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MCRS > SEC Filings for MCRS > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for MICROS SYSTEMS INC

Form 10-Q for MICROS SYSTEMS INC


29-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a leading worldwide designer, manufacturer, marketer, and servicer of enterprise information solutions for the global hospitality and specialty retail industries. Our enterprise solutions comprise three major areas: hotel information systems, restaurant information systems, and specialty retail information systems. We also offer a wide range of related services. We distribute our products and services directly and through a network of independent dealers and distributors.

We are organized and operate in four operating segments: U.S./Canada, Europe, the Pacific Rim, and Latin America regions. We have identified our U.S./Canada operating segment as a separate reportable segment and we have aggregated our three international operating segments into one reportable segment, international, as the three international operating segments share many similar economic characteristics. Our management views the U.S./Canada and international segments separately in operating our business, although the products and services are similar for each segment.

We have been adversely impacted by the current global economic uncertainty. We believe that cautious consumer spending, coupled with difficulties in obtaining credit, may continue to negatively impact our customers' abilities to acquire or open new hospitality and retail venues, and may also limit customers' willingness and ability to make certain capital expenditures on new systems and system upgrades. In light of these challenging and uncertain conditions, we continue to review certain discretionary expenses, and scrutinize carefully and cautiously the expansion of our workforce.

FORWARD-LOOKING STATEMENTS

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our actual results may differ materially from those anticipated in these forward-looking statements.

Examples of such forward-looking statements in this Quarter Report on Form 10-Q include the following:

our statements regarding valuation of our investments in auction rate securities and our plans to monitor our investments including as to liquidity of and creditworthiness of the issuers of the auction rate securities;

our belief that any reduction in liquidity of auction rate securities will not have a material impact on our overall liquidity;

our expectations regarding the impact or lack of impact on our financial position and results of operations of the application of recently adopted accounting standards;

our belief that, except as noted, existing legal claims or proceedings will not have a material adverse effect on our results of operations or financial position;

our expectations regarding the effects of current economic conditions on our customers, our distributors, and our business generally;

our expectations regarding effective tax rates in future periods;

our statements regarding the effects of foreign currency rate fluctuations (in particular, the Euro and British Pound Sterling) on our financial performance; and

our expectations about the adequacy of our cash flows and our available borrowing capacity to meet our working capital needs, and our ability to raise additional funds if and when needed.

RESULTS OF OPERATIONS

The following discussion of our results of operations for the three months ended September 30, 2012 includes the results of operations of Torex Retail Holdings Ltd. ("Torex"), a company we acquired on May 31, 2012.

Revenue:

The following table provides information regarding sales mix by reportable
segments for the three months ended September 30, 2012 and 2011 (amounts are net
of intersegment eliminations, and are based on the location of the customer):



                                        Three Months Ended September 30,
                       U.S./Canada                International                   Total
(in thousands)     2012          2011          2012          2011          2012          2011
Hardware         $  27,474     $  21,503     $  36,285     $  26,906     $  63,759     $  48,409
Software             9,755        12,029        21,023        21,244        30,778        33,273
Service             81,134        80,625       124,180        94,251       205,314       174,876
Total Revenue    $ 118,363     $ 114,157     $ 181,488     $ 142,401     $ 299,851     $ 256,558

The following table provides information regarding the total sales mix as a percent of total revenue:

                   Three Months Ended
                      September 30,
(in thousands)      2012          2011
Hardware               21.3 %       18.9 %
Software               10.2 %       13.0 %
Service                68.5 %       68.1 %
Total                 100.0 %      100.0 %

For the three months ended September 30, 2012, total revenue was approximately $299.9 million, an increase of approximately $43.3 million, or 16.9% compared to the same period last year. The revenue increase reflects the following factors:

Hardware and service revenue increased by 31.7% and 17.4%, respectively, compared to the same period last year. Software revenue decreased by 7.5% compared to the same period last year. A substantial portion of the increase in hardware and service revenue is attributable to the hardware and service revenue generated by Torex.

Additional total revenue of approximately $48.0 million generated by Torex.

We believe these results, particularly the decrease in software revenue, reflect continued adverse impact caused by current global economic uncertainty.

The unfavorable foreign currency exchange rate fluctuations, primarily for the Euro against the U.S. dollar, negatively impacted total revenue by approximately $8.2 million.

