e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the Quarterly Period Ended August 31, 2010
OR
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission File Number: 033-41752
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
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04-2746201
(I.R.S. Employer
Identification No.)
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14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
Telephone Number:
(781) 280-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
As of September 30, 2010, there were 43,287,000 shares of the registrant’s common stock, $.01 par
value per share, outstanding.
PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE NINE MONTHS ENDED AUGUST 31, 2010
INDEX
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited)
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(In thousands)
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August 31,
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November 30,
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2010
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2009
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Assets
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Current assets:
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Cash and equivalents
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$
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255,049
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$
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175,873
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Short-term investments
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14,164
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48,248
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Total cash and short-term investments
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269,213
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224,121
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Accounts receivable, net
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84,966
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98,872
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Other current assets
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25,266
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20,193
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Deferred income taxes
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14,932
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14,433
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Total current assets
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394,377
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357,619
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Property and equipment, net
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57,963
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59,625
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Acquired intangible assets, net
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90,646
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86,389
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Goodwill
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239,471
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218,498
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Deferred income taxes
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33,520
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30,638
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Long-term investments and other
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44,343
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46,081
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Total
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$
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860,320
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$
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798,850
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Liabilities and Shareholders’ Equity
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Current liabilities:
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Current portion, long-term debt
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$
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380
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$
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358
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Accounts payable
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6,337
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12,400
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Accrued compensation and related taxes
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36,699
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44,472
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Income taxes payable
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1,538
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4,082
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Other accrued liabilities
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34,217
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24,369
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Short-term deferred revenue
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134,334
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141,243
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Total current liabilities
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213,505
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226,924
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Long-term debt, less current portion
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377
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664
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Long-term deferred revenue
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3,342
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4,511
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Deferred income taxes
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3,262
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3,445
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Other non-current liabilities
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6,696
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7,854
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Commitments and contingencies
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Shareholders’ equity:
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Common stock and additional paid-in capital; authorized, 100,000
shares; issued and outstanding, 43,044 shares in 2010
and 40,604 shares in 2009
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314,563
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247,265
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Retained earnings, including accumulated other
comprehensive losses of $(10,020) in 2010 and $(3,385) in 2009
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318,575
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308,187
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Total shareholders’ equity
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633,138
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555,452
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Total
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$
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860,320
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$
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798,850
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See notes to unaudited condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations
(unaudited)
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(In thousands, except per share data)
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Three Months Ended Aug. 31,
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Nine Months Ended Aug. 31,
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2010
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2009
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2010
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2009
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Revenue:
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Software licenses
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$
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44,748
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$
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39,173
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$
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136,093
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$
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123,538
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Maintenance and services
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83,989
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80,260
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247,847
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233,802
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Total revenue
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128,737
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119,433
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383,940
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357,340
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Costs of revenue:
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Cost of software licenses
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2,025
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1,758
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5,633
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5,602
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Cost of maintenance and services
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17,845
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15,957
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53,086
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49,287
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Amortization of acquired intangibles for
purchased technology
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4,839
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4,811
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15,222
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14,609
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Total costs of revenue
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24,709
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22,526
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73,941
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69,498
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Gross profit
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104,028
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96,907
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309,999
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287,842
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Operating expenses:
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Sales and marketing
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39,362
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45,511
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122,707
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133,331
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Product development
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21,941
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22,378
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68,481
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70,320
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General and administrative
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11,937
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17,717
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38,167
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46,123
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Amortization of other acquired intangibles
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2,733
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2,310
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7,833
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7,149
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Restructuring expense
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11,533
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(211
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37,508
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5,237
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Acquisition-related expenses
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53
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110
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468
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330
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Total operating expenses
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87,559
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87,815
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275,164
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262,490
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Income from operations
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16,469
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9,092
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34,835
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25,352
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Other income (expense):
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Interest income and other
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615
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560
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2,677
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2,192
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Foreign currency gain (loss)
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(2,335
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(747
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2,278
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(1,610
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)
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Total other income (expense), net
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(1,720
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(187
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4,955
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582
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Income before provision for income taxes
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14,749
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8,905
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39,790
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25,934
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Provision for income taxes
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5,505
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3,384
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12,495
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9,855
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Net income
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$
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9,244
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$
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5,521
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$
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27,295
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$
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16,079
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Earnings per share:
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Basic
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$
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0.21
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$
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0.14
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$
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0.65
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$
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0.40
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Diluted
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$
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0.21
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$
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0.13
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$
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0.62
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$
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0.39
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Weighted average shares outstanding:
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Basic
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43,224
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40,117
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42,280
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40,018
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Diluted
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44,424
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41,261
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43,782
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40,826
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See notes to unaudited condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows
(unaudited)
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(In thousands)
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Nine Months Ended August 31,
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2010
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2009
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Cash flows from operating activities:
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Net income
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$
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27,295
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$
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16,079
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Depreciation and amortization of property and equipment
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8,296
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8,794
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Amortization of acquired intangible assets
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23,055
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21,757
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Stock-based compensation
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13,201
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16,914
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Deferred income taxes
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(1,155
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)
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(3,753
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)
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Tax benefit from stock plans
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6,058
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(508
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)
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Excess tax benefit from stock plans
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(3,486
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(13
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Changes in operating assets and liabilities, net of effects
from acquisitions:
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Accounts receivable
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13,342
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15,205
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Other current assets
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(3,296
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)
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740
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Accounts payable and accrued liabilities
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(2,999
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)
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(32,000
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)
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Income taxes payable
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(6,717
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)
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965
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Deferred revenue
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(3,059
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(8,458
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)
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Net cash provided by operating activities
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70,535
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35,722
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Cash flows from investing activities:
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Purchases of investments available for sale
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(14,552
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)
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(70,063
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Sales and maturities of investments available for sale
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30,896
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35,584
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Redemptions and repurchases of auction rate securities
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18,990
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7,050
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Purchases of property and equipment
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(7,091
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)
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(6,061
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Acquisitions
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(49,186
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)
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—
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Decrease (increase) in other non-current assets
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280
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(499
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)
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Net cash used for investing activities
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(20,663
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(33,989
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)
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Cash flows from financing activities:
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Issuance of common stock
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67,814
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7,407
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Excess tax benefit from stock plans
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3,486
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13
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Withholding
tax payments related to net issuance of restricted stock units
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(711
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)
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—
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Payment of long-term debt
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(266
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)
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(244
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)
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Repurchase of common stock
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(29,336
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)
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(5,145
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)
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Net cash provided by financing activities
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40,987
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2,031
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Effect of exchange rate changes on cash
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(11,683
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)
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11,870
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Net increase in cash and equivalents
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79,176
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15,634
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Cash and equivalents, beginning of period
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175,873
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96,485
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Cash and equivalents, end of period
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$
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255,049
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$
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112,119
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See notes to unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim
financial reporting. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete
financial statements and these unaudited financial statements should be read in conjunction with
the audited financial statements included in our Annual Report on Form 10-K for the fiscal year
ended November 30, 2009.
We have made no significant changes in the application of our significant accounting policies other
than required changes that were disclosed in our Annual Report on Form 10-K for the fiscal year
ended November 30, 2009.
We have prepared the accompanying unaudited condensed consolidated financial statements on the same
basis as the audited financial statements, and these financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the results
of the interim periods presented. The operating results for the interim periods presented are not
necessarily indicative of the results expected for the full fiscal year.
We evaluated subsequent events through the date and time our condensed consolidated financial
statements were issued.
Note 2: Revenue Recognition
We recognize software license revenue upon shipment of the product or, if delivered electronically,
when the customer has the right to access the software, provided that the license fee is fixed or
determinable, persuasive evidence of an arrangement exists and collection is probable. We do not
license our software with a right of return and generally do not license our software with
conditions of acceptance. If an arrangement does contain conditions of acceptance, we defer
recognition of the revenue until the acceptance criteria are met or the period of acceptance has
passed. If software licenses are sold on a subscription basis, we recognize the license fee ratably
over the subscription period. We generally recognize revenue for products distributed through
application partners and distributors when sold through to the end-user.
We generally sell our software licenses with maintenance services and, in some cases, also with
consulting services. For the undelivered elements, we determine vendor-specific objective evidence
(VSOE) of fair value to be the price charged when the undelivered element is sold separately. We
determine VSOE for maintenance sold in connection with a software license based on the amount that
will be separately charged for the maintenance renewal period. We determine VSOE for consulting
services by reference to the amount charged for similar engagements when a software license sale is
not involved.
