[May 09, 2013] BMC SOFTWARE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations Tweet (Edgar Glimpses Via Acquire Media NewsEdge) It is important that this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Annual Report on Form 10-K. 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. As discussed in Item 1. Business - Merger Agreement, on May 6, 2013, BMC entered into an Agreement and Plan of Merger with an entity formed by affiliates of investment funds advised by Bain Capital, LLC, Golden Gate Private Equity, Inc. and Insight Venture Management, LLC, and an entity affiliated with GIC Special Investments Pte Ltd. Overview A summary of select operating metrics for the year ended March 31, 2013 is as follows: • Total bookings, which represent the contract value of transactions closed and recorded, were $2,182.8 million, essentially flat as compared to fiscal 2012. During fiscal 2012, one large transaction generated total bookings of over $100 million, principally related to our MSM business. • Total license bookings were $841.8 million, representing a decrease of $40.6 million, or 4.6%, from fiscal 2012. During fiscal 2013, we closed 142 transactions with license values over $1 million (with total license bookings of $447.7 million) compared with 158 transactions with license values over $1 million (with total license bookings of $480.0 million) in fiscal 2012. • Within our ESM-Solutions segment, where we evaluate performance on the basis of license bookings, total license bookings decreased by $6.3 million, or 1.2%, from fiscal 2012. This decrease was principally due to the impact of foreign currency exchange rate changes which contributed to an approximate $6 million, or 1%, reduction in ESM license bookings for the fiscal year. • Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended March 31, 2013 decreased by $63.7 million, or 7.1%, and on an annualized basis, after normalizing for contract length, increased by $13.2 million, or 5.0%, as compared to the prior year period. Over the trailing 36 months ended March 31, 2013, total MSM bookings increased by $18.1 million or 0.7%, and annualized bookings, after normalizing for contract length, were relatively flat as compared to the prior period. • Total revenue was $2,201.4 million, representing an increase of $29.4 million, or 1.4%, over fiscal 2012. This increase was reflective of maintenance and professional services revenue increases of $58.7 million, or 5.4%, and $10.0 million, or 4.7%, respectively, partially offset by a decrease in license revenue of $39.3 million, or 4.5%. On a segment basis, total ESM-Solutions revenue increased by $7.4 million, or 0.7%, total ESM-Services revenue increased by $10.0 million, or 4.7%, and total MSM revenue increased by $12.0 million, or 1.4%, over fiscal 2012. • Operating income was $465.4 million, representing a decrease of $78.5 million, or 14.4%, from fiscal 2012. This decrease was attributable primarily to the impact of increased sales and other compensation expense as well as severance, exit costs and other restructuring charges incurred as a result of our fiscal 2013 operational review. Non-GAAP operating income was $740.6 million, representing a decrease of $39.0 million, or 5.0%, from fiscal 2012. • Net earnings were $331.0 million, representing a decrease of $70.0 million, or 17.5%, from fiscal 2012. Non-GAAP net earnings were $524.4 million, representing a decrease of $37.7 million, or 6.7%, from fiscal 2012. • Diluted earnings per share was $2.13, representing a decrease of $0.19, or 8.2%, from fiscal 2012. Non-GAAP diluted earnings per share was $3.37, representing an increase of $0.12, or 3.7%, over fiscal 2012. • Cash flows from operations were $765.1 million, representing a decrease of $35.2 million, or 4.4%, from fiscal 2012. We closed out the year with a solid balance sheet at March 31, 2013, including $1.6 billion in cash, cash equivalents and investments and $2.0 billion in deferred revenue. 24 -------------------------------------------------------------------------------- Table of Contents During the fourth quarter of fiscal 2013, we conducted a company-wide operational review to streamline our operations and reallocate resources to strategic areas of our business. As a result of this operational review, we recorded a $19.9 million charge for severance and related costs associated with workforce reductions in business unit and corporate functions across geographies in which we operate, as well as an asset impairment charge of $7.5 million related to certain capitalized development projects that are being discontinued. We estimate that an additional charge of up to $18 million for severance and related costs will be incurred in the first half of fiscal 2014, at which time this initiative will be substantially complete. While we estimate that the above workforce reductions will result in fiscal 2014 operating expense savings, we anticipate that these expense reductions will be substantially offset in fiscal 2014 by incremental personnel-related expenses, mostly due to headcount growth in other strategic areas of our business. We continue to invest in our technology leadership, including in the areas of cloud computing and SaaS. In addition to our ongoing product development efforts, we consummated multiple strategic acquisitions in our ESM segment during fiscal 2013 for aggregate purchase consideration of $19.5 million. Our acquisitions included Abydos Limited, a provider of workflow management solutions, VaraLogix, Inc., an application release automation provider, and my-eService, Inc., a provider of self-service IT support solutions. We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. In October 2012, our Board of Directors approved a new $1.0 billion stock repurchase program, and in November 2012 we entered into an accelerated share repurchase agreement to repurchase $750.0 million of our common stock under this program. Initial shares received under this repurchase agreement were 13.1 million, for a total value of $525.0 million. The agreement contemplates that the remaining shares will be settled no later than approximately seven months from the execution of the agreement. During fiscal 2013, we repurchased approximately 22.7 million shares for a total value of $925.0 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. 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. Acquisitions We have consummated multiple acquisitions of businesses in recent years. Each of these acquisitions has been accounted for using the acquisition method of accounting. Accordingly, the financial results for these entities have been included in our consolidated financial results since the applicable acquisition dates. Fiscal 2013 Acquisitions During fiscal 2013, we completed the acquisitions of Abydos Limited, a provider of workflow management solutions, VaraLogix, Inc., an application release automation provider, and my-eService, Inc., a provider of self-service IT support solutions, for total combined purchase consideration of $19.5 million. 25 -------------------------------------------------------------------------------- Table of Contents Fiscal 2012 Acquisitions During fiscal 2012, we completed the acquisitions of Numara Software Holdings, Inc., a provider of integrated IT service management solutions for mid-sized and small companies, for total purchase consideration of $304.1 million, and Coradiant Inc., a global provider of end-to-end performance management of web applications, for total purchase consideration of $130.0 million. Additionally, we completed the acquisitions of Aeroprise, Inc., a provider of mobile IT service management solutions, Neon Enterprise Software, LLC's IMS software portfolio, StreamStep, Inc., a provider of application release process management solutions, and I/O Concepts Software Corporation, a provider of mainframe management and security solutions, for total combined purchase consideration of $38.1 million. Fiscal 2011 Acquisitions During fiscal 2011, we completed the acquisition of the software business of Neptuny S.r.l., a provider of continuous capacity optimization software, and the acquisition of GridApp Systems, Inc., a provider of comprehensive database provisioning, patching and administration software, for total combined purchase consideration of $51.5 million. Historical Information Historical performance should not be viewed as indicative of future performance, as there can be no assurance that operating income or net earnings will be sustained at these levels. For a discussion of factors affecting operating results, see the Risk Factors section above. Results of Operations The following table sets forth, for the fiscal years indicated, the percentages that selected items in the accompanying consolidated statements of comprehensive income represent of total revenue. These financial results are not necessarily indicative of future results. Percentage of Total Revenue for the Year Ended March 31, 2013 2012 2011 Revenue: License 38.1 % 40.4 % 41.8 % Maintenance 51.7 % 49.8 % 49.6 % Professional services 10.2 % 9.8 % 8.6 % Total revenue 100.0 % 100.0 % 100.0 % Operating expenses: Cost of license revenue 7.2 % 7.3 % 6.3 % Cost of maintenance revenue 9.5 % 