The International segment revenue for the three months ended September 30, 2012 increased by approximately $39.1 million, an increase of 27.4% compared to the same period last year due to the following:

Hardware and service revenue increased by 34.9% and 31.8%, respectively, compared to the same period last year. Software revenue decreased by 1.0% compared to the same period last year. A substantial portion of the increase in hardware and service revenue is attributable to the hardware and service revenue generated by Torex, the revenues for which is almost entirely attributable to the International segment.

The unfavorable foreign currency exchange rate fluctuations, primarily for Euro against the U.S. dollar, negatively impacted total revenue by approximately $8.2 million.

U.S. segment revenue for the three months ended September 30, 2012 increased approximately $4.2 million, an increase of 3.7% compared to the same period last year due to the following:

Hardware and service revenue increased by 27.8% and 0.6%, respectively, compared to the same period last year. The increase in hardware revenue was primarily due to an increase in sales of third party computer equipment to our retail customers.

The software revenue decreased by 18.9% compared to the same period last year. We believe this result reflects continued adverse impact caused by current global economic uncertainty.

Cost of Sales:

The following table provides information regarding our cost of sales:



                                    Three Months Ended September 30,
                                  2012                             2011
                        Cost         % of Related        Cost         % of Related
(in thousands)        of Sales         Revenue         of Sales         Revenue
Hardware              $  43,057               67.5 %   $  30,163               62.3 %
Software                  5,365               17.4 %       4,859               14.6 %
Service                  98,169               47.8 %      77,120               44.1 %
Total Cost of Sales   $ 146,591               48.9 %   $ 112,142               43.7 %

For the three months ended September 30, 2012 and 2011, cost of sales as a percent of revenue were 48.9% and 43.7%, respectively. Hardware cost of sales as a percent of related revenue for the three months ended September 30, 2012 increased 5.2% compared to the same period last year. Software cost of sales as a percent of related revenue for the three months ended September 30, 2012 increased approximately 2.8% compared to the same period last year. Service costs as a percent of related revenue for the three months ended September 30, 2012 increased 3.7% compared to the same period last year. These increases were substantially due to our acquisition of Torex, which has lower margins in its products and services and higher sales of non-proprietary hardware, than MICROS generally realizes. The increases in cost of sales were also due to unfavorable product mix between software sales and hardware sales; between MICROS hardware products sales and third party hardware sales; and between professional services and maintenance services.

Selling, General and Administrative ("SG&A") Expenses:

SG&A expenses, as a percentage of revenue, for the three months ended September 30, 2012, were 25.9%, a decrease of 3.5% compared to the same period last year. This decrease was primarily due to decreases in compensation related expenses as compared to the same period last year.

Research and Development ("R&D") Expenses:

R&D expenses consisted primarily of labor costs less capitalized software development costs. The following table provides information regarding our R&D expenses:

                                           Three Months Ended
                                              September 30,
(in thousands)                                 2012         2011
R&D labor and other costs                $   17,653     $ 13,160
Capitalized software development costs         (850 )     (1,825 )
Total R&D expenses                       $   16,803     $ 11,335
% of Revenue                                    5.6 %        4.4 %

The decrease in capitalized software development costs is primarily related to the completion of the development of our next generation retail related software during the current period. The increase in total R&D expenses is primarily related to R&D expenses associated with Torex, a company that we acquired subsequent to the prior year period.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses for the three months ended September 30, 2012 were approximately $5.5 million, an approximately $1.3 million increase compared to the same period in 2011. This increase is related to amortization of intangible assets related to Torex, a company that we acquired subsequent to the prior year period, substantially due to amortization of acquired intangible assets.

Share-Based Compensation Expenses:

The following table provides information regarding the allocation of non-cash
share-based compensation expense across SG&A expense, R&D expense and cost of
sales:



                                                                 Three Months Ended
                                                                   September 30,
(in thousands, except per share data)                               2012           2011
SG&A                                                         $     3,700     $    2,659
R&D                                                                  437            309
Cost of sales                                                         73             37
Total non-cash share-based compensation expense                    4,210          3,005
Income tax benefit                                                (1,264 )         (943 )
Total non-cash share-based compensation expense, net of
tax benefit                                                  $     2,946     $    2,062
Impact on diluted net income per share attributable to
MICROS Systems, Inc.
common shareholders                                          $      0.04     $     0.03

As of September 30, 2012, there was approximately $25.6 million in non-cash share-based compensation cost related to non-vested awards that were not yet recognized in our consolidated statements of operations. This cost is expected to be recognized over a weighted-average period of 1.7 years.

