, respectively. Our auction rate securities consist entirely of bonds issued by public agencies that are backed by student loans with at least a 97% guarantee by the federal government under the United States Department of Education’s Federal Family Education Loan Program. All of these bonds are currently rated investment grade by Moody’s or Standard and Poor’s. Auctions for these securities began failing in early 2008 and have continued to fail, resulting in our continuing to hold such securities and the issuers paying interest at the maximum contractual rates. We do not believe that any of the underlying issuers of these auction rate securities are presently at risk of default or that the underlying credit quality of the assets backing the auction rate security investments has been impacted by the reduced liquidity of these investments. Due to the illiquidity in the auction rate securities market caused by failed auctions, we estimated the fair value of these securities using internally developed models of the expected cash flows of the securities on a discounted basis. These models incorporate assumptions about the expected cash flows of the underlying student loans discounted at an estimate of the rate of return required by investors, which includes an adjustment to reflect a lack of liquidity in the market for these securities. The range of and weighted average discount rates used in our models for the quarter ended June 30, 2012 were 3.9% to 4.1%, and 4.0%, respectively. Significant increases (decreases) in the discount rate used in the valuation would result in decreases (increases) in the fair value of the auction rate securities. Periodically, the issuers of certain of our auction rate securities have redeemed portions of our holdings at par value plus accrued interest. During the quarters ended June 30, 2012 and 2011, issuers redeemed available-for-sale holdings of $7.6 million and $0.2 million par value, respectively.
The unrealized loss on our available-for-sale auction rate securities, which have a fair value of $18.7 million at June 30, 2012, was $3.0 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 June 30, 2012 and March 31, 2012.
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 foreign currency 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 for accounting purposes, and therefore, the changes in the fair values of these contracts 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 June 30, 2012 and March 31, 2012 was $0.9 million and $8.1 million, respectively, and was recorded within other current assets in our condensed consolidated balance sheets. The fair value of our outstanding foreign currency forward contracts that closed in a loss position at June 30, 2012 and March 31, 2012 was $5.3 million and $0.6 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:
Foreign Currency Forward Contracts (receive United States dollar/pay foreign currency)
Euro
Australian dollar
Chinese yuan renminbi
Swedish krona
Swiss franc
Singapore dollar
Brazilian real
Danish krone
New Zealand dollar
South Korean won
Mexican peso
British pound
Other
Foreign Currency Forward Contracts (pay United States dollar/receive foreign currency)
Israeli shekel
Indian rupee
Our use of foreign currency forward exchange contracts is intended to principally offset gains and losses associated with foreign currency exposures. Therefore, the notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances and currency denomination of monetary assets and liabilities maintained by our global entities. The effect of the foreign currency forward contracts for the quarters ended June 30, 2012 and 2011, was a gain of $6.4 million and a loss of $3.7 million, respectively, which, after including gains and losses on our foreign currency exposures, resulted in net losses of $0.4 million and $1.0 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 is transferred to financial institutions on a non-recourse basis. We utilize wholly-owned finance subsidiaries in these finance receivables transfers. These entities are consolidated into our financial position and results of operations. We account for such transfers as sales in accordance with applicable accounting rules pertaining to the transfer of financial assets and the sale of future revenue when we have surrendered control of such receivables (including determining that such assets have been isolated beyond our reach and the reach of our creditors) and when we do not have significant continuing involvement in the generation of cash flows due the financial institutions. During the quarters ended June 30, 2012 and 2011, we transferred $72.8 million and $11.1 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 June 30, 2012, we held $115.6 million of finance receivables, net of $0.3 million of specific receivables which have been fully reserved.
At June 30, 2012, our finance receivables balance, net of allowance, by region and by class of internal credit rating was as follows:
Class 1
Class 2
Class 3
Other Financial Instruments
The fair value of our senior unsecured notes due 2018 at June 30, 2012 and March 31, 2012, based on market prices (Level 2), was $365.1 million and $368.4 million, respectively, compared to the carrying value of $298.9 million and $298.9 million, respectively.
The fair value of our senior unsecured notes due 2022 at June 30, 2012 and March 31, 2012, based on market prices (Level 1), was $514.0 million and $506.6 million, respectively, compared to the carrying value of $497.5 million and $497.4 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.