9.1 % 8.2 % Cost of professional services revenue 10.2 % 9.8 % 9.0 % Selling and marketing expenses 31.2 % 29.2 % 29.6 % Research and development expenses 7.9 % 7.6 % 8.8 % General and administrative expenses 10.8 % 10.0 % 10.7 % Amortization of intangible assets 2.0 % 1.9 % 1.6 % Total operating expenses 78.9 % 75.0 % 74.2 % Operating income 21.1 % 25.0 % 25.8 % Other expense, net (1.7 )% (0.6 )% (0.1 )% Earnings before income taxes 19.4 % 24.4 % 25.7 % Provision for income taxes 4.4 % 5.9 % 3.6 % Net earnings 15.0 % 18.5 % 22.1 % 26 -------------------------------------------------------------------------------- Table of Contents Revenue The following table provides information regarding software license and software maintenance revenue for fiscal 2013, 2012 and 2011. Percentage Change 2013 2012 Year Ended March 31, Compared to Compared to Software License Revenue 2013 2012 2011 2012 2011 (In millions) Enterprise Service Management $ 490.5 $ 543.3 $ 550.9 (9.7 )% (1.4 )% Mainframe Service Management 348.0 334.5 313.6 4.0 % 6.7 % Total software license revenue $ 838.5 $ 877.8 $ 864.5 (4.5 )% 1.5 % Percentage Change 2013 2012 Year Ended March 31, Compared to Compared to Software Maintenance Revenue 2013 2012 2011 2012 2011 (In millions) Enterprise Service Management $ 645.2 $ 585.0 $ 551.5 10.3 % 6.1 % Mainframe Service Management 493.9 495.4 472.7 (0.3 )% 4.8 % Total software maintenance revenue $ 1,139.1 $ 1,080.4 $ 1,024.2 5.4 % 5.5 % Percentage Change 2013 2012 Year Ended March 31, Compared to Compared to Total Software Revenue 2013 2012 2011 2012 2011 (In millions) Enterprise Service Management $ 1,135.7 $ 1,128.3 $ 1,102.4 0.7 % 2.3 % Mainframe Service Management 841.9 829.9 786.3 1.4 % 5.5 % Total software revenue $ 1,977.6 $ 1,958.2 $ 1,888.7 1.0 % 3.7 % Software License Revenue License revenue in fiscal 2013 was $838.5 million, a decrease of $39.3 million, or 4.5%, from fiscal 2012. 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 $19.6 million in fiscal 2013 as compared to fiscal 2012. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 54% in fiscal 2013, consistent with fiscal 2012. License revenue in fiscal 2012 was $877.8 million, an increase of $13.3 million, or 1.5%, over fiscal 2011. This increase was attributable to an increase in MSM license revenue, partially offset by a decrease in ESM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods increased by $9.7 million in fiscal 2012 as compared to fiscal 2011. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 54% in fiscal 2012 as compared to 51% in fiscal 2011. ESM license revenue was $490.5 million, or 58.5%, $543.3 million, or 61.9%, and $550.9 million, or 63.7%, of our total license revenue for fiscal 2013, 2012 and 2011, respectively. ESM license revenue in fiscal 2013 decreased by $52.8 million, or 9.7%, from fiscal 2012, due to a $31.3 million decrease in the amount of upfront license revenue recognized in connection with new transactions and a $21.5 million decrease in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in fiscal 2013 was attributable to a decrease in license transaction bookings along with a lower percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms. ESM license revenue in fiscal 2012 decreased by $7.6 million, or 1.4%, from fiscal 2011, due to a $13.4 million decrease in the recognition of previously deferred license revenue, partially offset by a $5.8 million increase in the amount of upfront license revenue recognized in connection with new transactions. The increase in upfront license revenue recognized 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 transaction bookings. 27 -------------------------------------------------------------------------------- Table of Contents MSM license revenue was $348.0 million, or 41.5%, $334.5 million, or 38.1%, and $313.6 million, or 36.3%, of our total license revenue for fiscal 2013, 2012 and 2011, respectively. MSM license revenue in fiscal 2013 increased by $13.5 million, or 4.0%, over fiscal 2012, due to an $11.6 million increase in the amount of upfront license revenue recognized in connection with new transactions and a $1.9 million increase in the recognition of previously deferred license revenue. The increase in upfront license revenue recognized was attributable to an increase in the 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 transaction bookings. MSM license revenue in fiscal 2012 increased by $20.9 million, or 6.7%, over fiscal 2011, due to a $23.1 million increase in the recognition of previously deferred license revenue, partially offset by a $2.2 million decrease in the amount of upfront license revenue recognized in connection with new transactions. The decrease in upfront license revenue recognized was attributable to decrease in the percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by an increase in license transaction bookings. For fiscal 2013, 2012 and 2011, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows: Year Ended March 31, 2013 2012 2011 (In millions) Deferrals of license revenue $ 390.9 $ 410.4 $ 454.1 Recognition from deferred license revenue (384.9 ) (404.5 ) (394.8 ) Impact of foreign currency exchange rate changes (2.7 ) (1.3 ) 2.6 Net increase in deferred license revenue $ 3.3 $ 4.6 $ 61.9 Deferred license revenue balance at end of period $ 694.0 $ 690.7 $ 686.1 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 March 31, 2013, the deferred license revenue balance was $694.0 million. Estimated future recognition from deferred license revenue at March 31, 2013 is (in millions): Fiscal 2014 $ 319.6 Fiscal 2015 182.2 Fiscal 2016 and thereafter 192.2 $ 694.0 Software Maintenance Revenue Maintenance revenue in fiscal 2013 was $1,139.1 million, an increase of $58.7 million, or 5.4% over fiscal 2012, due to an increase in ESM maintenance revenue, partially offset by a decrease in MSM maintenance revenue, as discussed below. Maintenance revenue in fiscal 2012 was $1,080.4 million, an increase of $56.2 million, or 5.5% over fiscal 2011, due to increases in maintenance revenue in both our ESM and MSM segments, as discussed below. Maintenance revenue for fiscal 2013 and 2012 included $27.9 million and $9.7 million, respectively, of revenue from our SaaS offerings, which is included in our ESM segment. Maintenance revenue from our SaaS offerings was a nominal amount in fiscal 2011. 28 -------------------------------------------------------------------------------- Table of Contents ESM maintenance revenue was $645.2 million, or 56.6%, $585.0 million, or 54.1%, and $551.5 million, or 53.8%, of our total maintenance revenue for fiscal 2013, 2012 and 2011, respectively. ESM maintenance revenue in fiscal 2013 increased by $60.2 million, or 10.3%, over fiscal 2012. ESM maintenance revenue in fiscal 2012 increased by $33.5 million, or 6.1%, over fiscal 2011. These year over year increases were attributable primarily to the expansion of our installed ESM customer license base, including the impact from acquisitions, and increases in SaaS subscription revenue. MSM maintenance revenue was $493.9 million, or 43.4%, $495.4 million, or 45.9%, and $472.7 million, or 46.2%, of our total maintenance revenue for fiscal 2013, 2012 and 2011, respectively. MSM maintenance revenue in fiscal 2013 decreased by $1.5 million, or 0.3%, from fiscal 2012. MSM maintenance revenue in fiscal 2012 increased by $22.7 million, or 4.8%, over fiscal 2011, due to the expansion of our installed MSM customer license base and increased capacities of the installed base. At March 31, 2013, the deferred maintenance revenue balance was $1.2 billion. Estimated future recognition from deferred maintenance revenue at March 31, 2013 is (in millions): Fiscal 2014 $ 686.5 Fiscal 2015 299.2 Fiscal 2016 and thereafter 260.9 $ 1,246.6 Domestic vs. International Revenue Percentage Change 2013 2012 Year Ended March 31, Compared to Compared to 2013 2012 2011 2012 2011 (In millions) License: Domestic $ 397.4 $ 412.5 $ 420.4 (3.7 )% (1.9 )% International 441.1 465.3 444.1 (5.2 )% 4.8 % Total license revenue 838.5 877.8 864.5 (4.5 )% 1.5 % Maintenance: Domestic 627.9 581.7 556.8 7.9 % 4.5 % International 511.2 498.7 467.4 2.5 % 6.7 % Total maintenance revenue 1,139.1 1,080.4 1,024.2 5.4 % 5.5 % Professional services: Domestic 103.3 103.6 85.9 (0.3 )% 20.6 % International 120.5 110.2 90.7 9.3 % 21.5 % Total professional services revenue 223.8 213.8 176.6 4.7 % 21.1 % Total domestic revenue 1,128.6 1,097.8 1,063.1 2.8 % 3.3 % Total international revenue 1,072.8 1,074.2 1,002.2 (0.1 )% 7.2 % Total revenue $ 2,201.4 $ 2,172.0 $ 2,065.3 1.4 % 5.2 % We estimate that foreign currency exchange rate fluctuations caused an approximate $25 million decrease and an approximate $11 million increase in our international revenue for fiscal 2013 and fiscal 2012, respectively, as compared to the prior year. Domestic License Revenue Domestic license revenue was $397.4 million, or 47.4%, $412.5 million, or 47.0%, and $420.4 million, or 48.6%, of our total license revenue for fiscal 2013, 2012 and 2011, respectively. Domestic license revenue in fiscal 2013 decreased by $15.1 million, or 3.7%, from fiscal 2012, due to a $15.6 million decrease in ESM license revenue, partially offset by a nominal increase in MSM license revenue. Domestic license revenue in fiscal 2012 decreased by $7.9 million, or 1.9%, from fiscal 2011, due to a $9.2 million decrease in ESM license revenue, partially offset by a $1.3 million increase in MSM license revenue. 