We generally recognize revenue from software licenses sold together with maintenance and/or
consulting services upon shipment using the residual method, provided that the above criteria have
been met. If VSOE of fair value for the undelivered elements cannot be established, we defer all
revenue from the arrangement until the earlier of the point at which such sufficient VSOE does
exist or all elements of the arrangement have been delivered, or if the only undelivered element is
maintenance, then we recognize the entire fee ratably. If payment of the software license fees is
dependent upon the performance of consulting services or the consulting services are essential to
the functionality of the licensed software, then we recognize both the software license and
consulting fees using the percentage of completion method.
We recognize maintenance revenue ratably over the term of the applicable agreement. We generally
recognize revenue from services, primarily consulting and customer education, as the related
services are performed.
6
Note 3: Earnings Per Share
We compute basic earnings per share using the weighted average number of common shares outstanding.
We compute diluted earnings per share using the weighted average number of common shares
outstanding plus the effect of outstanding dilutive stock options and restricted stock units, using
the treasury stock method, and outstanding deferred stock units. The following table provides the
calculation of basic and diluted earnings per share on an interim basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Aug. 31,
|
|
|
Nine Months Ended Aug. 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Net income
|
|
$
|
9,244
|
|
|
$
|
5,521
|
|
|
$
|
27,295
|
|
|
$
|
16,079
|
|
|
|
|
Weighted average shares outstanding
|
|
|
43,224
|
|
|
|
40,117
|
|
|
|
42,280
|
|
|
|
40,018
|
|
|
Dilutive impact from common stock
equivalents
|
|
|
1,200
|
|
|
|
1,144
|
|
|
|
1,502
|
|
|
|
808
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
44,424
|
|
|
|
41,261
|
|
|
|
43,782
|
|
|
|
40,826
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
|
$
|
0.65
|
|
|
$
|
0.40
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.13
|
|
|
$
|
0.62
|
|
|
$
|
0.39
|
|
|
|
We excluded stock awards representing approximately 3,296,000 shares and 5,894,000 shares of common
stock from the calculation of diluted earnings per share in the third quarter of fiscal years 2010
and 2009, respectively, because these awards were anti-dilutive. We excluded stock awards
representing approximately 2,931,000 shares and 7,012,000 shares of common stock from the
calculation of diluted earnings per share in the first nine months of fiscal years 2010 and 2009,
respectively, because these awards were anti-dilutive.
Note 4: Stock-based Compensation
Stock-based compensation expense reflects the fair value of stock-based awards measured at the
grant date and recognized over the relevant service period. We estimate the fair value of each
stock-based award on the measurement date using either the current market price or the
Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates
assumptions as to stock price volatility, the expected life of options, a risk-free interest rate
and dividend yield. We recognize stock-based compensation expense ratably over the service period
of the award, which is generally five years for options, and three years for restricted stock units
and restricted stock awards.
The following table provides the classification of stock-based compensation as reflected in our
consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Aug. 31,
|
|
|
Nine Months Ended Aug. 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Cost of software licenses
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
22
|
|
|
$
|
28
|
|
|
Cost of maintenance and services
|
|
|
225
|
|
|
|
238
|
|
|
|
684
|
|
|
|
706
|
|
|
Sales and marketing
|
|
|
1,340
|
|
|
|
1,445
|
|
|
|
4,132
|
|
|
|
4,331
|
|
|
Product development
|
|
|
1,066
|
|
|
|
1,037
|
|
|
|
3,139
|
|
|
|
2,984
|
|
|
General and administrative
|
|
|
1,351
|
|
|
|
6,121
|
|
|
|
4,689
|
|
|
|
8,865
|
|
|
Restructuring
|
|
|
210
|
|
|
|
—
|
|
|
|
535
|
|
|
|
—
|
|
|
|
|
Total stock-based
compensation expense
|
|
$
|
4,199
|
|
|
$
|
8,849
|
|
|
$
|
13,201
|
|
|
$
|
16,914
|
|
|
|
We provide for deferred income taxes resulting from temporary differences between financial and
taxable income. We record valuation allowances to reduce deferred tax assets to the amount that is
more likely than not to be realized. We have not provided for U.S. income taxes on the
undistributed earnings of non-U.S. subsidiaries, as these earnings have been permanently reinvested
or would be principally offset by foreign tax credits.
Our federal income tax returns are closed by statute for all years prior to fiscal 2006 and we are
no longer subject to audit for those periods. Certain state taxing authorities are currently
examining our income tax returns for years through fiscal 2008.
7
Our state income tax returns have been examined or are closed by statute for all years prior to
fiscal 2005. Tax authorities for certain non-U.S. jurisdictions are also examining returns
affecting unrecognized tax benefits, none of which are material to our balance sheet, cash flows or
statements of operations. With some exceptions, we are generally no longer subject to tax
examinations in non-U.S. jurisdictions for years prior to fiscal 2003.
In the first nine months of fiscal 2010, we recorded a nonrecurring tax benefit of $2.5 million.
The nonrecurring tax benefit related to a change in estimate of the magnitude of our foreign
earnings and profits utilized to determine the tax characterization of certain international cash
repatriation (based on the completion of a comprehensive earnings and profits study), partially
offset by resolution of certain of our uncertain tax positions related to netting of intercompany
balances.
We believe that we have adequately provided for any reasonably foreseeable outcomes related to
our tax audits and that any settlement will not have a material adverse effect on our consolidated
financial position or results of operations. However, there can be no assurances as to the possible
outcomes.
A summary of our available for sale investments by major security type at August 31, 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Security Type
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
10,408
|
|
|
$
|
306
|
|
|
$
|
—
|
|
|
$
|
10,714
|
|
|
US government and agency securities
|
|
|
9,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,999
|
|
|
Auction rate securities — municipal bonds
|
|
|
27,200
|
|
|
|
—
|
|
|
|
(3,883
|
)
|
|
|
23,317
|
|
|
Auction rate securities — student loans
|
|
|
19,000
|
|
|
|
—
|
|
|
|
(2,613
|
)
|
|
|
16,387
|
|
|
Certificates of deposit
|
|
|
2,424
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,424
|
|
|
|
|
Total
|
|
$
|
69,031
|
|
|
$
|
306
|
|
|
$
|
(6,496
|
)
|
|
$
|
62,841
|
|
|
|
Such amounts are classified on our balance sheet at August 31, 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Security Type
|
|
Equivalents
|
|
|
Investments
|
|
|
Investments
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
—
|
|
|
$
|
10,714
|
|
|
$
|
—
|
|
|
US government and agency securities
|
|
|
7,499
|
|
|
|
2,500
|
|
|
|
—
|
|
|
Auction rate securities — municipal bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
23,317
|
|
|
Auction rate securities — student loans
|
|
|
—
|
|
|
|
—
|
|
|
|
16,387
|
|
|
Certificates of deposit
|
|
|
1,474
|
|
|
|
950
|
|
|
|
—
|
|
|
|
|
Total
|
|
$
|
8,973
|
|
|
$
|
14,164
|
|
|
$
|
39,704
|
|
|
|
For each of the auction rate securities (ARS) , we evaluated the risks related to the structure,
collateral and liquidity of the investment, and forecasted the probability of issuer default,
auction failure and a successful auction at par or a redemption at par for each future auction
period. The weighted average cash flow for each period was then discounted back to present value
for each security. Based on this methodology, we determined that the fair value of our non-current
ARS investments is $39.7 million, and the temporary impairment charge recorded at August 31, 2010
in accumulated other comprehensive loss to reduce the value of our available-for-sale ARS
investments was $6.5 million.
We will not be able to access these remaining funds until a future auction for these ARS is
successful, we sell the securities in a secondary market, or they are redeemed by the issuer. As
such, these remaining investments currently lack short-term liquidity and are therefore classified
as long-term investments on the balance sheet at August 31, 2010. However, based on our cash and
short-term investments balance of $269.2 million and expected operating cash flows, we do not
anticipate the lack of liquidity associated with these ARS to adversely affect our ability to
conduct business and believe we have the ability to hold the affected securities throughout the
currently estimated recovery period. Therefore, the impairment on these securities is considered
only temporary in nature. If the credit rating of either the security issuer or the third-party
insurer underlying the investments deteriorates significantly, we may be required to adjust the
carrying value of the ARS through an other-than-temporary impairment charge to earnings.