(3) Long-Term Borrowings
Long-term borrowings at June 30, 2012 and March 31, 2012 consisted of:
Senior unsecured notes due 2018 (net of $1.1 million and $1.1 million of unamortized discount at June 30, 2012 and March 31, 2012, respectively)
Senior unsecured notes due 2022 (net of $2.5 million and $2.6 million of unamortized discount at June 30, 2012 and March 31, 2012, respectively)
Capital leases and other obligations
Less current maturities of capital leases and other obligations (included in accrued liabilities)
In February 2012, we issued $500.0 million of senior unsecured notes due 2022. Net proceeds to us after original issuance discount and issuance costs amounted to $493.3 million. These senior notes were issued at an original issuance discount of $2.7 million. These senior notes bear interest at a rate of 4.25% per annum, payable semi-annually in February and August of each year. These senior notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of these senior notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable United States Treasury rate plus 35 basis points, plus accrued and unpaid interest. These senior notes are subject to the provisions of an indenture which includes covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions.
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In November 2010, we entered into a credit agreement with certain institutional lenders providing for an unsecured revolving credit facility in an amount up to $400.0 million which is scheduled to expire on November 30, 2014 (the Credit Facility). Subject to certain conditions, at any time prior to maturity, we may invite existing and new lenders to increase the size of the Credit Facility up to a maximum of $600.0 million. The Credit Facility includes provisions for swing line loans of up to $25.0 million and standby letters of credit of up to $50.0 million. Revolving loans under the Credit Facility bear interest, at the Company’s option, at a rate equal to either (i) the base rate (as defined) plus a margin based on the credit ratings of BMC’s senior unsecured notes due 2018, or (ii) the LIBOR rate (as defined) plus a margin based on the credit ratings of BMC’s senior notes due 2018, for interest periods of one, two, three or six months. As of June 30, 2012 and through July 31, 2012, we have not borrowed any funds under the Credit Facility.
In June 2008, we issued $300.0 million of senior unsecured notes due 2018. Net proceeds to us after original issuance discount and issuance costs amounted to $295.6 million. These senior notes were issued at an original issuance discount of $1.8 million. These senior notes bear interest at a rate of 7.25% per annum, payable semi-annually in June and December of each year. These senior notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of these senior notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable United States Treasury rate plus 50 basis points, plus accrued and unpaid interest. These senior notes are subject to the provisions of an indenture which includes covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions.
At June 30, 2012, we were in compliance with all debt covenants.
(4) Income Taxes
Income tax expense was $11.6 million and $17.8 million for the quarters ended June 30, 2012 and 2011, respectively, resulting in effective tax rates of 17.7% and 15.7%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with earnings from lower tax rate jurisdictions throughout the world and our policy of indefinitely reinvesting earnings from certain jurisdictions (primarily in Europe), as well as due to additional accruals, changes in estimates, releases and settlements with taxing authorities related to our uncertain tax positions and benefits associated with income attributable to both domestic production activities and the extraterritorial income exclusion. During the quarters ended June 30, 2012 and 2011, the overall favorable effects of foreign tax rates on our effective tax rate were 13.4% and 12.0% of pre-tax earnings, respectively. During the quarter ended June 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 5.5% of pre-tax earnings. 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, 2007, except for one issue related to the year ended March 31, 2006. 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. A trial was held in May 2012 and post-trial briefs are required to be submitted by September 2012 after which we will await the Tax Court’s ruling. 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.
(5) Share-Based Compensation
During the quarter ended June 30, 2012, we granted 1.7 million and 0.2 million time-based nonvested stock units and market-based nonvested stock units, respectively, at a weighted average grant date fair value of $42.95 and $52.03, respectively, to our executive officers and non-executive employees. Time-based nonvested stock units primarily 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 ended June 30, 2012, we issued 0.6 million shares of common stock related to exercises of stock options and 1.2 million shares of common stock related to vesting of nonvested stock units.
At June 30, 2012, we had approximately $265.7 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 comprehensive income is summarized as follows:
Total share-based compensation expense
(6) Stockholders’ Equity
Earnings Per Share
The two-class method is utilized for the computation of earnings per share (EPS). The two-class method requires a portion of net income 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 and was insignificant for the quarter ended June 30, 2011. There were no participating securities outstanding during the quarter ended June 30, 2012.
Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options and other dilutive securities using the treasury stock method.
The following table summarizes our basic and diluted EPS computations for the quarters ended June 30, 2012 and 2011:
Basic earnings per share:
Net earnings allocated to common shares
Weighted average number of common shares outstanding
Diluted earnings per share:
Incremental shares from assumed conversions of share-based awards
Adjusted weighted average number of common shares outstanding
For the quarters ended June 30, 2012 and 2011, 1.7 million and 0.3 million weighted average potential common shares, respectively, have been excluded from the calculation of diluted EPS as they were anti-dilutive.