29-------------------------------------------------------------------------------- Table of Contents International License Revenue International license revenue was $441.1 million, or 52.6%, $465.3 million, or 53.0%, and $444.1 million, or 51.4%, of our total license revenue for fiscal 2013, 2012 and 2011, respectively. International license revenue in fiscal 2013 decreased by $24.2 million, or 5.2%, from fiscal 2012, due to a $37.3 million decrease in ESM license revenue, partially offset by a $13.1 million increase in MSM license revenue. The ESM license revenue decrease was attributable to decreases of $20.8 million, $11.0 million and $9.0 million in our Europe, Middle East and Africa (EMEA), Canada and Latin America markets, respectively, partially offset by a $3.5 million increase in our Asia Pacific market. The MSM license revenue increase was attributable primarily to increases of $10.6 million and $5.8 million in our EMEA and Asia Pacific markets, respectively, partially offset by a $3.8 million decrease in our Canada market. International license revenue in fiscal 2012 increased by $21.2 million, or 4.8%, over fiscal 2011, due to a $1.6 million increase in ESM license revenue and a $19.6 million increase in MSM license revenue. The ESM license revenue increase was attributable to increases of $7.7 million, $7.2 million and $5.5 million in our Latin America, Asia Pacific and Canada markets, respectively, partially offset by an $18.8 million decrease in our EMEA market. The MSM license revenue increase was attributable to increases of $12.7 million, $11.6 million and $2.4 million in our EMEA, Latin America and Asia Pacific markets, respectively, partially offset by a $7.1 million decrease in our Canada market. Domestic Maintenance Revenue Domestic maintenance revenue was $627.9 million, or 55.1%, $581.7 million, or 53.8%, and $556.8 million, or 54.4%, of our total maintenance revenue for fiscal 2013, 2012 and 2011, respectively. Domestic maintenance revenue in fiscal 2013 increased by $46.2 million, or 7.9%, over fiscal 2012, due to a $44.0 million increase in ESM maintenance revenue and a $2.2 million increase in MSM maintenance revenue. Domestic maintenance revenue in fiscal 2012 increased by $24.9 million, or 4.5%, over fiscal 2011, due to a $19.0 million increase in ESM maintenance revenue and a $5.9 million increase in MSM maintenance revenue. International Maintenance Revenue International maintenance revenue was $511.2 million, or 44.9%, $498.7 million, or 46.2%, and $467.4 million, or 45.6%, of our total maintenance revenue for fiscal 2013, 2012 and 2011, respectively. International maintenance revenue in fiscal 2013 increased by $12.5 million, or 2.5%, over fiscal 2012, due to a $16.1 million increase in ESM maintenance revenue, partially offset by a $3.6 million decrease in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to increases of $6.6 million, $6.5 million and $3.2 million in our EMEA, Asia Pacific and Canada markets, respectively. The MSM maintenance revenue decrease was attributable primarily to decreases of $2.6 million and $2.1 million in our EMEA and Latin America markets, respectively, partially offset by a $1.1 million increase in our Asia Pacific market. International maintenance revenue in fiscal 2012 increased by $31.3 million, or 6.7%, over fiscal 2011, due to a $14.4 million increase in ESM maintenance revenue and a $16.9 million increase in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to increases of $6.5 million, $5.9 million and $1.3 million in our Asia Pacific, EMEA and Canada markets, respectively. The MSM maintenance revenue increase was attributable primarily to increases of $8.7 million, $6.6 million and $2.0 million in our Latin America, EMEA and Asia Pacific markets, respectively. Professional Services Revenue Professional services revenue in fiscal 2013 increased by $10.0 million, or 4.7%, over fiscal 2012, which is reflective of a $10.3 million, or 9.3%, increase in international professional services revenue, partially offset by a nominal decrease in domestic professional services revenue. The overall increase is attributable primarily to increases in implementation and consulting revenue, including increased demand for cloud implementations, partially offset by a decrease in education services revenue period over period. Professional services revenue in fiscal 2012 increased by $37.2 million, or 21.1%, over fiscal 2011, which is reflective of a $17.7 million, or 20.6%, increase in domestic professional services revenue and a $19.5 million, or 21.5%, increase in international professional services revenue. These increases were attributable primarily to increases in implementation, consulting and education services revenue period over period, including increased demand for cloud implementations. 30 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Percentage Change 2013 2012 Year Ended March 31, Compared to Compared to 2013 2012 2011 2012 2011 (In millions) Cost of license revenue $ 159.6 $ 158.4 $ 129.8 0.8 % 22.0 % Cost of maintenance revenue 208.4 198.5 169.4 5.0 % 17.2 %Cost of professional services revenue 224.0 212.0 186.0 5.7 % 14.0 % Selling and marketing expenses 686.9 634.0 611.4 8.3 % 3.7 % Research and development expenses 174.6 165.2 181.6 5.7 % (9.0 )% General and administrative expenses 238.7 217.9 220.7 9.5 % (1.3 )% Amortization of intangible assets 43.8 42.1 33.6 4.0 % 25.3 % Total operating expenses $ 1,736.0 $ 1,628.1 $ 1,532.5 6.6 % 6.2 % We estimate that the effect of foreign currency exchange rate fluctuations on our international operating expenses resulted in an approximate $27 million reduction in fiscal 2013 operating expenses as compared to fiscal 2012 and an approximate $14 million increase in fiscal 2012 operating expenses as compared to fiscal 2011. 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 fiscal 2013, 2012 and 2011, cost of license revenue was $159.6 million, or 7.2%, $158.4 million, or 7.3%, and $129.8 million, or 6.3%, of total revenue, respectively, and 19.0%, 18.0% and 15.0% of license revenue, respectively. Cost of license revenue in fiscal 2013 increased by $1.2 million, or 0.8%, over fiscal 2012. This increase was attributable primarily to a $14.9 million increase in the amortization of capitalized software development costs, partially offset by a $12.5 million decrease in the amortization of acquired technology. The increase in the amortization of capitalized software development costs is related to the increase in the amount of costs capitalized in prior periods related to development activities and represents an increased investment in software development. The decrease in amortization of acquired technology is attributable to a reduction in amortization associated with intangible assets acquired in connection with past acquisitions that became fully amortized, partially offset by an increase in amortization associated with intangible assets acquired in connection with our fiscal 2012 and 2013 acquisitions. Cost of license revenue in fiscal 2012 increased by $28.6 million, or 22.0%, over fiscal 2011. This increase was attributable primarily to an $18.6 million increase in the amortization of capitalized software development costs and a $10.0 million increase in the amortization of acquired technology. 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 represents an increased investment in software development due to the growth of our business. 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 fiscal 2013, 2012 and 2011, cost of maintenance revenue was $208.4 million, or 9.5%, $198.5 million, or 9.1%, and $169.4 million, or 8.2%, of total revenue, respectively, and 18.3%, 18.4% and 16.5% of maintenance revenue, respectively. Cost of maintenance revenue in fiscal 2013 increased by $9.9 million, or 5.0%, over fiscal 2012. This increase was attributable to a $5.9 million increase in personnel costs, a $4.1 million increase in third party SaaS hosting and support costs, a $1.9 million increase in third party maintenance outsourcing costs, a $1.3 million increase in share-based compensation expense and a $1.0 million net increase in other expenses, partially offset by a $4.3 million decrease related to the early exit of a long-term service contract during fiscal 2012. 