8
A summary of our investments by major security type at November 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Security Type
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
10,371
|
|
|
$
|
272
|
|
|
$
|
(3
|
)
|
|
$
|
10,640
|
|
|
US government and agency securities
|
|
|
11,072
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,072
|
|
|
Auction rate securities — municipal bonds
|
|
|
27,950
|
|
|
|
—
|
|
|
|
(4,205
|
)
|
|
|
23,745
|
|
|
Auction rate securities — student loans
|
|
|
19,500
|
|
|
|
—
|
|
|
|
(2,531
|
)
|
|
|
16,969
|
|
|
Certificates of deposit
|
|
|
11,653
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
11,652
|
|
|
|
|
Subtotal — available-for-sale securities
|
|
|
80,546
|
|
|
|
272
|
|
|
|
(6,740
|
)
|
|
|
74,078
|
|
|
|
|
Put option related to ARS rights offering
|
|
|
—
|
|
|
|
1,596
|
|
|
|
—
|
|
|
|
1,596
|
|
|
Auction rate securities — student loans
|
|
|
17,740
|
|
|
|
—
|
|
|
|
(1,596
|
)
|
|
|
16,144
|
|
|
|
|
Subtotal — trading securities
|
|
|
17,740
|
|
|
|
1,596
|
|
|
|
(1,596
|
)
|
|
|
17,740
|
|
|
|
|
Total
|
|
$
|
98,286
|
|
|
$
|
1,868
|
|
|
$
|
(8,336
|
)
|
|
$
|
91,818
|
|
|
|
Such amounts are classified on our balance sheet at November 30, 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Security Type
|
|
Equivalents
|
|
|
Investments
|
|
|
Investments
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
—
|
|
|
$
|
10,640
|
|
|
$
|
—
|
|
|
US government and agency securities
|
|
|
2,500
|
|
|
|
8,572
|
|
|
|
—
|
|
|
Auction rate securities — municipal bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
23,745
|
|
|
Auction rate securities — student loans
|
|
|
—
|
|
|
|
—
|
|
|
|
16,969
|
|
|
Certificates of deposit
|
|
|
356
|
|
|
|
11,296
|
|
|
|
—
|
|
|
|
|
Subtotal — available-for-sale securities
|
|
|
2,856
|
|
|
|
30,508
|
|
|
|
40,714
|
|
|
|
|
Put option related to ARS rights offering
|
|
|
—
|
|
|
|
1,596
|
|
|
|
—
|
|
|
Auction rate securities — student loans
|
|
|
—
|
|
|
|
16,144
|
|
|
|
—
|
|
|
|
|
Subtotal — trading securities
|
|
|
—
|
|
|
|
17,740
|
|
|
|
—
|
|
|
|
|
Total
|
|
$
|
2,856
|
|
|
$
|
48,248
|
|
|
$
|
40,714
|
|
|
|
The put option related to the ARS rights offering
was exercisable beginning on June 30, 2010. On such date, we exercised the put option and our remaining
portfolio of ARS trading securities was repurchased at par by UBS, the investment firm that brokered the
original purchase of these ARS.
9
The fair
value of our investments at August 31, 2010 and November 30, 2009, by contractual
maturity, is as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Aug. 31, 2010
|
|
|
Nov. 30, 2009
|
|
|
|
|
Due in one year or less (1)
|
|
$
|
54,929
|
|
|
$
|
80,396
|
|
|
Due after one year
|
|
|
7,912
|
|
|
|
9,826
|
|
|
|
|
Total
|
|
$
|
62,841
|
|
|
$
|
90,222
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes ARS which are tendered for interest-rate setting purposes periodically throughout the
year. Beginning in February 2008, auctions for these securities began to fail, and therefore these
investments currently lack short-term liquidity. The remaining contractual maturities of these
securities range from 6 to 37 years.
|
Investments with continuous unrealized losses for less than twelve months and twelve months or
greater and their related fair values are as follows at August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
|
|
|
|
or Greater
|
|
|
Total
|
|
|
Total
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Security Type
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
US government and agency securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Auction rate
securities — municipal bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
23,317
|
|
|
|
(3,883
|
)
|
|
|
23,317
|
|
|
|
(3,883
|
)
|
|
Auction rate securities — student loans
|
|
|
—
|
|
|
|
—
|
|
|
|
16,387
|
|
|
|
(2,613
|
)
|
|
|
16,387
|
|
|
|
(2,613
|
)
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,704
|
|
|
$
|
(6,496
|
)
|
|
$
|
39,704
|
|
|
$
|
(6,496
|
)
|
|
|
Investments with continuous unrealized losses for less than twelve months and twelve months or
greater and their related fair values are as follows at November 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
|
|
|
|
or Greater
|
|
|
Total
|
|
|
Total
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Security Type
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
835
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
835
|
|
|
$
|
(3
|
)
|
|
US government and agency securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Auction rate
securities — municipal bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
23,748
|
|
|
|
(4,205
|
)
|
|
|
23,748
|
|
|
|
(4,205
|
)
|
|
Auction rate securities — student loans
|
|
|
—
|
|
|
|
—
|
|
|
|
33,161
|
|
|
|
(4,127
|
)
|
|
|
33,161
|
|
|
|
(4,127
|
)
|
|
Certificates of deposit
|
|
|
109
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
109
|
|
|
|
(1
|
)
|
|
|
|
Total
|
|
$
|
944
|
|
|
$
|
(4
|
)
|
|
$
|
56,909
|
|
|
$
|
(8,332
|
)
|
|
$
|
57,853
|
|
|
$
|
(8,336
|
)
|
|
|
The unrealized losses associated with state and municipal obligations and corporate bonds and notes
are attributable to changes in interest rates. The unrealized losses associated with ARS are
discussed above. Management does not believe any unrealized losses represent other-than-temporary
impairments based on our evaluation of available evidence as of August 31, 2010.
10
Note 7: Derivative Instruments
We generally use foreign currency option contracts that are not designated as hedging instruments
to hedge economically a portion of forecasted international cash flows for up to one year in the
future. All foreign currency option contracts are recorded at fair value in other current assets
on the balance sheet at the end of each reporting period and expire within one year. In the third
quarter and first nine months of fiscal 2010, mark-to-market gains (losses) of $(1.6) million and
$3.7 million, respectively, on foreign currency option contracts were recorded in other income in
the statement of operations.
We also use forward contracts that are not designated as hedging instruments to hedge economically
the impact of the variability in exchange rates on accounts receivable and collections denominated
in certain foreign currencies. We generally do not hedge the net assets of our international
subsidiaries. All forward contracts are recorded at fair value in other current assets on the
balance sheet at the end of each reporting period and expire within 90 days. In the third quarter
and first nine months of fiscal 2010, realized and unrealized losses of $0.2 million and $7.3
million, respectively, from our forward contracts were recognized in other income in the statement
of operations. These losses were substantially offset by realized and unrealized gains on the
offsetting positions.
The table below details outstanding foreign currency forward and option contracts at August 31,
2010 where the notional amount is determined using contract exchange rates:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Notional Value
|
|
|
Fair Value
|
|
|
|
|
Foreign currency forward contracts to sell U.S. dollars
|
|
$
|
40,418
|
|
|
$
|
348
|
|
|
Foreign currency forward contracts to purchase U.S. dollars
|
|
|
15,360
|
|
|
|
68
|
|
|
Foreign currency option contracts to purchase U.S. dollars
|
|
|
109,777
|
|
|
|
5,718
|
|
|
|
|
Total
|
|
$
|
165,555
|
|
|
$
|
6,134
|
|
|
|
Note 8: Fair Value Measurements
The following table details the fair value measurements within the fair value hierarchy of our
financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
August 31,
|
|
|
Using Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
Description
|
|
2010
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
|
State and municipal bond obligations
|
|
$
|
10,714
|
|
|
$
|
10,714
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
US government and agency securities
|
|
|
9,999
|
|
|
|
9,999
|
|
|
|
—
|
|
|
|
—
|
|
|
Auction rate securities — municipal bonds
|
|
|
23,317
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,317
|
|
|
Auction rate securities — student loans
|
|
|
16,387
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,387
|
|
|
Certificates of deposit
|
|
|
2,424
|
|
|
|
2,424
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign exchange derivatives
|
|
|
6,134
|
|
|
|
—
|
|
|
|
6,134
|
|
|
|
—
|
|
|
|
|
Total
|
|
$
|
68,975
|
|
|
$
|
23,137
|
|
|
$
|
6,134
|
|
|
$
|
39,704
|
|
|
|
The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market
approach, using prices and other relevant information generated by market transactions involving
identical or comparable assets. The valuation technique used to measure fair value for our Level 3
assets is an income approach, where the expected weighted average future cash flows were discounted
back to present value for each asset.