Treasury Stock
Our Board of Directors has authorized a total of $5.0 billion to repurchase common stock. During the quarter ended June 30, 2012, we repurchased 3.5 million shares for $150.0 million under these authorizations. At June 30, 2012, approximately $700.3 million remains authorized in the stock repurchase program, which does not have an expiration date. In addition, during the quarter ended June 30, 2012, we repurchased 0.4 million shares for $16.9 million to satisfy employee tax withholding obligations upon the vesting of share-based awards.
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Shareholder Rights Agreement
On May 12, 2012, our Board of Directors authorized and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding common share through a shareholder rights agreement (the “Rights Agreement”). Each Right, once exercisable, represents the right to purchase one one-thousandth of a series B junior participating preferred share, par value $0.01, for $180, or an equivalent value of common shares determined at 50% of the then-current market price of BMC’s common stock, provided sufficient common shares are then unissued. The Rights become exercisable in the event any individual person or entity (including the ownership of their related affiliates) acquires 10% or more of the outstanding share capital of the Company without the approval of BMC’s Board of Directors, and until such time are inseparable from and trade with BMC’s common stock. The Rights have a de minimus fair value and are accounted for as a component of stockholders’ equity. The Rights Agreement expires May 11, 2013.
(7) Guarantees and Contingencies
Guarantees
Under our standard software license agreements, we agree to indemnify, defend and hold harmless our licensees from and against certain losses, damages and costs arising from claims alleging the licensees’ use of our software infringes the intellectual property rights of a third party. Also, under these standard license agreements, we represent and warrant to licensees that our software products operate substantially in accordance with published specifications.
Other guarantees include promises to indemnify, defend and hold harmless each of our executive officers, non-employee directors and certain key employees from and against losses, damages and costs incurred by each such individual in administrative, legal or investigative proceedings arising from alleged wrongdoing by the individual while acting in good faith within the scope of his or her job duties on our behalf.
We also had outstanding letters of credit, performance bonds and similar instruments at June 30, 2012 of approximately $44.5 million primarily in support of performance obligations to various customers, but also related to facilities and other obligations.
Historically, we have not incurred significant costs related to such indemnifications, warranties and guarantees. As such, and based on other factors, no provision or accrual for these items has been made.
Contingencies
We are 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 $11 million based on current exchange rates; 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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(8) Segment Reporting
We are organized into two primary business units, Enterprise Service Management (ESM) and Mainframe Service Management (MSM). ESM derives its revenue from our performance management, automation, IT service management, and Atrium solution suites (collectively, ESM-Solutions), along with professional services revenue derived from consulting, implementation, integration and educational services related principally to the delivery of our ESM solutions (ESM-Services). MSM derives its revenue from solution suites for mainframe data and performance management and enterprise workload automation. Beginning in the first quarter of fiscal 2013, we expanded our ESM segment reporting to include separate financial information for both ESM-Solutions and ESM-Services, consistent with the manner in which business segment performance is being assessed internally for evaluating performance and making resource allocation decisions.
Segment performance is measured based on internal segment operating income. Segment operating income for ESM-Solutions and MSM reflects 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. Indirect operating expenses are allocated to ESM-Solutions and MSM based on budgeted bookings, revenue and other allocation methods that management believes to be reasonable. Segment operating income for ESM-Services reflects professional services revenue less direct segment operating expenses consisting primarily of cost of professional services revenue and direct selling and marketing costs.
Our measure of segment operating income does not include the effect of share-based compensation expenses, amortization of acquired technology and other intangible assets, the costs associated with severance, exit costs and related charges or proxy contest costs, which are collectively included in unallocated operating expenses below. Assets and liabilities are reviewed by management at the consolidated level only. The Company has reclassified all periods presented to conform to the current period presentation.
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The following tables summarize segment performance for the quarters ended June 30, 2012 and 2011:
Quarter Ended June 30, 2012
Direct and allocated indirect segment operating expenses:
Segment operating income (loss)
Unallocated operating expenses
Other loss, net
Quarter Ended June 30, 2011
(9) New Accounting Pronouncements Not Yet Adopted
In December 2011, the Financial Accounting Standards Board (FASB) issued guidance requiring new disclosures regarding balance sheet offsetting. This guidance requires entities to disclose the gross amounts of certain recognized financial assets and liabilities, to reconcile these amounts to the net positions recognized in the balance sheet and to provide qualitative disclosures about the rights of offset relating to these financial assets and liabilities. This new disclosure guidance is effective for us beginning with our first quarter of fiscal 2014.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
It is important that this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with: (i) the attached unaudited condensed consolidated financial statements and notes thereto, (ii) the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2012, 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, 2012.