Non-operating Income:

Net non-operating income for the three months ended September 30, 2012 was approximately $0.8 million compared to approximately $2.4 million for the same period in 2011. The decrease of approximately $1.5 million was primarily due to foreign currency exchange losses of approximately $0.7 million for the three months ended September 30, 2012 compared to foreign currency exchange gains of approximately $0.5 million for the same period in 2011. The decrease was also attributable to a decrease in interest income of approximately $0.6 million due to aggregate decreases of approximately $163.3 million in cash equivalents and in short-term and long-term investment balances, from $778.9 million at September 30, 2011 to $615.6 million at September 30 2012 and due to lower interest rates during the three months ended September 30, 2012 compared to the same period last year. This decrease in cash equivalents and investment balances reflects the use of funds to acquire Torex in May 2012.

Income Tax Provisions:

The effective tax rate for the three months ended September 30, 2012 and 2011 was 24.0% and 33.0%, respectively. The decrease in tax rate for the three months ended September 30, 2012 compared to the same period in 2011 was primarily attributable to increases in tax benefits realized upon the expiration of statutes of limitation or settlements with tax authorities and decreases in tax associated with changes in our earnings mix among jurisdictions.

Based on currently available information, we estimate that the fiscal year 2013 effective tax rate will be approximately between 27% and 28%. We believe that due to earnings fluctuations, changes in the mix of earnings among jurisdictions, and the impact of certain discrete items recognized during the interim reporting periods, there may be some degree of adjustment to the effective tax rate on a quarterly basis.

We have recognized a net decrease in unrecognized tax benefits for the three months ended September 30, 2012 as compared to the same period in 2011, which resulted in a reduction in the effective tax rate of 11.8% and a reduction in income tax expense by approximately $6.4 million. This reduction was primarily due to favorable settlements with tax authorities. We estimate that within the next 12 months, our unrecognized income tax benefits will decrease by between approximately $3.6 million to approximately $5.6 million due to the expiration of statues of limitations and settlement of issues with tax authorities. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Over the next 12 months, it is reasonably possible that our tax positions will continue to generate liabilities related to uncertain tax positions.

Our income tax returns are no longer subject to examination by the U.S. tax authorities for tax years ending before June 2011, by the U.K. tax authorities for tax years ending before June 2009, by the German tax authorities for tax years ending before June 2007 and the Irish tax authorities for tax years ending before June 2008. Certain periods prior to these dates, however, could be subject to adjustment via competent authority or due to the impact of items such as carryback or carryforward claims.

Recent accounting standards

Recently Adopted Accounting Pronouncements

On July 1, 2012, we adopted FASB guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders' equity. The new guidance requires the changes in other comprehensive income be presented either in a single continuous statement of net income and other comprehensive income or in two separate but consecutive statements. In accordance with this update, we have presented two separate but consecutive statements which include the components of net income and other comprehensive income. The adoption of this new guidance did not have a material impact on our condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In July 2012, the FASB issued revised FASB guidance on how an entity tests indefinite-lived intangible assets for impairment. Under the new guidance, an entity is no longer required to calculate the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This revised guidance is effective for us beginning in our fiscal year 2014. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

The following comprise the categories of critical accounting estimates that we used in the preparation of our condensed consolidated financial statements:

Revenue recognition;

Allowance for doubtful accounts;

Inventory;

Financial instruments and fair value measurements;

Capitalized software development costs;

Valuation of long-lived assets and intangible assets;

Goodwill and indefinite-lived intangible assets;

Share-based compensation;

Income taxes.

We have reviewed our critical accounting estimates and the related disclosures with our Audit Committee. Critical accounting estimates are described further in our Annual Report on Form 10-K for the year ended June 30, 2012 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Estimates."

LIQUIDITY AND CAPITAL RESOURCES



Sources and Uses of Cash

Our Condensed Consolidated Statement of Cash Flows summary is as follows:



                                    Three Months Ended
                                       September 30,
(in thousands)                         2012          2011
Net cash provided by (used in):
Operating activities              $   6,022     $  19,566
Investing activities                  7,792         3,982
Financing activities                 (7,457 )     (23,832 )

Operating activities:

Net cash provided by operating activities for the three months ended September 30, 2012 decreased approximately $13.5 million compared to the three months ended September 30, 2011. This decrease was primarily due to certain unfavorable changes in working capital in comparison to the same period last year, including higher bonus and interim income tax payments during the three months ended September 30, 2012 as compared to September 30, 2011, a longer collection period for domestic receivables and higher inventory levels. These unfavorable changes were partially offset by an increase in net income of approximately $3.8 million.