31-------------------------------------------------------------------------------- Table of Contents Cost of maintenance revenue in fiscal 2012 increased by $29.1 million, or 17.2%, over fiscal 2011. This increase was attributable to a $7.3 million increase in third party maintenance outsourcing costs, a $5.5 million increase in personnel costs, including third party subcontracting fees, a $5.4 million increase in share-based compensation expense, a $4.3 million increase related to the early exit of a long-term service contract, a $3.5 million increase in third party SaaS hosting and support costs and a $3.1 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 fiscal 2013, 2012 and 2011, cost of professional services revenue was $224.0 million, or 10.2%, $212.0 million, or 9.8%, and $186.0 million, or 9.0%, of total revenue, respectively, and 100.1%, 99.2% and 105.3% of professional services revenue, respectively. Cost of professional services revenue in fiscal 2013 increased by $12.0 million, or 5.7%, over fiscal 2012. This increase was attributable to a $14.3 million increase in personnel and related costs, due principally to an increase in professional services headcount, a $1.5 million increase in facilities expense and a $2.5 million net increase in other expenses, partially offset by a $6.3 million decrease in third party subcontracting fees. Cost of professional services revenue in fiscal 2012 increased by $26.0 million, or 14.0%, over fiscal 2011. This increase was attributable primarily to a $19.7 million increase in personnel and related costs and a $5.7 million increase in third party subcontracting fees, commensurate with increases in professional services revenue. 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 fiscal 2013, 2012 and 2011, selling and marketing expenses were $686.9 million, or 31.2%, $634.0 million, or 29.2%, and $611.4 million, or 29.6%, of total revenue, respectively. Selling and marketing expenses in fiscal 2013 increased by $52.9 million, or 8.3%, over fiscal 2012. This increase was attributable primarily to an $18.7 million increase in sales personnel and related costs and a $15.2 million increase in share-based compensation expense, both principally due to an increase in sales retention efforts, a $6.4 million increase in severance expense associated with a workforce reduction, a $5.6 million increase in third party consulting fees, a $3.3 million increase in marketing campaign expenditures, a $2.1 million increase in facilities expense and a $2.0 million increase in bad debt expense. Selling and marketing expenses in fiscal 2012 increased by $22.6 million, or 3.7%, over fiscal 2011. This increase was attributable to a $14.2 million increase in sales personnel and related costs, principally due to an increase in variable compensation expense attributable to increased revenue as well as an increase in sales personnel headcount, a $9.1 million increase in marketing campaign expenditures, a $4.6 million increase in share-based compensation expense and a $1.5 million net increase in other expenses, partially offset by a $4.1 million decrease in third party consulting fees and a $2.7 million decrease in legal costs relating to a fiscal 2011 matter. Research and Development Expenses Research and development expenses consist primarily of salaries and related 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 fiscal 2013, 2012 and 2011, research and development expenses were $174.6 million, or 7.9%, $165.2 million, or 7.6%, and $181.6 million, or 8.8%, of total revenue, respectively. Research and development expenses in fiscal 2013 increased by $9.4 million, or 5.7%, over fiscal 2012. This increase was attributable to a $9.6 million increase in severance expense associated with a workforce reduction, a $7.5 million asset impairment related to certain capitalized development projects that are being discontinued, a $5.5 million increase in third party contractor fees, a $2.9 million decrease in capitalized research and development costs related to software development projects and a $2.1 million increase in facilities expense, partially offset by a $17.2 million decrease in personnel costs and a $1.0 million net decrease in other expenses. 32-------------------------------------------------------------------------------- Table of Contents Research and development expenses in fiscal 2012 decreased by $16.4 million, or 9.0%, from fiscal 2011. This decrease was attributable to a $19.8 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, a $1.8 million decrease in equipment expense, a $1.7 million decrease in facilities expenses and a $3.1 million net decrease in other expenses, partially offset by a $7.2 million increase in personnel and related costs and a $2.8 million increase in share-based compensation expense. 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. During fiscal 2013, 2012 and 2011, general and administrative expenses were $238.7 million, or 10.8%, $217.9 million, or 10.0%, and $220.7 million, or 10.7%, of total revenue, respectively. General and administrative expenses in fiscal 2013 increased by $20.8 million, or 9.5%, over fiscal 2012. This increase was attributable primarily to a $6.6 million increase in personnel costs, a $6.1 million increase in other professional fees, a $4.9 million increase in proxy contest costs, a $2.7 million increase in severance expense associated with a workforce reduction and a $1.0 million increase in share-based compensation expense. General and administrative expenses in fiscal 2012 decreased by $2.8 million, or 1.3%, from fiscal 2011. This decrease was attributable to an $8.2 million decrease in personnel costs, principally due to a decrease in variable compensation expense, and a $3.5 million decrease in facilities expenses, partially offset by a $6.4 million increase in share-based compensation expense and a $2.5 million net increase in other expenses. Amortization of Intangible Assets Amortization of intangible assets consists of the amortization of customer relationships and other intangible assets recorded in connection with our business combinations. During fiscal 2013, 2012 and 2011, amortization of intangible assets was $43.8 million, $42.1 million and $33.6 million, respectively. Amortization of intangible assets in fiscal 2013 increased by $1.7 million, or 4.0%, over fiscal 2012 primarily due to the prior year accounting correction discussed below. Excluding the effect of this correction, amortization of intangible assets decreased by $2.8 million, due to a reduction in amortization associated with intangible assets acquired in connection with past acquisitions that became fully amortized, partially offset by amortization associated with intangible assets acquired in connection with our fiscal 2012 and 2013 acquisitions. Amortization of intangible assets in fiscal 2012 increased by $8.5 million, or 25.3%, over fiscal 2011. This increase was attributable primarily to amortization associated with intangible assets acquired in connection with our fiscal 2011 and 2012 acquisitions. This increase was partially offset by an accounting correction made during fiscal 2012, related to the foreign currency impacts of certain intangible assets associated with a fiscal 2000 business combination, which had the effect of decreasing intangible asset amortization expense by $4.5 million for fiscal 2012. Other Income (Expense), Net Other income (expense), net, consists primarily of interest earned, realized gains and losses on investments, interest expense on our outstanding borrowings and foreign currency gains and losses. Other income (expense), net, for fiscal 2013, 2012 and 2011 consisted of expense of $37.5 million, $13.9 million and $1.5 million, respectively. The change in other income (expense), net for fiscal 2013 was attributable to a $24.5 million increase in interest expense, primarily due to the issuance of our senior unsecured notes due February 2022 and December 2022 and the execution of our unsecured term loan due November 2015 (the Term Loan) and a decrease in interest and other income of $2.3 million, partially offset by an increase in net gains on investments of $3.2 million. The change in other income (expense), net for fiscal 2012 was attributable to a $4.5 million reduction in net gains on investments primarily due to market declines on our trading securities, a $4.4 million reduction in interest and other income primarily due to a reduction in interest on our financed accounts receivable and a $3.5 million increase in interest expense primarily due to the issuance of our senior unsecured notes due February 2022. 33-------------------------------------------------------------------------------- Table of Contents Income Taxes Income tax expense was $96.9 million, $129.0 million and $75.1 million in fiscal 2013, 2012 and 2011, respectively, resulting in effective tax rates of 22.6%, 24.3% and 14.1%, 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. For fiscal 2013, 2012 and 2011, the overall favorable effects of foreign tax rates on our effective tax rate were 10.3%, 7.7% and 10.3% of pre-tax earnings, respectively. During fiscal 2012 and 2011, we also recorded discrete net tax benefits of $6.2 million and $57.2 million, respectively, associated with tax authority settlements related to prior years' tax matters which favorably impacted our effective tax rate by 1.2% and 10.8% of pre-tax earnings, respectively. Our effective tax rate could fluctuate on an quarterly basis and could be adversely affected to the extent forecasted earnings for the year are lower than anticipated in countries with lower statutory rates and higher than anticipated in countries with higher statutory rates. Non-GAAP Financial Measures and Reconciliations In an effort to provide investors with additional information regarding our results as determined by GAAP, we disclose various non-GAAP financial measures in our quarterly earnings press releases and other public disclosures. The primary non-GAAP financial measures we focus on are: (i) non-GAAP operating income, (ii) non-GAAP net earnings and (iii) non-GAAP diluted earnings per share. Each of these financial measures excludes the impact of certain items and therefore has not been calculated in accordance with GAAP. These non-GAAP financial measures exclude share-based compensation expense; the amortization of intangible assets; severance, exit costs and other restructuring 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. 