This MD&A contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified by the use of the words “believe,” “expect,” “anticipate,” “estimate,” “will,” “contemplate,” “would” and similar expressions that contemplate future events. Such forward-looking statements are based on management’s reasonable current assumptions and expectations. Numerous important factors, risks and uncertainties, including but not limited to those summarized under Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2012, 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.
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Overview
A summary of select operating metrics for our first fiscal quarter ended June 30, 2012 is as follows:
Total bookings, which represent the contract value of new transactions that we closed and recorded, were $470.3 million for the quarter, representing a decrease of $145.1 million, or 23.6%, from the prior year quarter. The prior year quarter included one large transaction that generated total bookings of over $100 million, principally related to our MSM business.
Total license bookings were $127.9 million for the quarter, representing a decrease of $64.6 million, or 33.6%, from the prior year quarter. During the quarter, we closed 21 transactions with license bookings over $1 million (with total license bookings of $53.8 million) compared to 31 transactions with license bookings over $1 million (with total license bookings of $122.1 million) in the prior year quarter.
Within our ESM-Solutions segment, where we evaluate performance on the basis of license bookings, total license bookings for the quarter decreased by $11.7 million, or 11.6%, from the prior year quarter. We attribute this decrease primarily to the impact of foreign currency exchange rate changes, a weakening global economic environment and internal sales-related factors. We estimate that foreign currency exchange rate changes contributed to an approximate $5 million, or 5%, reduction in ESM license bookings as compared to the prior year quarter, on a constant currency basis. We also saw evidence of the weakening economic environment in certain areas. Lastly, while sales force capacity reached planned levels during the quarter, we believe that overall productivity was negatively impacted by lower sales force tenure and experience levels, particularly in certain regions.
Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended June 30, 2012 decreased by $214.7 million, or 21.7%, and on an annualized basis, after normalizing for contract length, decreased by $38.0 million, or 12.6%, as compared to the prior year period. These trailing twelve month decreases were attributable primarily to the large prior year transaction referred to above as well as the timing of other transaction renewal cycles. Over the trailing 36 months ended June 30, 2012, total MSM bookings increased by $82.5 million, or 3.3%, and on an annualized basis, after normalizing for contract length, increased by $21.8 million, or 2.7%, as compared to the prior year period.
Total revenue for the quarter was $504.4 million, representing an increase of $2.0 million, or 0.4%, over the prior year quarter. The increase for the quarter was reflective of maintenance and professional services revenue increases of $14.2 million, or 5.4%, and $5.7 million, or 11.8%, respectively, partially offset by a license revenue decrease of $17.9 million, or 9.4%. On a segment basis, ESM-Solutions revenue for the quarter decreased by $6.1 million, or 2.3%, ESM-Services revenue increased by $5.7 million, or 11.8%, and MSM revenue increased by $2.4 million, or 1.2%, as compared to the prior year quarter. We estimate that foreign currency exchange rate fluctuations contributed to an approximate $9 million, or 2%, decrease in revenue as compared to the prior year quarter, on a constant currency basis.
Operating income for the quarter was $73.9 million, representing a decrease of $41.2 million, or 35.8%, from the prior year quarter. Non-GAAP operating income for the quarter was $148.0 million, representing a decrease of $22.5 million, or 13.2%, from the prior year quarter.
Net earnings for the quarter were $54.1 million, representing a decrease of $41.6 million, or 43.5%, from the prior year quarter. Non-GAAP net earnings for the quarter were $105.9 million, representing a decrease of $23.4 million, or 18.1%, from the prior year quarter.
Diluted earnings per share for the quarter was $0.33, representing a decrease of $0.20 per share, or 37.7%, from the prior year quarter. Non-GAAP diluted earnings per share was $0.65, representing a decrease of $0.07 per share, or 9.7%, from the prior year quarter.
Cash flows from operations for the quarter ended June 30, 2012 were $219.6 million, representing a decrease of $41.8 million, or 16.0%, from the prior year quarter. We closed out the quarter with a strong balance sheet at June 30, 2012, including $1.6 billion in cash, cash equivalents and investments and $2.0 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 a strategic acquisition in our ESM segment during the quarter ended June 30, 2012, acquiring Abydos Limited, a provider of workflow management solutions, which enhances the user experience of our Remedy IT Service Management suite.
We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter ended June 30, 2012, we repurchased 3.5 million shares for a total value of $150.0 million.
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.
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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.