11
The following table reflects the activity for our financial assets measured at fair value using
Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Aug. 31,
|
|
|
Nine Months Ended Aug. 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Balance, beginning of period
|
|
$
|
49,705
|
|
|
$
|
58,205
|
|
|
$
|
58,454
|
|
|
$
|
65,214
|
|
|
Redemptions and repurchases
|
|
|
(10,265
|
)
|
|
|
(1,650
|
)
|
|
|
(18,990
|
)
|
|
|
(7,050
|
)
|
|
Unrealized gain included in accumulated other
comprehensive income
|
|
|
264
|
|
|
|
1,779
|
|
|
|
240
|
|
|
|
170
|
|
|
Unrealized gain on ARS trading securities
included
in other income
|
|
|
1,049
|
|
|
|
459
|
|
|
|
1,596
|
|
|
|
1,269
|
|
|
Unrealized loss on put option related to ARS
rights
offering included in other income
|
|
|
(1,049
|
)
|
|
|
(459
|
)
|
|
|
(1,596
|
)
|
|
|
(1,269
|
)
|
|
|
|
Balance, end of period
|
|
$
|
39,704
|
|
|
$
|
58,334
|
|
|
$
|
39,704
|
|
|
$
|
58,334
|
|
|
|
Note 9: Comprehensive Income
The components of comprehensive income include net income, foreign currency translation adjustments
and unrealized gains and losses on investments. The following table provides the composition of
comprehensive income on an interim basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Aug. 31,
|
|
|
Nine Months Ended Aug. 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Net income, as reported
|
|
$
|
9,244
|
|
|
$
|
5,521
|
|
|
$
|
27,295
|
|
|
$
|
16,079
|
|
|
Foreign currency translation adjustments
|
|
|
2,915
|
|
|
|
896
|
|
|
|
(6,925
|
)
|
|
|
8,284
|
|
|
Unrealized gains on investments
|
|
|
169
|
|
|
|
1,082
|
|
|
|
289
|
|
|
|
183
|
|
|
|
|
Total comprehensive income
|
|
$
|
12,328
|
|
|
$
|
7,499
|
|
|
$
|
20,659
|
|
|
$
|
24,546
|
|
|
|
Note 10: Common Stock Repurchases
We purchased and retired approximately 997,000 shares and 261,000 shares of our common stock for
$29.3 million and $5.1 million in the first nine months of fiscal 2010 and fiscal 2009,
respectively. We have repurchased substantially all available shares under our previous Board
authorized share repurchase program. On October 1, 2010, the Board of Directors authorized, for the
period from October 1, 2010 through September 30, 2011, the purchase of up to $100 million of our
common stock, at such times that management deems such purchases to be an effective use of cash.
Goodwill is the amount by which the cost of acquired net assets in a business acquisition exceeded
the fair value of net identifiable assets on the date of purchase. Goodwill in certain
jurisdictions changes each period due to changes in foreign currency exchange rates. We assigned
goodwill of $61.0 million to the Application Development Platforms operating segment, $78.1 million
to the Enterprise Business Solutions operating segment and $100.4 million to the Enterprise Data
Solutions operating segment. See Note 12 for a description of each operating segment. The
increase in goodwill from the end of fiscal 2009 was primarily related to the acquisition of
Savvion Inc. (Savvion) in January 2010. See Note 15 for a description of the Savvion acquisition.
Note 12: Segment Information
Operating segments, as defined under U.S. generally accepted accounting principles (GAAP), are
components of an enterprise about which discrete financial information is available and regularly
reviewed by the chief operating decision maker in deciding how to allocate resources and assess
performance. We internally report results to our chief operating decision maker on both a
business unit basis and a functional basis. Our business units represent our segments for financial
reporting purposes.
However, our organization is managed primarily on a functional basis. We assign dedicated costs
and expenses directly to each business unit. We utilize an allocation methodology to assign all
other costs and expenses to each business unit. A significant portion of the total costs and
expenses assigned to each business unit are allocated. We disclose revenue and operating income
based upon internal accounting methods. Our chief operating decision maker is our Chief Executive
Officer.
12
For fiscal 2010, we have reorganized our internal reporting into three business units, each of
which meet the criteria for segment reporting: (1) Application Development Platforms, which
includes the OpenEdge, Orbix and ObjectStore product sets; (2) Enterprise Business Solutions, which
includes the Apama, Sonic, Actional, Savvion and FUSE product sets; and (3) Enterprise Data
Solutions, which includes the DataDirect Connect, DataDirect Shadow and DataServices product sets.
Segment data for 2009 has been formatted to conform to the current year presentation.
We do not manage our assets or capital expenditures by segment or assign other income and income
taxes to segments. We manage and report such items on a consolidated company basis.
The following table provides revenue and income (losses) from operations for our reportable
segments on an interim basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Aug. 31,
|
|
|
Nine Months Ended Aug. 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Development Platform
segment
|
|
$
|
77,238
|
|
|
$
|
79,837
|
|
|
$
|
243,696
|
|
|
$
|
238,800
|
|
|
Enterprise Business Solutions segment
|
|
|
35,097
|
|
|
|
19,788
|
|
|
|
87,651
|
|
|
|
59,101
|
|
|
Enterprise Data Solutions segment
|
|
|
16,480
|
|
|
|
20,094
|
|
|
|
53,732
|
|
|
|
61,968
|
|
|
Reconciling items
|
|
|
(78
|
)
|
|
|
(286
|
)
|
|
|
(1,139
|
)
|
|
|
(2,529
|
)
|
|
|
|
Total
|
|
$
|
128,737
|
|
|
$
|
119,433
|
|
|
$
|
383,940
|
|
|
$
|
357,340
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Development Platform
segment
|
|
$
|
48,719
|
|
|
$
|
43,491
|
|
|
$
|
151,505
|
|
|
$
|
118,507
|
|
|
Enterprise Business Solutions segment
|
|
|
(4,431
|
)
|
|
|
(16,377
|
)
|
|
|
(30,957
|
)
|
|
|
(43,027
|
)
|
|
Enterprise Data Solutions segment
|
|
|
(4,591
|
)
|
|
|
(2,189
|
)
|
|
|
(12,207
|
)
|
|
|
(3,480
|
)
|
|
Reconciling items
|
|
|
(23,228
|
)
|
|
|
(15,833
|
)
|
|
|
(73,506
|
)
|
|
|
(46,648
|
)
|
|
|
|
Total
|
|
$
|
16,469
|
|
|
$
|
9,092
|
|
|
$
|
34,835
|
|
|
$
|
25,352
|
|
|
|
The reconciling items within revenue represent purchase accounting adjustments for deferred revenue
related to acquisitions, as such amounts are not deducted from internal measurements of segment
revenue. Amounts included under reconciling items within income from operations represent
amortization of acquired intangibles, stock-based compensation, restructuring and
acquisition-related expenses, purchase accounting adjustments for deferred revenue and certain
unallocated administrative expenses.
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise
in the ordinary course of business. While the outcome of these claims cannot be predicted with
certainty, management does not believe that the outcome of any of these legal matters will have a
material adverse effect on our consolidated financial position or results of operations.
On January 21, 2010, JuxtaComm Technologies (JuxtaComm) filed a complaint in the Eastern District
of Texas against Progress Software, two of our subsidiaries and 19 other defendants, alleging
infringement of JuxtaComm’s US patent 6,195,662 (“System for Transforming and Exchanging Data
Between Distributed Heterogeneous Computer Systems”). In its complaint, JuxtaComm seeks
unspecified monetary damages and permanent injunctive relief. In May 2010, we filed a response to
this complaint in which we denied all claims. The discovery phase of this litigation has
commenced. We intend to vigorously defend ourselves; however, we cannot predict the outcome of
this matter and an adverse resolution of this lawsuit could have a material adverse effect on our
financial position or results of operations.