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 other restructuring 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. 34 -------------------------------------------------------------------------------- Table of Contents For a detailed explanation of the adjustments made to comparable GAAP financial measures, the reasons why management uses these measures and the usefulness of these measures, see items (1) - (6) below. Year Ended March 31, 2013 2012 2011 (In millions) Operating income: GAAP operating income $ 465.4 $ 543.9 $ 532.8 Share-based compensation expense (1) 147.4 127.2 106.5 Amortization of intangible assets (2) 86.9 97.7 79.1 Severance, exit costs and other restructuring charges (3) 36.0 10.8 14.3 Proxy contest costs (4) 4.9 - - Non-GAAP operating income $ 740.6 $ 779.6 $ 732.7 Year Ended March 31, 2013 2012 2011 (In millions) Net earnings: GAAP net earnings $ 331.0 $ 401.0 $ 456.2 Share-based compensation expense (1) 147.4 127.2 106.5 Amortization of intangible assets (2) 86.9 97.7 79.1 Severance, exit costs and other restructuring charges (3) 36.0 10.8 14.3 Proxy contest costs (4) 4.9 - - Provision for income taxes on above pre-tax non-GAAP adjustments (5) (81.8 ) (68.4 ) (52.7 ) Certain discrete tax items (6) - (6.2 ) (57.2 ) Non-GAAP net earnings $ 524.4 $ 562.1 $ 546.2 Year Ended March 31, 2013 2012 2011 Diluted earnings per share*: GAAP diluted earnings per share $ 2.13 $ 2.32 $ 2.50 Share-based compensation expense (1) 0.95 0.74 0.58 Amortization of intangible assets (2) 0.56 0.57 0.43 Severance, exit costs and other restructuring charges (3) 0.23 0.06 0.08 Proxy contest costs (4) 0.03 - - Provision for income taxes on above pre-tax non-GAAP adjustments (5) (0.53 ) (0.40 ) (0.29 ) Certain discrete tax items (6) - (0.04 ) (0.31 ) Non-GAAP diluted earnings per share* $ 3.37 $ 3.25 $ 2.99 * 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 consolidated statements of 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. 35 -------------------------------------------------------------------------------- Table of Contents (3) Severance, exit costs and other restructuring charges. Our non-GAAP financial measures exclude severance, exit costs and other restructuring charges, and any subsequent changes in estimates, as they relate to our corporate restructuring and exit activities, including asset impairments resulting from a fourth quarter fiscal 2013 operational review. 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 other restructuring charges, in order to provide comparability and consistency with historical operating results. (4) Proxy contest costs. During the first quarter of fiscal 2013, the Company became engaged in a proxy contest initiated by a shareholder of the Company. We recorded charges of approximately $4.9 million for unplanned proxy contest expenses during fiscal 2013, consisting primarily of outside financial advisory, legal, solicitation and consulting fees. 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 such costs, in order to provide comparability and consistency with historical operating results. (5) 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. (6) Certain discrete tax items. Our non-GAAP financial measures exclude net tax benefits of $6.2 million and $57.2 million for fiscal 2012 and 2011, 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 March 31, 2013, we had $1.6 billion in cash, cash equivalents and investments, approximately 69% of which was held by our international subsidiaries and was largely generated from our international operations. Our international operations have generated $747.1 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 March 31, 2013 of approximately $50.3 million primarily in support of performance obligations to various customers but also related to facilities and other obligations. In June 2008, we issued $300.0 million of senior unsecured notes due June 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 and 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. In February 2012, we issued $500.0 million of senior unsecured notes due February 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 and 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. In November 2012, we issued $300.0 million of senior unsecured notes due December 2022. Net proceeds to us after original issuance discount and issuance costs amounted to $295.1 million. These senior notes were issued at an original issuance discount of $2.3 million and bear interest at a rate of 4.5% 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 45 basis points, plus accrued and unpaid interest. 36 -------------------------------------------------------------------------------- Table of Contents The above senior notes contain provisions for a put option upon a change of control, requiring us to offer to purchase the senior notes at 101% of principal plus accrued and unpaid interest, as well as provisions for early redemption, at our option, at an amount equal to the greater of 100% of the principal amount to be redeemed or the sum of the present values of the remaining principal and interest payments discounted to the redemption date. In November 2012, we entered into a $200.0 million unsecured term loan agreement, due November 2015, with an institutional lender. Net proceeds to us after issuance costs amounted to $199.6 million. The Term Loan bears interest at a variable rate equal to the one-month LIBOR rate plus 1.625%, based upon our current debt rating, payable monthly. The Term Loan may be prepaid at our option any time after the second anniversary of the closing date, or in the case of a change in control event may be prepaid prior to the second anniversary of the closing date, at the principal amount plus a 0.50% premium. We concurrently entered into an interest rate swap agreement to hedge the variability of cash interest payments due to changes in the LIBOR benchmark interest rate, fixing our interest rate at 2.033%. The interest rate swap matures in November 2015 and has periodic interest settlements, both consistent with the terms of our Term Loan. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate. At March 31, 2013, the fair value of our interest rate swap was a liability of $0.3 million and was recorded within other liabilities in our consolidated balance sheet. 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 our senior unsecured notes due June 2018 or (ii) the LIBOR rate (as defined) plus a margin based on the credit ratings of our senior notes due June 2018, for interest periods of one, two, three or six months. As of March 31, 2013 and through May 9, 2013, we have not borrowed any funds under the Credit Facility. These credit facilities are subject to covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions. 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. 37-------------------------------------------------------------------------------- Table of Contents Our cash flows during fiscal 2013, 2012 and 2011 were: Year Ended March 31, 2013 2012 2011 (In millions) Net cash provided by operating activities $ 765.1 $ 800.3 $ 765.2 Net cash used in investing activities (233.8 ) (665.9 ) (147.6 ) Net cash used in financing activities (635.4 ) (282.0 ) (340.9 ) Effect of exchange rate changes on cash and cash equivalents (13.6 ) (16.4 ) 15.6 Net increase (decrease) in cash and cash equivalents $ (117.7 ) $ (164.0 ) $ 292.3 Cash Flows from Operating Activities Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities in fiscal 2013 decreased by $35.2 million from fiscal 2012, attributable primarily to the net impact of working capital changes and a decrease in net earnings before non-cash expenses (principally depreciation, amortization, deferred income taxes, share-based compensation expense and impairment charges). Net cash provided by operating activities in fiscal 2012 increased by $35.1 million over fiscal 2011, attributable primarily to the net impact of working capital changes, partially offset by a decrease in net earnings before non-cash expenses (principally depreciation, amortization, share-based compensation expense and deferred income taxes). Cash Flows from Investing Activities Net cash used in investing activities in fiscal 2013 decreased by $432.1 million from fiscal 2012. This decrease was attributable primarily to a decrease in cash paid for acquisitions and increases in proceeds from maturities of investments, partially offset by an increase in purchases of investments. Net cash used in investing activities in fiscal 2012 increased by $518.3 million over fiscal 2011. This increase was attributable primarily to an increase in cash expended for