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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 comprehensive income represent of total revenue. These financial results are not necessarily indicative of future results.
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Revenue
The following table provides information regarding software license and software maintenance revenue for the quarters ended June 30, 2012 and 2011:
Software License Revenue
Enterprise Service Management
Mainframe Service Management
Total software license revenue
Software Maintenance Revenue
Total software maintenance revenue
Total Software Revenue
Total software revenue
License revenue for the quarter ended June 30, 2012 was $171.6 million, a decrease of $17.9 million, or 9.4%, from the prior year quarter. This decrease was attributable to a decrease in ESM license revenue, partially offset by an increase in MSM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods decreased $9.8 million for the quarter ended June 30, 2012 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 58% in the current quarter as compared to 45% in the prior year quarter.
ESM license revenue was $97.1 million, or 56.6%, and $118.5 million, or 62.5%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively. ESM license revenue for the quarter ended June 30, 2012 decreased by $21.4 million, or 18.1%, from the prior year quarter, due to a $12.2 million decrease in the recognition of previously deferred license revenue and a $9.2 million reduction in upfront license revenue recognized in connection with new transactions. The decrease in upfront license revenue recognized in the quarter ended June 30, 2012 was attributable to a decrease in license bookings along with a lower percentage of such bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms.
MSM license revenue was $74.5 million, or 43.4%, and $71.0 million, or 37.5%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively. MSM license revenue for the quarter ended June 30, 2012 increased by $3.5 million, or 4.9%, over the prior year quarter. This increase was due to a $2.4 million increase in the recognition of previously deferred license revenue and a $1.1 million increase in the amount of upfront license revenue recognized in connection with new transactions. The increase in upfront license revenue recognized in the quarter ended June 30, 2012 was attributable to a higher percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by a decrease in license bookings.
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Deferred License Revenue
For the quarters ended June 30, 2012 and 2011, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows:
Deferrals of license revenue
Recognition from deferred license revenue
Impact of foreign currency exchange rate changes
Net increase (decrease) in deferred license revenue
Deferred license revenue balance at end of period
The primary reasons for license revenue deferrals include, but are not limited to, customer transactions that include products for which the maintenance pricing is based on a combination of undiscounted license list prices, net license fees or discounted license list prices, certain arrangements that include unlimited licensing rights, time-based licenses that are recognized over the term of the arrangement, customer transactions that include products with differing maintenance periods and other transactions for which we do not have or are not able to determine vendor-specific objective evidence of the fair value of the maintenance and/or professional services. The contract terms and conditions that result in deferral of revenue recognition for a given transaction result from arm’s length negotiations between us and our customers. We anticipate our transactions will continue to include such contract terms that result in deferral of the related license revenue as we expand our offerings to meet customers’ product, pricing and licensing needs.
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 from the deferred revenue balance in each future quarter is generally predictable. At June 30 2012, the deferred license revenue balance was $647.0 million. Estimated future recognition from deferred license revenue at June 30, 2012 is (in millions):
Remainder of fiscal 2013
Fiscal 2014
Fiscal 2015 and thereafter
Maintenance revenue for the quarter ended June 30, 2012 was $278.8 million, an increase of $14.2 million, or 5.4%, over the prior year quarter, due to an increase in ESM maintenance revenue, partially offset by a decrease in MSM maintenance revenue, as discussed below. Maintenance revenue included revenue from our SaaS offerings, which is included in our ESM segment, of $5.6 million and $1.1 million for the quarters ended June 30, 2012 and 2011, respectively.
ESM maintenance revenue was $156.5 million, or 56.1%, and $141.2 million, or 53.4%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively. ESM maintenance revenue for the quarter ended June 30, 2012 increased by $15.3 million, or 10.8%, over the prior year quarter. This increase was attributable primarily to an expanded installed ESM customer license base.
MSM maintenance revenue was $122.3 million, or 43.9%, and $123.4 million, or 46.6%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively. MSM maintenance revenue for the quarter ended June 30, 2012 decreased by $1.1 million, or 0.9%, from the prior year quarter.
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Deferred Maintenance Revenue
At June 30, 2012, the deferred maintenance revenue balance was $1.3 billion. Estimated future recognition from deferred maintenance revenue at June 30, 2012 is (in millions):
Domestic vs. International Revenue
License:
Domestic
International
Total license revenue
Maintenance:
Total maintenance revenue
Professional services:
Total professional services revenue
Total domestic revenue
Total international revenue
We estimate that foreign currency exchange rate fluctuations contributed to an approximate $9 million decrease in our international revenue for the quarter ended June 30, 2012 as compared to the prior year quarter, on a constant currency basis.