Note 14: Restructuring Charges
Q3 2010 Restructuring Plan
During the third quarter of fiscal 2010, our management approved, committed to and initiated plans
to restructure and improve efficiencies in our operations as a result of certain management and
organizational changes. The restructuring was undertaken to better position the company for
long-term growth, improved profitability, greater competitiveness and improved efficiency across
our global business. These strategic initiatives include the refinement of our product portfolio
towards core and high-growth opportunities, the global consolidation and redeployment of a portion
of our product development and administrative personnel, assets and processes to other global
locations that offer greater efficiencies to the business and the continued
13
consolidation of offices around the world. To accomplish these goals, and with a view toward
better optimizing operations and improving productivity and efficiency, we reduced our global
workforce by approximately 7 percent primarily within the development, sales and administrative
organizations. This workforce reduction was conducted across all geographies and also resulted in a
consolidation of offices in certain locations. The total costs associated with the restructuring
aggregated to $11.5 million. These costs primarily related to employee severance and facilities
related expenses, and were recorded to the restructuring expense line item within our consolidated
statements of operations. The restructuring charge included $0.2 million of noncash stock-based
compensation and $0.3 million of adjustments related to previous restructurings. The excess
facilities and other costs represent facilities costs for unused space and termination costs of
automobile leases for employees included in the workforce reduction.
These strategic initiatives also involve the increased investment and expansion of development and
administration operations in India, where we have run a successful development organization for
several years. Over the next fifteen months, we expect to increase the size of our development
organization in Hyderabad, India, from about a third of our development resources to about half, in
order to manage our development costs as we increase overall R&D headcount and bandwidth in our key
product areas. Therefore, we expect to move and add additional product group functions as well as
certain administrative functions to India. This expansion in India will result in the reduction of
our development and administration operations headcount in other geographies in which we operate.
In addition, we intend to continue the consolidation of some of our offices around the world.
Through these initiatives, we expect to incur aggregate future pre-tax restructuring charges and
pre-tax non-recurring transition expenses of approximately $10 million to $20 million over the next
fifteen months, primarily consisting of costs for severance, transition costs and consolidation of
facilities. The transition expenses are necessary to ramp up the new, more efficient capabilities
ahead of switching over from the existing cost structure. We will report these restructuring
charges and transition expenses in our financial results as they are incurred during the phase-in
period.
Q1 2010 Restructuring Plan
During the first quarter of fiscal 2010, our management approved, committed to and initiated
plans to restructure and improve efficiencies in our operations as a result of certain management
and organizational changes and recent acquisitions. The restructuring was undertaken to enhance
and re-focus our product strategy, to improve the way we take our products to market by becoming
more customer and solutions driven, and to increase our market awareness. To accomplish these
goals, and with a view toward better optimizing operations and improving productivity and
efficiency, we reduced our global workforce by approximately 13 percent primarily within the sales,
development and marketing organizations. This workforce reduction was conducted across all
geographies and also resulted in a consolidation of offices in certain locations. The total costs
associated with the restructuring aggregated to $26.0 million. These costs primarily related to
employee severance and facilities related expenses, and were recorded to the restructuring expense
line item within our consolidated statements of operations. The restructuring charge included $0.3
million of noncash stock-based compensation. The excess facilities and other costs represent
facilities costs for unused space and termination costs of automobile leases for employees included
in the workforce reduction.
Q4 2008 and Q1 2009 Restructuring Plans
During the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009, our management
approved, committed to and initiated plans to restructure and improve efficiencies in our
operations as a result of certain management and organizational changes and recent acquisitions.
The total expected costs associated with these restructurings aggregated to $11.8 million. These
costs primarily related to employee severance and facilities related expenses, and were recorded to
the restructuring expense line item within our consolidated statements of income. The excess
facilities and other costs represent facilities costs for unused space and termination costs of
automobile leases for employees included in the workforce reduction.
In addition to the above restructuring plans and in connection with certain of our prior
acquisitions, we established reserves for exit costs related to consolidation and closure of
facilities for unused space and employee severance included as part of the purchase price
allocation. Substantially all such amounts have been settled except for remaining excess facility
costs associated with our location in Ireland.
14
A summary of activity for all restructuring actions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess Facilities
|
|
|
Employee Severance
|
|
|
|
|
|
|
|
and Other Costs
|
|
|
and Related Benefits
|
|
|
Total
|
|
|
|
|
Balance, December 1, 2009
|
|
$
|
6,191
|
|
|
$
|
252
|
|
|
$
|
6,443
|
|
|
Establishment of reserve related to Q1 2010 restructuring
|
|
|
5,288
|
|
|
|
20,157
|
|
|
|
25,445
|
|
|
Establishment of reserve related to Q3 2010 restructuring
|
|
|
2,452
|
|
|
|
8,573
|
|
|
|
11,025
|
|
|
Additional
adjustments to initial reserves
|
|
|
(201
|
)
|
|
|
704
|
|
|
|
503
|
|
|
Cash disbursements
|
|
|
(3,891
|
)
|
|
|
(24,292
|
)
|
|
|
(28,183
|
)
|
|
Translation adjustments and other
|
|
|
(538
|
)
|
|
|
(438
|
)
|
|
|
(976
|
)
|
|
|
|
Balance, August 31, 2010
|
|
$
|
9,301
|
|
|
$
|
4,956
|
|
|
$
|
14,257
|
|
|
|
The amounts included under cash disbursements for excess facilities costs are net of proceeds
received from sublease agreements. The balance of the employee severance and related benefits is
expected to be paid over a period of time ending in fiscal 2011. The balance of the excess
facilities and related costs is expected to be paid over a period of time ending in fiscal 2013.
For all restructuring reserves described above the short-term portion of $10.2 million is included
in other accrued liabilities and the long-term portion of $4.1 million is included in other
non-current liabilities on the balance sheet at August 31, 2010.
Note 15: Business Combinations
On January 8, 2010, we acquired all of the equity interests in Savvion, a privately-held company,
through a merger of Savvion with a wholly-owned subsidiary for an aggregate purchase price of $49.2
million. Savvion is a provider of business process management software. The Savvion product lines
became part of our Enterprise Business Solutions business unit. The acquisition was accounted for
as a purchase, and accordingly, the results of operations of Savvion are included in our operating
results from the date of acquisition. The purchase price was paid in cash from available funds.
At the beginning of fiscal 2010, we adopted the revised accounting standard for business
combinations. The most significant changes in the revised standard affecting the accounting for
our acquisition of Savvion (in contrast to our prior acquisitions) are that we (i) capitalized
in-process research and development assets of $2.0 million; (ii) expensed acquisition-related
transaction costs of $0.4 million: and (iii) recognized all pre-acquisition loss and gain
contingencies at their acquisition-date fair values. In addition, changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement
period will be recognized in earnings rather than as adjustments to the cost of acquisition. We
have estimated the fair value of all assets acquired and liabilities assumed in the transaction.
The allocation of the purchase price is as follows:
|
|
|
|
|
|
|
|
|
(In thousands
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Life (in years)
|
|
|
|
Acquired intangible assets
|
|
$
|
28,000
|
|
|
7 to 9 years
|
|
Goodwill
|
|
|
20,993
|
|
|
|
|
Accounts receivable
|
|
|
5,120
|
|
|
|
|
Deferred tax assets
|
|
|
1,645
|
|
|
|
|
Liabilities assumed, net of other assets
|
|
|
(6,572
|
)
|
|
|
|
|
|
Net cash paid
|
|
$
|
49,186
|
|
|
|
|
|
We recorded the excess of the purchase price over the identified tangible and intangible assets as
goodwill. We believe that the investment value of the synergy created as a result of this
acquisition, due to future product and solution offerings, has principally contributed to a
purchase price that resulted in the recognition of approximately $21 million of goodwill, which is
not deductible for tax purposes.