acquisitions, a decrease in proceeds from the maturities and sales of investments, an increase in investment purchases and an increase in capitalization of software development costs. Cash Flows from Financing Activities Net cash used in financing activities in fiscal 2013 increased by $353.4 million over fiscal 2012. This increase was attributable primarily to an increase in purchases of common stock, including $750.0 million related to our accelerated share repurchase, partially offset by an increase in proceeds from stock option exercises. Additionally, in fiscal 2013, cash flows from financing activities included approximately $500.0 million in proceeds from the issuance of the senior unsecured notes due December 2022 and the Term Loan. Net cash used in financing activities in fiscal 2012 decreased by $58.9 million from fiscal 2011. This decrease was attributable primarily to an increase in proceeds from borrowings, partially offset by an increase in treasury stock acquired and a decrease in proceeds from stock option exercises. Trade Finance Receivables We provide financing on a portion of our sales transactions to customers that meet our standards of creditworthiness. We believe our practice of providing financing at reasonable market interest rates enhances our competitive position. We participate in established programs with third party financial institutions and sell a significant portion of our finance receivables to such institutions on a non-recourse basis, enabling us to collect cash on a timely basis while fully transferring credit risk of customer default to third party financial institutions. We record transfers of finance receivables to third party financial institutions as sales of such finance receivables 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 fiscal 2013, 2012 and 2011, we transferred $184.7 million, $227.9 million and $172.3 million, respectively, of such receivables through these programs. 38-------------------------------------------------------------------------------- Table of Contents Treasury Stock Purchases Our Board of Directors has authorized a total of $6.0 billion to repurchase common stock under a common stock repurchase program, including a new $1.0 billion stock repurchase authorization approved in October 2012. On November 23, 2012, we entered into an accelerated share repurchase agreement (the ASR) to repurchase $750.0 million of our common stock under this program. Under the terms of the ASR, we paid $750.0 million to a financial institution and initially received 13.1 million shares of common stock, or 70% of the number of shares to be repurchased if such shares were repurchased at a price equal to the closing price of our common stock on November 23, 2012. The specific number of shares that we will ultimately repurchase under the ASR will be based generally on the daily discounted volume-weighted average share price of our common stock during the repurchase period, subject to other adjustments pursuant to the terms and conditions of the ASR. The ASR contemplates that the repurchase period will last no longer than approximately seven months from the execution of the agreement. At the completion of the repurchase period, we may be entitled to receive additional shares of our common stock from the financial institution or, under certain circumstances specified in the ASR, we may be required to deliver shares or make a cash payment (at our option) to the financial institution. Under the terms of the ASR, the maximum number of shares that could be delivered is 25.0 million. The fair market value of the 13.1 million shares initially delivered was approximately $525.0 million and was included in treasury stock, reducing the weighted-average number of basic and diluted common shares used to calculate earnings per share (EPS). The remaining $225.0 million was included in additional paid-in capital (APIC) and will be reclassified from APIC to treasury stock upon final settlement of the ASR. If this contract were settled on March 31, 2013, based on the daily discounted volume-weighted average price of our common stock since the effective date of the ASR, the financial institution would be required to deliver 5.0 million shares to us for the $225.0 million portion of the ASR that has not yet been settled. These shares were not included in the calculation of diluted weighted-average common shares outstanding during the year ended March 31, 2013 because their effect was anti-dilutive. During the year ended March 31, 2013, we repurchased a total of 22.7 million shares valued at $925.0 million under the Board authorizations. From the inception of the stock repurchase authorizations through March 31, 2013, we have purchased 174.6 million shares for $5.1 billion. At March 31, 2013, approximately $700.2 million remains authorized in the stock repurchase program, which does not have an expiration date. During the year ended March 31, 2013, we repurchased 1.1 million shares for $45.2 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 existing cash as well as cash generated from domestic operations, and therefore, affects our overall domestic versus international liquidity balances. See Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities above for a monthly detail of treasury stock purchases for the quarter ended March 31, 2013. 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. On May 4, 2013, the Company entered into Amendment No. 1 (the Rights Agreement Amendment) to the Rights Agreement. Among other things, the Rights Agreement Amendment stipulates that the Rights will not become exercisable by virtue of the Merger Agreement or the consummation of the Merger and exempts Parent, a subsidiary of Parent, their affiliates and associates, the Sponsors, and Elliott Associates, L.P., Elliott International, L.P. and any of their affiliates or associates from becoming an Acquiring Person as defined under the terms of the Rights Agreement in connection with the transactions contemplated by the Merger Agreement or any agreement entered into in connection with the Merger Agreement. 39 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following is a summary of our contractual obligations at March 31, 2013: Less Than After 5 1 Year 1-3 Years 3-5 Years Years Total (In millions)Unsecured long-term borrowings (1) $ 60.6 $ 319.8 $ 113.0 $ 1,263.4 1,756.8 Capital lease obligations (2) 8.6 8.2 1.5 - 18.3 Operating lease obligations 40.8 37.5 12.7 4.1 95.1 Purchase obligations (3) 10.4 3.6 - - 14.0 Other long-term liabilities reflected on the balance sheet (2)(4) 16.3 1.9 - 21.1 39.3 Total contractual obligations (5)(6) $ 136.7 $ 371.0 $ 127.2 $ 1,288.6 1,923.5 (1) Amounts represent the principal and interest payments relating to our long-term debt. We have an outstanding interest rate swap agreement accounted for as a cash flow hedge that has the economic effect of modifying the variable interest obligation associated with our $200.0 million Term Loan for a fixed-rate obligation. The impact of this interest rate swap was factored into the calculation of future interest payments on long-term debt. (2) Represents contractual amounts due, including interest. (3) Represents obligations under agreements with non-cancelable terms to purchase goods or services. The agreements are enforceable and legally binding, and contain specific terms, including quantities to be purchased and the timing of the purchase. (4) Includes deferred compensation, which is presented as payable after five years because of the uncertain timing of the related payments. (5) Total does not include contractual obligations recorded on the balance sheet as current liabilities, other than capital lease obligations and other long-term liabilities above. (6) We are unable to make a reasonably reliable estimate as to when cash settlement with taxing authorities will occur for our unrecognized tax benefits due to the uncertainties related to these tax matters. Therefore, our liability for unrecognized tax benefits of $90.5 million, including interest and penalties, is not included in the table above. Critical Accounting Policies and Estimates The preparation of our 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 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 with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the related disclosures below. Revenue Recognition We derive revenue principally from software-related arrangements consisting of software license and maintenance offerings, non-software arrangements consisting of our SaaS offerings as well as the associated professional services for each of these types of arrangements. We commence revenue recognition when all of the following core revenue recognition criteria are satisfied: i) persuasive evidence of an arrangement exists; ii) delivery of the license or service has occurred or is occurring; iii) the arrangement fee is fixed or determinable and iv) collection of the arrangement fee is probable. Software License and Maintenance Arrangements Software license revenue is recognized when the core revenue recognition criteria above are satisfied and vendor-specific objective evidence (VSOE) of the fair value of undelivered elements exists. As substantially all of our software licenses are sold in multiple-element arrangements that include either maintenance or both maintenance and professional services, we use the residual method to determine the amount of license revenue to be recognized. Under the residual method, consideration is allocated to undelivered elements based upon VSOE of the fair value of those elements, with the residual of the arrangement fee allocated to and recognized as license revenue. We have established VSOE of the fair value of our maintenance offerings through independent maintenance renewals. These demonstrate a consistent relationship of pricing maintenance as a percentage of either the net license fee or the discounted or undiscounted license list price. VSOE of the fair value of professional services is established based on daily rates when sold on a stand-alone basis, as well as management-approved pricing for certain new offerings. 