Domestic License Revenue
Domestic license revenue was $77.7 million, or 45.3%, and $85.3 million, or 45.0%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively. Domestic license revenue for the quarter ended June 30, 2012 decreased by $7.6 million, or 8.9%, from the prior year quarter, due to a $9.7 million decrease in ESM license revenue, partially offset by a $2.1 million increase in MSM license revenue.
International License Revenue
International license revenue was $93.9 million, or 54.7%, and $104.2 million, or 55.0%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively.
International license revenue for the quarter ended June 30, 2012 decreased by $10.3 million, or 9.9%, from the prior year quarter, due to an $11.7 million decrease in ESM license revenue, partially offset by a $1.4 million increase in MSM license revenue. The ESM license revenue decrease was attributable primarily to decreases of $6.5 million, $3.0 million and $2.7 million in our Europe, Middle East and Africa (EMEA), Latin America and Asia Pacific markets, respectively. The MSM license revenue increase was attributable primarily to increases of $2.0 million and $1.0 million in our Asia Pacific and Latin America markets, respectively, partially offset by a $1.5 million decrease in our EMEA market.
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Domestic Maintenance Revenue
Domestic maintenance revenue was $154.4 million, or 55.4%, and $141.6 million, or 53.5%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively. Domestic maintenance revenue for the quarter ended June 30, 2012 increased by $12.8 million, or 9.0%, over the prior year quarter, due to an $11.5 million increase in ESM maintenance revenue and a $1.3 million increase in MSM maintenance revenue.
International Maintenance Revenue
International maintenance revenue was $124.4 million, or 44.6%, and $123.0 million, or 46.5%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively.
International maintenance revenue for the quarter ended June 30, 2012 increased by $1.4 million, or 1.1%, over the prior year quarter, due to a $3.9 million increase in ESM maintenance revenue, partially offset by a $2.5 million decrease in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to an increase of $1.9 million in each of our EMEA and Asia Pacific markets. The MSM maintenance revenue decrease was attributable primarily to decreases of $1.6 million and $1.3 million in our Latin America and EMEA markets, respectively.
Professional Services Revenue
Professional services revenue for the quarter ended June 30, 2012 increased by $5.7 million, or 11.8%, over the prior year quarter, which is reflective of a $2.6 million, or 11.9%, increase in domestic professional services revenue and a $3.1 million, or 11.7%, increase in international professional services revenue. These increases were attributable primarily to increases in implementation and consulting services revenue period over period, including increased demand for cloud implementations.
Operating Expenses
We estimate that foreign currency exchange rate fluctuations contributed to an approximate $13 million decrease in our international operating expenses for the quarter ended June 30, 2012 as compared to the prior year quarter, on a constant currency basis.
Cost of License Revenue
Cost of license revenue consists primarily of the amortization of capitalized software costs for internally developed products, the amortization of acquired technology for products acquired through business combinations, license-based royalties to third parties and production and distribution costs for initial product licenses. For the quarters ended June 30, 2012 and 2011, cost of license revenue was $39.2 million, or 7.8%, and $38.3 million, or 7.6%, of total revenue, respectively, and 22.8% and 20.2% of license revenue, respectively.
Cost of license revenue for the quarter ended June 30, 2012 increased by $0.9 million, or 2.3%, over the prior year quarter. This increase was attributable primarily to a $1.5 million increase in the amortization of capitalized software development costs. The increase in the amortization of capitalized software development costs is related to increases in the amount of costs capitalized in prior periods related to development activities and represented an increased investment in software development.
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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, as well as internal and third party infrastructure hosting and support costs associated with our SaaS offerings. For the quarters ended June 30, 2012 and 2011, cost of maintenance revenue was $50.9 million, or 10.1%, and $43.8 million, or 8.7%, of total revenue, respectively, and 18.3% and 16.6% of maintenance revenue, respectively.
Cost of maintenance revenue for the quarter ended June 30, 2012 increased by $7.1 million, or 16.2%, over the prior year quarter. This increase was attributable to a $2.6 million increase in personnel costs, including third party subcontracting fees, a $1.4 million increase in third party SaaS hosting and support costs, a $1.0 million increase in third party maintenance outsourcing costs and a $2.1 million net increase in other expenses.