We have not included pro forma financial information for Savvion as the historical operations were
not significant to our consolidated financial statements.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions
regarding forward-looking statements. This Form 10-Q, and other information provided by us or
statements made by our directors, officers or employees from time to time, may contain
“forward-looking” statements and information, which involve risks and uncertainties. Actual future
results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are
planning” or “plan to” are forward-looking, as are other statements concerning future financial
results, product offerings or other events that have not yet occurred. There are several important
factors that could cause actual results or events to differ materially from those anticipated by
the forward-looking statements, including but not limited to the following: the receipt and
shipment of new orders; the timely release and market acceptance of new products and /or
enhancements to our existing products; the growth rates of certain market segments; the positioning
of our products in those market segments; variations in the demand for professional services and
technical support; pricing pressures and the competitive environment in the software industry; the
continued uncertainty in the U.S. and international economies, which could result in fewer sales of
our products and may otherwise harm our business; business and consumer use of the Internet; our
ability to complete and integrate acquisitions; our ability to realize the expected benefits and
anticipated synergies from acquired businesses; our ability to penetrate international markets and
manage our international operations; the possibility that our efforts to contain our operating
expenses may not have the effect we expect; the Company’s ability to realize the expected benefits
from its previously-announced restructuring actions; the charges and expenses associated with, and
potential disruption to the Company’s business from those restructuring actions; changes in
exchange rates; and those factors discussed in Part I, Item 1A (Risk Factors) in our Annual Report
on Form 10-K for the fiscal year ended November 30, 2009. Although we have sought to identify the
most significant risks to our business, we cannot predict whether, or to what extent, any of such
risks may be realized. We also cannot assure you that we have identified all possible issues which
we might face. We undertake no obligation to update any forward-looking statements that we make.
Overview
We are a global enterprise software company that enables organizations to achieve higher levels of
business performance by improving their operational responsiveness. Operational responsiveness is
the ability of business processes and systems to respond to changing business conditions and
customer interactions as they occur. We offer a portfolio of best-in-class, real-time business
solutions providing visibility into business systems and processes, event processing to respond to
business events that could affect performance, and business process management enabling businesses
to continually improve business processes with no disruption to their business. We also provide
enterprise data solutions (data access and integration) and application development platforms (for
application development and management, and SaaS enablement). We maximize the benefits of
operational responsiveness while minimizing information technology complexity and total cost of
ownership.
For fiscal 2010, we reorganized our segment reporting into three business units: Application
Development Platforms, Enterprise Business Solutions and Enterprise Data Solutions. Our product
lines comply with open standards, deliver high levels of performance and scalability and provide a
low total cost of ownership. Our products are generally sold under perpetual licenses, but certain
product lines and business activities also utilize a term or subscription licensing model. A
complete discussion of our business units is included in our Annual Report on Form 10-K for our
fiscal year ended November 30, 2009.
On January 8, 2010, we acquired all of the equity interests in Savvion, a privately-held company,
through the merger of Savvion with a wholly-owned subsidiary for an aggregate purchase price of
approximately $49 million, net of cash acquired. Savvion is a provider of business process
management software. The Savvion product lines became part of our Enterprise Business Solutions
business unit. The acquisition was accounted for as a purchase, and accordingly, the results of
operations of Savvion are included in our operating results from the date of acquisition. The
purchase price was paid in cash from available funds.
The results for the first nine months of fiscal 2010 reflect a restructuring charge of $37.5
million taken in connection with the previously announced restructurings of our operations. These
restructurings were principally completed during the first and third quarter. The restructurings
were undertaken to enhance and re-focus our product strategy, to improve the way we take our
products to market by becoming more customer and solutions driven, and to increase Progress
Software’s market awareness. To accomplish these goals, and with a view toward better optimizing
operations and improving productivity and efficiency, we reduced our global workforce by
approximately 13 percent in the first quarter restructuring and 7 percent in the third quarter
restructuring primarily within our sales, development and marketing organizations. This workforce
reduction was conducted across all geographies and also resulted in a consolidation of offices in
certain locations.
16
These strategic initiatives also involve the increased investment and expansion of development and
administration operations in India, where we have run a successful development organization for
several years. We expect to increase the size of our development organization in Hyderabad, India,
from about a third of our development resources to about half, in order to manage our development
costs as we increase overall R&D headcount and bandwidth in our key product areas. Therefore, over
the next fifteen months, we expect to move and add additional product group functions as well as
certain administrative functions to India. This expansion in India will result in the reduction of
our development and administration operations headcount in all other geographies in which we
operate. In addition, we intend to continue the consolidation of some of our offices around the
world.
Through these initiatives, we expect to incur aggregate future pre-tax restructuring charges and
pre-tax non-recurring transition expenses of approximately $10 million to $20 million over the next
fifteen months, primarily comprising costs for severance, transition costs and consolidation of
facilities. The transition expenses are necessary to ramp up the new, more efficient capabilities
ahead of switching over from the existing cost structure.
Another factor impacting our results is that we derive a significant portion of our revenue from
international operations. In the first three quarters of fiscal 2009, the strengthening of the
U.S. dollar against most major currencies, primarily the euro and the British pound, negatively
affected the translation of our results into U.S. dollars. In the fourth quarter of fiscal 2009
and in the first six months of fiscal 2010, the weakening of the U.S. dollar against most major
currencies positively affected the translation of our results into U.S. dollars. Since then and
expecting a continuation into the fourth quarter of fiscal 2010, we anticipate that the stronger
U.S. dollar against most major currencies will negatively affect the translation of our results
into U.S. dollars.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (GAAP). These accounting principles require us to make certain estimates,
judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we
rely are reasonable based upon information available to us at the time that these estimates,
judgments and assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial statements as well as
the reported amounts of revenues and expenses during the periods presented. To the extent there are
material differences between these estimates, judgments or assumptions and actual results, our
financial statements will be affected. The accounting policies that reflect our more significant
estimates, judgments and assumptions and which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:
|
|
•
|
|
Revenue Recognition
|
|
|
|
|
•
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
•
|
|
Goodwill and Intangible Assets
|
|
|
|
|
•
|
|
Income Tax Accounting
|
|
|
|
|
•
|
|
Stock-Based Compensation
|
|
|
|
|
•
|
|
Investments in Debt Securities
|
|
|
|
|
•
|
|
Restructuring Charges
|
In many cases, the accounting treatment of a particular transaction is specifically dictated by
GAAP and does not require management’s judgment in its application. There are also areas in which
management’s judgment in selecting among available alternatives would not produce a materially
different result. Our senior management has reviewed these critical accounting policies and related
disclosures with the Audit Committee of the Board of Directors.
During the first nine months of fiscal 2010, there were no significant changes in our critical
accounting policies and estimates. See Management’s Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended
November 30, 2009 for a more complete discussion of our critical accounting policies and estimates.
17
Results of Operations
The following table provides certain income and expense items as a percentage of total revenue, and
the percentage change in dollar amounts of such items compared with the corresponding period in the
previous fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Revenue
|
|
|
Period-to-Period Change
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Three
|
|
|
Nine
|
|
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
Month
|
|
|
Month
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Period
|
|
|
Period
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
35
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
14
|
%
|
|
|
10
|
%
|
|
Maintenance and services
|
|
|
65
|
|
|
|
67
|
|
|
|
65
|
|
|
|
65
|
|
|
|
5
|
|
|
|
6
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
Costs of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
15
|
|
|
|
1
|
|
|
Cost of maintenance and services
|
|
|
14
|
|
|
|
13
|
|
|
|
14
|
|
|
|
14
|
|
|
|
12
|
|
|
|
8
|
|
|
Amortization of acquired
intangibles for purchased
technology
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
Total costs of revenue
|
|
|
19
|
|
|
|
19
|
|
|
|
19
|
|
|
|
20
|
|
|
|
10
|
|
|
|
6
|
|
|
|
|
Gross profit
|
|
|
81
|
|
|
|
81
|
|
|
|
81
|
|
|
|
80
|
|
|
|
7
|
|
|
|
8
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
31
|
|
|
|
38
|
|
|
|
32
|
|
|
|
37
|
|
|
|
(14
|
)
|
|
|
(8
|
)
|
|
Product development
|
|
|
17
|
|
|
|
19
|
|
|
|
18
|
|
|
|
19
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
General and administrative
|
|
|
9
|
|
|
|
15
|
|
|
|
10
|
|
|
|
13
|
|
|
|
(33
|
)
|
|
|
(17
|
)
|
|
Amortization of other acquired
intangibles
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
18
|
|
|
|
10
|
|
|
Restructuring expense
|
|
|
9
|
|
|
|
0
|
|
|
|
10
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
Acquisition-related expenses
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
*
|
|
|
|
42
|
|
|
|
|
Total operating expenses
|
|
|
68
|
|
|
|
74
|
|
|
|
72
|
|
|
|
73
|
|
|
|
0
|
|
|
|
5
|
|
|
|
|
Income from operations
|
|
|
13
|
|
|
|
7
|
|
|
|
9
|
|
|
|
7
|
|
|
|
81
|
|
|
|
37
|
|
|
Other income (expense)
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
|
(820
|
)
|
|
|
751
|
|
|
|
|
Income before provision for taxes
|
|
|
11
|
|
|
|
7
|
|
|
|
10
|
|
|
|
7
|
|
|
|
66
|
|
|
|
53
|
|
|
Provision for income taxes
|
|
|
4
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
63
|
|
|
|
27
|
|
|
|
|
Net income
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
67
|
%
|
|
|
70
|
%
|
|
|
Revenue.