40-------------------------------------------------------------------------------- Table of Contents We are unable to establish VSOE of fair value for all undelivered elements in certain arrangements that include multiple software products for which the associated maintenance pricing is based on a combination of undiscounted license list prices, net license fees or discounted license list prices. We are also unable to establish VSOE of fair value for all undelivered elements in certain arrangements that include unlimited licensing rights and certain arrangements that contain rights to future unspecified software products as part of the maintenance offering. If VSOE of fair value of one or more undelivered elements does not exist, license revenue is deferred and recognized upon delivery of those elements or when VSOE of fair value exists for all remaining undelivered elements, or if the deferral is due to the factors described above, license revenue is recognized ratably over the longest expected delivery period of undelivered elements in the arrangement, which is typically the longest maintenance term. In our time-based license agreements, we are unable to establish VSOE of fair value for undelivered maintenance elements because the contractual maintenance terms in these arrangements are the same duration as the license terms, and VSOE of fair value of maintenance cannot be established. Accordingly, license fees in time-based license arrangements are recognized ratably over the term of the arrangements. Maintenance revenue is recognized ratably over the contractual terms of the maintenance arrangements, which primarily range from one to three years and in some instances can extend up to five or more years. Professional Services Arrangements Professional services revenue, which principally relates to implementation, integration and education services associated with our products, is derived under both time-and-material and fixed fee arrangements and in most instances is recognized on a proportional performance basis based on days of effort. If no discernible customer deliverable exists until the completion of the professional services, we apply the completed performance method and defer the recognition of professional services revenue until completion of the services, which is typically evidenced by a signed completion letter from the customer. Services that are sold in connection with software license arrangements generally qualify for separate accounting from the license elements because they do not involve significant production, modification or customization of our products and are not otherwise considered to be essential to the functionality of such products. In arrangements where the professional services do not qualify for separate accounting from the license elements, the combined software license and professional services revenue are recognized based on contract accounting using either the percentage-of-completion or completed-contract method. SaaS Arrangements SaaS subscription fees are recognized ratably over the contractual terms of the subscription arrangements beginning on the date that the service is made available to customers. Additional professional services fees, principally related to optional services engagements that are not essential to the functionality of our core SaaS offerings and are considered to have standalone value, are generally recognized on a proportional performance basis based on days of effort. In our consolidated financial statements, SaaS subscription revenue and optional professional services revenue are included in maintenance and professional services revenue, respectively. To date, SaaS and related professional services revenues have not represented a significant percentage of our total revenue in any period since our SaaS offerings were first introduced to the market in late fiscal 2010. Other Revenue Recognition Considerations In arrangements containing both software and non-software (e.g., SaaS) elements, which to date have been infrequent, we allocate the arrangement consideration first into software and non-software units of accounting based on a relative selling price hierarchy and then apply the applicable software and non-software revenue recognition criteria to each unit of accounting. To date, we have determined the relative selling price of software and non-software units of accounting based on management's best estimate of selling price as other means of determining relative selling price (e.g., VSOE or other third party evidence) have not been available with respect to all of the components in bundled software and non-software arrangements. We also execute arrangements through resellers, distributors and systems integrators (collectively, channel partners) in which the channel partners act as the principals in the transactions with the end users of our products and services. In license arrangements with channel partners, title and risk of loss pass to the channel partners upon execution of our arrangements with them and the delivery of our products to the channel partner or the end user. We recognize revenue from transactions with channel partners on a net basis (the amount actually received by us from the channel partners) when all other revenue recognition criteria are satisfied. We do not offer right of return, product rotation or price protection to any of our channel partners. Revenue from financed customer transactions are generally recognized in the same manner as those requiring current payment, as we have a history of offering installment contracts to customers and successfully enforcing original payment terms without making concessions. In arrangements where the fees are not considered to be fixed or determinable, we recognize revenue when payments become due under the arrangement. If we determine that a transaction is not probable of collection or a risk of concession exists, we do not recognize revenue in excess of the amount of cash received. 41-------------------------------------------------------------------------------- Table of Contents We are required to charge certain taxes on our revenue transactions. These amounts are not included in revenue. Instead, we record a liability when the amounts are collected and relieve the liability when payments are made to the applicable government agency. In our consolidated statements of comprehensive income, revenue is categorized as license, maintenance or professional services revenue. We allocate revenue from arrangements containing multiple elements to each of these categories based on the VSOE of fair value for elements in each revenue arrangement and the application of the residual method for arrangements in which we have established VSOE of fair value for all undelivered elements. In arrangements where we are not able to establish VSOE of fair value for all undelivered elements, we first allocate revenue to any undelivered elements for which VSOE of fair value has been established, then allocate revenue to any undelivered elements for which VSOE of fair value has not been established based upon management's best estimate of fair value of those undelivered elements and apply a residual method to determine the license fee. Management's best estimate of fair value of undelivered elements for which VSOE of fair value has not been established is based upon the VSOE of similar offerings and other objective criteria. Capitalized Software Development Costs Costs of internally developed software are expensed until the technological feasibility of the software product has been established. Thereafter, software development costs are capitalized until the product is generally available to customers in accordance with relevant accounting standards. Judgment is involved in determining the point at which technological feasibility is reached. If different judgments were made, they could result in a different amount of costs that are capitalized. Capitalized software development costs are then amortized using the greater of an amount determined by the ratio of current revenues recognized to the total anticipated revenues for a product or straight-line over the product's estimated economic life beginning at the date of general availability of the product to our customers. We evaluate our capitalized software development