Cost of Professional Services Revenue
Cost of professional services revenue consists primarily of salaries, related personnel costs and third party subcontracting fees associated with implementation, consulting and education services that we provide to our customers and the related infrastructure to support this business. For the quarters ended June 30, 2012 and 2011, cost of professional services revenue was $57.7 million, or 11.4%, and $47.4 million, or 9.4%, of total revenue, respectively, and 106.9% and 98.1% of professional services revenue, respectively.
Cost of professional services revenue for the quarter ended June 30, 2012 increased by $10.3 million, or 21.7%, over the prior year quarter. This increase was attributable to a $7.8 million increase in personnel and related costs, due principally to an increase in professional services headcount, a $1.4 million increase in third party subcontracting fees, commensurate with increases in professional services revenue, and a $1.1 million net increase in other expenses.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries, related personnel costs, sales commissions and costs associated with advertising, marketing, industry trade shows and sales seminars. For the quarters ended June 30, 2012 and 2011, selling and marketing expenses were $164.9 million, or 32.7%, and $144.7 million, or 28.8%, of total revenue, respectively.
Selling and marketing expenses for the quarter ended June 30, 2012 increased by $20.2 million, or 14.0%, over the prior year quarter. This increase was attributable to an increase in sales personnel and related costs of $11.6 million, principally due to an increase in sales personnel headcount as well as sales retention efforts, a $4.8 million increase in share-based compensation expense, a $1.2 million increase in third party consulting fees and a $2.6 million net increase in other expenses.
Research and Development Expenses
Research and development expenses consist primarily of salaries and personnel costs and third party subcontracting fees related to software developers and development support personnel, including product management, software programmers, testing and quality assurance personnel and writers of technical documentation, such as product manuals and installation guides. These expenses also include computer hardware and software costs, telecommunications costs and personnel costs associated with our development and production labs. For the quarters ended June 30, 2012 and 2011, research and development expenses were $42.2 million, or 8.4%, and $44.7 million, or 8.9%, of total revenue, respectively.
Research and development expenses for the quarter ended June 30, 2012 decreased by $2.5 million, or 5.6%, from the prior year quarter. This decrease was attributable to a $4.2 million increase in capitalized research and development costs related to software development projects, due to the scope and timing of several key future product releases, partially offset by a $1.7 million net increase in other expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related personnel costs of executive management, finance and accounting, facilities management, legal and human resources. Other costs included in general and administrative expenses include fees paid for outside accounting and legal services, consulting projects and insurance. For the quarters ended June 30, 2012 and 2011, general and administrative expenses were $63.0 million, or 12.5%, and $58.6 million, or 11.7%, of total revenue, respectively.
General and administrative expenses for the quarter ended June 30, 2012 increased by $4.4 million, or 7.5%, over the prior year quarter. This increase was attributable to a $6.2 million increase in proxy contest costs, partially offset by a $1.8 million net decrease in other expenses.
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Amortization of Intangible Assets
Amortization of intangible assets consists of the amortization of customer relationships and other intangible assets recorded in connection with our business combinations. For the quarters ended June 30, 2012 and 2011, amortization of intangible assets was $12.6 million and $9.8 million, respectively.
Amortization of intangible assets for the quarter ended June 30, 2012 increased by $2.8 million, or 28.6%, over the prior year quarter. This increase was attributable primarily to amortization associated with intangible assets acquired in connection with our fiscal 2012 and 2013 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 2022 and capital leases. Other income (loss), net, for the quarters ended June 30, 2012 and 2011, was a loss of $8.2 million and $1.6 million, respectively.
The change in other income (loss), net for the quarter ended June 30, 2012 was attributable primarily to a $4.7 million increase in interest expense primarily due to the issuance of our senior unsecured notes due 2022 and a $1.4 million reduction in interest and other income primarily due to a reduction in interest on our financed accounts receivable.
Income Taxes
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; proxy contest costs; 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.
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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; proxy contest costs; 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.
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) – (6) below.
Operating income:
GAAP operating income
Share-based compensation expense (1)
Amortization of intangible assets (2)
Severance, exit costs and related charges (3)
Proxy contest costs (4)
Non-GAAP operating income
Net earnings:
GAAP net earnings
Provision for income taxes on above pre-tax non-GAAP adjustments (5)
Certain discrete tax items (6)
Non-GAAP net earnings
Diluted earnings per share*:
GAAP diluted earnings per share
Non-GAAP diluted earnings per share*
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Liquidity and Capital Resources
At June 30, 2012, we had $1.6 billion in cash, cash equivalents and investments, approximately 61% of which was held by our international subsidiaries and was largely generated from our international operations. Our international operations have generated $638.5 million of earnings that we have determined will be invested indefinitely in those operations. If such earnings were to be repatriated, we would incur a United States federal income tax liability that is not currently accrued in our financial statements. We also had outstanding letters of credit, performance bonds and similar instruments at June 30, 2012 of approximately $44.5 million primarily in support of performance obligations to various customers, but also related to facilities and other obligations.