Investing activities:

Net cash provided by investing activities for the three months ended September 30, 2012 was approximately $7.8 million, reflecting approximately $12.5 million in cash received from the sale of investments, net of cash used to purchase investments. We used approximately $4.6 million to purchase property, plant and equipment, and to internally develop software to be licensed to others.

Net cash provided by investing activities for the three months ended September 30, 2011 was approximately $4.0 million, reflecting approximately $10.4 million in cash received from the sale of investments, net of cash used to purchase investments. We used approximately $5.9 million to purchase property, plant and equipment, and to internally develop software to be licensed to others.

Financing activities:

Net cash used in financing activities for the three months ended September 30, 2012 was approximately $7.5 million, reflecting approximately $13.2 million used to purchase our stock, partially offset by proceeds from stock option exercises of approximately $4.4 million and realized tax benefits from stock option exercises of approximately $1.4 million.

Net cash used in financing activities for the three months ended September 30, 2011 was approximately $23.8 million, reflecting approximately $25.4 million used to purchase our stock, partially offset by proceeds from stock option exercises of approximately $1.4 million and realized tax benefits from stock option exercises of approximately $0.3 million.

Capital Resources

Our cash and cash equivalents and short-term investment balance of approximately $581.2 million at September 30, 2012 is a decrease of approximately $0.9 million from the June 30, 2012 balance. At September 30, 2012, approximately $251.6 million of our cash and cash equivalents and short-term investment balance is held internationally. We currently have no plans to repatriate to the U.S. our cumulative unremitted foreign earnings, as we intend to permanently reinvest such earnings internationally. If we change our strategy in the future and repatriate such funds, the amount of any taxes, which could be significant, and the application of any tax credits, would be determined based on the income tax laws at the time of such repatriation.

The favorable foreign exchange rate fluctuations, substantially for the Euro against the U.S. dollar as compared to June 30, 2012, increased our cash and cash equivalents' balance at September 30, 2012 by approximately $4.9 million. All cash and cash equivalents and short-term investments are being retained for our operations, expansion of our business, the repurchase of our common stock, and future acquisitions.

We have two credit agreements (the "Credit Agreements") that, through July 31, 2013, provide an aggregate $50.0 million multi-currency committed line of credit. As of September 30, 2012, we had no balance outstanding under the Credit Agreements and had applied approximately $0.6 million to guarantees. We also have a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.3 million at the September 30, 2012 exchange rate). As of September 30, 2012, there were no balances outstanding on this credit facility, but approximately EUR 0.4 million (approximately $0.5 million at the September 30, 2012 exchange rate) of the credit facility has been used for guarantees. As of September 30, 2012, we had an aggregate borrowing capacity of approximately $50.2 million under all of the credit facilities described above. See Note 5 "Credit Agreements," in the Notes to the Condensed Consolidated Financial Statements included in this report for further information about our credit facilities. We do not currently invest in financial instruments designed to protect against interest rate fluctuations, although we will continue to evaluate the need to do so in the future.

We believe that our cash and cash equivalents, short-term investments, cash generated from operations and our available lines of credit are sufficient to provide our working capital needs for the foreseeable future. Based on our expected operating cash flows and sources of cash, we do not believe that any further limitations on liquidity of our auction rate securities will have a material impact on our overall ability to meet our liquidity needs. In light of current economic conditions generally and in light of the overall performance of the stock market in recent periods, we cannot assume that funds would be available from other sources if we were required to fund significant acquisitions or any unanticipated and substantial cash needs. We currently anticipate that our property, plant and equipment expenditures for fiscal year 2013 will be approximately $20 million.

The following table provides information regarding certain financial indicators of our liquidity and capital resources:

                                                              September 30,       June 30,
(in thousands, except ratios)                                     2012              2012
Cash and cash equivalents and short-term investments (1)     $       581,168     $   582,038
Available credit facilities                                  $        51,286     $    51,266
Outstanding credit facilities                                              0               0
Outstanding guarantees                                                (1,119 )        (1,055 )
Unused credit facilities                                     $        50,167     $    50,211
Working capital (2)                                          $       538,761     $   500,127
MICROS Systems, Inc.'s shareholders' equity                  $     1,145,349     $ 1,092,645
Current ratio (3)                                                       2.33            2.20

(1) Does not include approximately $34.3 million invested in auction rate securities, classified as long-term investments in our Condensed Consolidated Balance Sheet as of September 30, 2012 and June 30, 2012.

(2) Current assets less current liabilities.

(3) Current assets divided by current liabilities. The Company does not have any long-term debt.

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