Our total revenue increased 8% from $119.4 million in the third quarter of fiscal 2009 to
$128.7 million in the third quarter of fiscal 2010. Total revenue would have increased by 10% if
exchange rates had been constant in the third quarter of fiscal 2010 as compared to exchange rates
in effect in the third quarter of fiscal 2009. Total revenue increased 7% from $357.3 million in
the first nine months of fiscal 2009 to $383.9 million in the first nine months of fiscal 2010.
Total revenue would have increased by 5% if exchange rates had been constant in the first nine
months of fiscal 2010 as compared to exchange rates in effect in the first nine months of fiscal
2009.
On a segment basis, revenue from our Application Development Platforms product line decreased 3%
from $79.8 million in the third quarter of fiscal 2009 to $77.2 million in the third quarter of
fiscal 2010. Revenue from our Enterprise Business Solutions product line increased 77% from $19.8
million in the third quarter of fiscal 2009 to $35.1 million in the third quarter of fiscal 2010.
Revenue for the Enterprise Business Solutions product line in the third quarter of fiscal 2010
included $6.4 million of revenue from the product line acquired in the Savvion transaction earlier
in fiscal 2010. Organic growth for the Enterprise Business Solutions product line, absent the
acquisition, was 45% in the third quarter of fiscal 2010. Revenue from our Enterprise Data
Solutions product line decreased 18% from $20.1 million in the third quarter of fiscal 2009 to
$16.5 million in the third quarter of fiscal 2010.
Revenue from our Application Development Platforms product line increased 2% from $238.8 million in
the first nine months of fiscal 2009 to $243.7 million in the first nine months of fiscal 2010.
Revenue from our Enterprise Business Solutions product line increased 48% from $59.1 million in the
first nine months of fiscal 2009 to $87.7 million in the first nine months of fiscal 2010. Revenue
for the Enterprise Business Solutions product line in the first nine months of fiscal 2010 included
$13.3 million of revenue from the Savvion product line. Organic growth for the Enterprise Business
Solutions product line,
18
absent the acquisition, was 26% in the first nine months of fiscal 2010 driven primarily by the
Apama and FUSE product sets. Revenue from our Enterprise Data Solutions product line decreased 13%
from $62.0 million in the first nine months of fiscal 2009 to $53.7 million in the first nine
months of fiscal 2010.
Software license revenue increased 14% from $39.2 million in the third quarter of fiscal 2009 to
$44.7 million in the third quarter of fiscal 2010. Software license revenue would have increased
by 16% if exchange rates had been constant in the third quarter of fiscal 2010 as compared to
exchange rates in effect in the third quarter of fiscal 2009. Software license revenue increased
10% from $123.5 million in the first nine months of fiscal 2009 to $136.1 million in the first nine
months of fiscal 2010. Software license revenue would have increased by 7% if exchange rates had
been constant in the first nine months of fiscal 2010 as compared to exchange rates in effect in
the first nine months of fiscal 2009. Excluding the impact of changes in exchange rates, the
increase in software license revenue was due to an increase in the Application Development
Platforms and Enterprise Business Solutions product lines partially offset by a decrease in our
Enterprise Data Solutions product lines. Software license revenue from both indirect channels and
direct end users increased in the first nine months of fiscal 2010 as compared to the first nine
months of fiscal 2009.
Maintenance and services revenue increased 5% from $80.3 million in the third quarter of fiscal
2009 to $84.0 million in the third quarter of fiscal 2010. Maintenance revenue was flat and
professional services revenue increased 42% in the third quarter of fiscal 2010 as compared to the
third quarter of fiscal 2009. Maintenance and services revenue would have increased by 8% if
exchange rates had been constant in the third quarter of fiscal 2010 as compared to exchange rates
in effect in the third quarter of fiscal 2009. Maintenance and services revenue increased 6% from
$233.8 million in the first nine months of fiscal 2009 to $247.8 million in the first nine months
of fiscal 2010. Maintenance and services revenue would have increased by 4% if exchange rates had
been constant in the first nine months of fiscal 2010 as compared to exchange rates in effect in
the first nine months of fiscal 2009. Excluding the impact of changes in exchange rates, the
increase in maintenance and services revenue was primarily the result of a slight increase in our
installed customer base of maintenance renewals and growth in our professional services revenue,
including projects related to Savvion.
Total revenue generated in North America increased 32% from $42.1 million in the third quarter of
fiscal 2009 to $55.6 million in the third quarter of fiscal 2010 and represented 39% of total
revenue in the third quarter of fiscal 2009 compared to 45% in the third quarter of fiscal 2010.
Total revenue generated in markets outside North America increased 3% from $64.8 million in the
third quarter of fiscal 2009 to $66.7 million in the third quarter of fiscal 2010 and represented
61% of total revenue in the third quarter of fiscal 2009 compared to 55% in the third quarter of
fiscal 2010. Total revenue generated in markets outside North America would have represented 53%
of total revenue if exchange rates had been constant in the third quarter of fiscal 2010 as
compared to the exchange rates in effect in the third quarter of fiscal 2009. Revenue from two of
the three major regions outside North America, consisting of Asia Pacific and Latin America, each
increased in the third quarter of fiscal 2010 as compared to the third quarter of fiscal 2009,
which was partially offset by a decrease in revenue from EMEA.
Total revenue generated in North America increased 17% from $150.1 million in the first nine months
of fiscal 2009 to $174.8 million in the first nine months of fiscal 2010 and represented 44% of
total revenue in the first nine months of fiscal 2009 and 46% of total revenue in the first nine
months of fiscal 2010. Total revenue generated in markets outside North America increased 4% from
$194.7 million in the first nine months of fiscal 2009 to $202.6 million in the first nine months
of fiscal 2010 and represented 56% of total revenue in the first nine months of fiscal 2009
compared to 54% of total revenue in the first nine months of fiscal 2010. Revenue from two of the
three major regions outside North America, consisting of Asia Pacific and Latin America, each
increased in the first nine months of fiscal 2010 as compared to the first nine months of fiscal
2009, which was partially offset by a decrease in revenue from EMEA. Total revenue generated in
markets outside North America would have represented 52% of total revenue if exchange rates had
been constant in the first nine months of fiscal 2010 as compared to the exchange rates in effect
in the first nine months of fiscal 2009.
Cost of Software Licenses.
Cost of software licenses consists primarily of costs of
royalties, electronic software distribution costs, duplication and packaging. Cost of software
licenses increased 15% from $1.8 million in the third quarter of fiscal 2009 to $2.0 million in the
third quarter of fiscal 2010, and increased as a percentage of software license revenue from 4% to
5%. Cost of software licenses increased 1% from $5.6 million in the first nine months of fiscal
2009 to $5.7 million in the first nine months of fiscal 2010, and decreased as a percentage of
software license revenue from 5% in the first nine months of fiscal 2009 to 4% in the first nine
months of fiscal 2010. Cost of software licenses as a percentage of software license revenue
varies from period to period depending upon the relative product mix.
Cost of Maintenance and Services.
Cost of maintenance and services consists primarily of costs of
providing customer support, consulting and education. Cost of maintenance and services increased
12% from $16.0 million in the third quarter of fiscal 2009 to $17.8 million in the third quarter of
fiscal 2010, and increased as a percentage of maintenance and services revenue from 20% to 21%.
Cost of maintenance and services increased 8% from $49.3 million in the first nine months of fiscal
2009 to $53.1 million in the first nine months of fiscal 2010, and remained the same as a
percentage of maintenance and
19
services revenue at 21%. The total dollar amount of expense in fiscal 2010 increased due to higher
usage of third-party contractors for service engagements.