At June 30, 2012 and March 31, 2012, we held auction rate securities with a par value of $21.7 million and $29.3 million, respectively, which were classified as available-for-sale. The total estimated fair value of our auction rate securities was $18.7 million and $26.9 million at June 30, 2012 and March 31, 2012, respectively. Our auction rate securities consist entirely of bonds issued by public agencies that are backed by student loans with at least a 97% guarantee by the federal government under the United States Department of Education’s Federal Family Education Loan Program. All of these bonds are currently rated investment grade by Moody’s or Standard and Poor’s. Auctions for these securities began failing in early 2008 and have continued to fail, resulting in our continuing to hold such securities and the issuers paying interest at the maximum contractual rates. We do not believe that any of the underlying issuers of these auction rate securities are presently at risk of default or that the underlying credit quality of the assets backing the auction rate security investments has been impacted by the reduced liquidity of these investments. Due to the illiquidity in the auction rate securities market caused by failed auctions, we estimated the fair value of these securities using internally developed models of the expected cash flows of the securities on a discounted basis. These models incorporate assumptions about the expected cash flows of the underlying student loans discounted at an estimate of the rate of return required by investors, which includes an adjustment to reflect a lack of liquidity in the market for these securities. Periodically, the issuers of certain of our auction rate securities have redeemed portions of our holdings at par value plus accrued interest. During the quarters ended June 30, 2012 and 2011, issuers redeemed available-for-sale holdings of $7.6 million and $0.2 million par value, respectively.
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We believe that our existing cash and investment balances, funds generated from operating activities and available credit under the Credit Facility will be sufficient to meet our working and other capital requirements for the foreseeable future. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and investments to fund such activities in the future. In the event additional needs for cash arise, we might find it advantageous to utilize third party financing sources based on factors such as our then available cash and its source (i.e., cash held in the United States versus international locations), the cost of financing and our internal cost of capital.
We may from time to time seek to repurchase or retire securities, including outstanding borrowings and equity securities, in open market repurchases, unsolicited or solicited privately negotiated transactions or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934, as amended (the Exchange Act), and the rules and regulations thereunder. Such repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, our liquidity requirements and contractual restrictions, if applicable. The amount of repurchases, which is subject to management discretion, may be material and may change from period to period.
Our cash flows for the quarters ended June 30, 2012 and 2011 were:
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Cash Flows from Operating Activities
Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities for the quarter ended June 30, 2012 decreased by $41.8 million from the prior year quarter, attributable primarily to a decrease in net income.
Cash Flows from Investing Activities
Net cash used in investing activities for the quarter ended June 30, 2012 decreased by $89.1 million from the prior year quarter. This decrease was attributable primarily to a decrease in cash paid for acquisitions, partially offset by an increase in the purchases of investments.
Cash Flows from Financing Activities
Net cash used in financing activities for the quarter ended June 30, 2012 decreased by $20.8 million from the prior year quarter, attributable primarily to a decrease in treasury stock acquired.
Treasury Stock Purchases
Our Board of Directors has authorized a total of $5.0 billion to repurchase common stock. During the quarter ended June 30, 2012, we purchased 3.5 million shares for $150.0 million. From the inception of the stock repurchase authorization through June 30, 2012, we have purchased 155.5 million shares for $4.3 billion. At June 30, 2012, there was $700.3 million remaining in the stock repurchase program, which does not have an expiration date. In addition, during the quarter ended June 30, 2012, we repurchased 0.4 million shares for $16.9 million to satisfy employee tax withholding obligations upon the vesting of share-based awards.
The repurchase of stock will continue to be funded primarily with cash generated from domestic operations and, therefore, affects our overall domestic versus international liquidity balances. See PART II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds below for a monthly detail of treasury stock purchases for the quarter ended June 30, 2012.
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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, 2012 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the quarter ended June 30, 2012.
New Accounting Pronouncements Not Yet Adopted
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, 2012; 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, 2012.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Based on management’s evaluation (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) are effective.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 and Rule 15d-15 under the Exchange Act that occurred during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
April 1—30, 2012
May 1—31, 2012
June 1—30, 2012
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Item 6. Exhibits
(a) Exhibits.
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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.
July 31, 2012
/s/ ROBERT E. BEAUCHAMP
/s/ STEPHEN B. SOLCHER
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