costs at each balance sheet date to determine if the unamortized balance related to any given product exceeds the estimated net realizable value of that product. Any such excess is written off through accelerated amortization in the quarter in which it is identified. Determining net realizable value requires that we make estimates and use judgment in quantifying the appropriate amount to write off, if any. Actual amounts realized from the sales of software products could differ from our estimates. Also, any future changes to our product portfolio could result in significant increases to our cost of license revenue as a result of the impairment of capitalized software development costs or acquired technology. Share-Based Compensation Share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as compensation expense generally on a straight-line basis over the requisite service period of the award, which is typically the vesting period. We use the fair value of the Company's common stock at the date of grant as an estimate of fair value for time-based nonvested stock units, and we utilize Monte Carlo simulation models to estimate the fair value of certain market-based nonvested stock units. The fair values of share-based awards determined on the date of grant using a fair value model are impacted by our stock price as well as assumptions regarding a number of complex and subjective variables. These assumptions include our expected stock price volatility, the risk-free interest rate over the term of the awards and expected stock price volatilities of the NASDAQ-100 Index used in our Monte Carlo simulation models. We estimate the volatility of our stock price using historical volatility derived from historical prices of our common stock. We estimate the risk-free interest rate based on zero-coupon yields implied from United States Treasury issues with maturities similar to the expected term of the awards. We have never paid cash dividends and do not currently intend to pay cash dividends, and therefore we assume an expected dividend yield of zero in the valuation models. We estimate potential forfeitures of share-based awards at the time of grant and record compensation expense for those awards expected to vest. The estimate of forfeitures is reassessed over the requisite service period and, to the extent that actual forfeitures differ, or are expected to differ, from such estimates, compensation expense is adjusted through a cumulative catch-up adjustment in the period of change and the remaining unrecognized share-based compensation expense is recorded over the remaining requisite service period. If we use different assumptions for estimating share-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the amount of such expense recorded in future periods may differ significantly from what we have recorded in the current period. We record deferred tax assets for share-based awards that we believe will result in deductions on our income tax returns, based on the amount of share-based compensation expense recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, such shortfalls reduce our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase our income tax expense. 42-------------------------------------------------------------------------------- Table of Contents Valuation of Goodwill and Intangible Assets When we acquire a business, a portion of the purchase consideration is typically allocated to acquired technology and other identifiable intangible assets, such as customer relationships. The excess of the purchase consideration over the net of the acquisition-date fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill. The amounts allocated to acquired technology and other intangible assets represent our estimates of their fair values at the acquisition date. We amortize the acquired technology and other intangible assets with finite lives over their estimated useful lives. The estimation of acquisition-date fair values of intangible assets and their useful lives requires us to make assumptions and judgments, including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, projections of future cash flows and appropriate discount rates. We assess goodwill for impairment as of January 1 of each fiscal year, or more frequently if events or changes in circumstances indicate that the fair value of a reporting unit has been reduced below its carrying value. When conducting our annual goodwill impairment assessment, we use a three step process. The first step is to perform an optional qualitative evaluation as to whether it is more likely than not that the fair value of any of our reporting units is less than its carrying value, using an assessment of relevant events and circumstances. In performing this assessment, we are required to make assumptions and judgments including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we are not required to perform any additional tests in assessing goodwill for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, we perform a second step for that reporting unit, consisting of a quantitative assessment of goodwill impairment. This quantitative assessment requires us to estimate the fair value of each reporting unit and compare the estimated fair value of each reporting unit, determined using a combination of the income and market approaches on an invested capital basis, to its respective carrying value (including goodwill) as of the date of the impairment test. The third step, employed for any reporting unit that fails the second step, is used to measure the amount of any potential impairment and compares the implied fair value of the reporting unit with the carrying amount of goodwill. If a reporting unit's carrying value is negative, the Company does not follow this three-step process, and instead performs a qualitative evaluation to determine whether it is more likely than not that the reporting unit's goodwill is impaired. If such reporting unit's goodwill is determined to be impaired, the third step discussed above is performed to measure the amount of any potential impairment. Assumptions, judgments and estimates about fair values are complex and often subjective and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates used in determining the fair values of intangible assets, the associated useful lives and the fair values of our reporting units are reasonable and appropriate, different assumptions, judgments and estimates could materially affect the fair value or useful lives of our intangible assets and our goodwill impairment assessment, which could result in future impairment charges and those charges could be material to our results of operations. Accounting for Income Taxes We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and their respective tax bases, along with net operating losses and tax credit carryforwards. Income tax expense includes U.S. and foreign income taxes, including U.S. federal taxes on undistributed earnings of foreign subsidiaries to the extent such earnings are not considered to be indefinitely re-invested. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We utilize a "more likely than not" threshold for the recognition and derecognition of tax positions and measure positions accordingly. We reflect changes in recognition or measurement in the period in which the change in judgment occurs, which can be caused by the closing of a tax audit, judicial rulings, expirations of the statute of limitations or refinements of estimates based on changing facts or circumstances. We recognize interest and penalties in income tax expense in our consolidated statements of comprehensive income. Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities and the process of identifying items of revenue and expense that qualify for preferential tax treatment. We are subject to corporate income tax audits in multiple jurisdictions and our income tax expense includes amounts intended to satisfy income tax assessments that may result from the examination of our tax returns that have been filed in these jurisdictions. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net earnings in the period in which such determination is made. 43-------------------------------------------------------------------------------- Table of Contents Our effective tax rate includes the impact of certain undistributed foreign earnings for which no United States taxes have been provided because such earnings are planned to be indefinitely reinvested outside the United States. Remittances of foreign earnings to the United States are planned based on projected cash flow, working capital and investment needs of foreign and domestic operations. Based on these assumptions, we estimate the amount that will be distributed to the United States and provide United States federal taxes on these amounts. Material changes in our estimates could impact our effective tax rate. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination. New Accounting Pronouncements Not Yet Adopted In December 2011, the 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 and is applicable to our disclosures regarding our interest rate swap and foreign currency forward contracts. [ Back To TMCnet.com's Homepage ]