Amortization of Acquired Intangibles for Purchased Technology
. Amortization of acquired
intangibles for purchased technology primarily represents the amortization of the value assigned to
technology-related intangible assets obtained in business combinations. Amortization of acquired
intangibles for purchased technology increased 1% from $4.8 million in the third quarter of fiscal
2009 to $4.9 million in the third quarter of fiscal 2010. Amortization of acquired intangibles for
purchased technology increased 4% from $14.6 million in the first nine months of fiscal 2009 to
$15.2 million in the first nine months of fiscal 2010. The increase was due to amortization
expense associated with the acquisition of Savvion.
Gross Profit
. Our gross profit increased 7% from $96.9 million in the third quarter of fiscal 2009
to $104.0 million in the third quarter of fiscal 2010. Our gross profit as a percentage of total
revenue remained the same at 81% in the third quarter of fiscal 2009 compared to the third quarter
of fiscal 2010. Our gross profit increased 8% from $287.8 million in the first nine months of
fiscal 2009 to $310.0 million in the first nine months of fiscal 2010. Our gross profit as a
percentage of total revenue remained the same at 81% in the first nine months of fiscal 2009
compared to the first nine months of fiscal 2010. The increase in our gross profit was due to the
increase in total revenue, partially offset by an increase in cost of maintenance and services
expenses and amortization expense of acquired intangibles for purchased technology as described
above.
Sales and Marketing.
Sales and marketing expenses decreased 14% from $45.5 million in the third
quarter of fiscal 2009 to $39.4 million in the third quarter of fiscal 2010, and decreased as a
percentage of total revenue from 38% to 31%. Sales and marketing expenses decreased 8% from $133.3
million in the first nine months of fiscal 2009 to $122.7 million in the first nine months of
fiscal 2010, and decreased as a percentage of total revenue from 37% to 32%. The decrease in sales
and marketing expenses was due to restructuring activities that occurred in the first quarter of
fiscal 2010.
Product Development.
Product development expenses decreased 2% from $22.4 million in the third
quarter of fiscal 2009 to $21.9 million in the third quarter of fiscal 2010, and decreased as a
percentage of revenue from 19% to 17%. Product development expenses decreased 3% from $70.3
million in the first nine months of fiscal 2009 to $68.5 million in the first nine months of fiscal
2010, and decreased as a percentage of revenue from 20% to 18%. The decrease was primarily due to
the restructuring activities that occurred in the first quarter of 2010, partially offset by an
increase associated with the product development team acquired in the Savvion transaction.
General and Administrative
. General and administrative expenses include the costs of our finance,
human resources, legal, information systems and administrative departments. General and
administrative expenses decreased 33% from $17.7 million in the third quarter of fiscal 2009 to
$11.9 million in the third quarter of fiscal 2010, and decreased as a percentage of revenue from
15% to 9%. General and administrative expenses decreased 17% from $46.1 million in the first nine
months of fiscal 2009 to $38.2 million in the first nine months of fiscal 2010, and decreased as a
percentage of revenue from 13% to 10%. The decrease was primarily due to insurance reimbursements
in excess of previously estimated amounts related to professional services fees from the SEC
investigation and derivative lawsuits associated with our historical stock option grant practices
and restructuring activities that occurred in the first quarter of fiscal 2010, partially offset by
integration and transition expenses associated with the Savvion acquisition.
Restructuring Expenses
. During the third quarter of fiscal 2010, our management approved,
committed to and initiated plans to restructure and improve efficiencies in our operations as a
result of certain management and organizational changes. The restructuring was undertaken to
better position the company for long-term growth, improved profitability, greater competitiveness
and improved efficiency across our global business. These initiatives include the refinement of
our product portfolio towards core and high-growth opportunities, the global consolidation and
redeployment of a portion of our product development and administrative personnel, assets and
processes to other global locations that offer greater efficiencies to the business and the
continued consolidation of offices around the world. To accomplish these goals, and with a view
toward better optimizing operations and improving productivity and efficiency, we reduced our
global workforce by approximately 7 percent primarily within the development, sales and
administrative organizations. This workforce reduction was conducted across all geographies and
also resulted in a consolidation of offices in certain locations. The total costs associated with
the restructuring aggregated to $11.5 million. These costs primarily related to employee severance
and facilities related expenses, and were recorded to the restructuring expense line item within
our consolidated statements of operations. The restructuring charge included $0.2 million of
noncash stock-based compensation. The excess facilities and other costs represent facilities costs
for unused space and termination costs of automobile leases for employees included in the workforce
reduction.
During the first quarter of fiscal 2010, our management approved, committed to and initiated plans
to restructure and improve efficiencies in our operations as a result of certain management and
organizational changes and our recent acquisitions. The restructuring was undertaken to enhance
and re-focus our product strategy, to improve the way we take our products to market by becoming
more customer and solutions driven, and to increase our market awareness. To accomplish these
goals, and with
20
a view toward better optimizing operations and improving productivity and efficiency, we reduced
our global workforce by approximately 13 percent primarily within the sales, development and
marketing organizations. This workforce reduction was conducted across all geographies and also
resulted in a consolidation of offices in certain locations. The total costs associated with the
restructuring was $26.0 million in the first nine months of fiscal 2010, primarily related to
employee severance, excess facilities costs for unused space and, to a lesser extent, termination
costs of automobile leases for terminated employees.
Amortization of Other Acquired Intangibles
. Amortization of other acquired intangibles primarily
represents the amortization of value assigned to non-technology-related intangible assets obtained
in business combinations. Amortization of other acquired intangibles increased from $2.3 million
in the third quarter of fiscal 2009 to $2.7 million in the third quarter of fiscal 2010.
Amortization of other acquired intangibles increased from $7.1 million in the first nine months of
fiscal 2009 to $7.8 million in the first nine months of fiscal 2010. The increase was due to
amortization expense associated with the acquisition of Savvion.
Acquisition-related Expenses
. Acquisition-related expenses in the first nine months of fiscal 2010
primarily relate to the transaction costs, primarily professional services fees, associated with
the acquisition of Savvion.
Income From Operations
. Income from operations increased from $9.1 million in the third quarter of
fiscal 2009 to $16.5 million in the third quarter of fiscal 2010. Income from operations increased
from $25.4 million in the first nine months of fiscal 2009 to $35.8 million in the first nine
months of fiscal 2010. The increase in the first nine months of fiscal 2010 as compared to the
first nine months of fiscal 2009 was primarily the result of higher revenue and costs savings
associated with our restructuring activities, partially offset by the restructuring charges that
occurred in the first and third quarters of 2010.
Operating income from our Application Development Platforms business unit increased 12% from $43.5
million in the third quarter of fiscal 2009 to $48.7 million in the third quarter of fiscal 2010.
The operating loss from our Enterprise Business Solutions business unit decreased 73% from $(16.4)
million in the third quarter of fiscal 2009 to $(4.4) million in the third quarter of fiscal 2010.
The operating loss from our Enterprise Data Solutions business unit increased from $(2.2) million
in the third quarter of fiscal 2009 to $(4.6) million in the third quarter of fiscal 2010.
On a segment basis, operating income from our Application Development Platforms business unit
increased 28% from $118.5 million in the first nine months of fiscal 2009 to $151.5 million in the
first nine months of fiscal 2010. The operating loss from our Enterprise Business Solutions
business unit decreased from $(43.0) million in the first nine months of fiscal 2009 to $(31.0)
million in the first nine months of fiscal 2010. The operating loss from our Enterprise Data
Solutions business unit increased from $(3.5) million in the first nine months of fiscal 2009 to
$(12.2) million in the first nine months of fiscal 2010. The increase in operating income in our
Application Development Platforms group was due to the impact of the restructuring and
re-allocation of resources, primarily sales and marketing, to the other two business units. See
further discussion of segment reporting in footnote 12 of the condensed consolidated financial
statements included in this report.
Other Income (Expense)
. Other income, primarily consisting of interest income and foreign currency
gains and losses, increased from an expense of $0.2 million in the third quarter of fiscal 2009 to
an expense of $1.7 million in the third quarter of fiscal 2010. Other income increased from $0.6
million in the first nine months of fiscal 2009 to income of $5.0 million in the first nine months
of fiscal 2010. The increase was primarily due to an increase of $4.0 million in the value of our
foreign currency average rate option contracts, which do not qualify for hedge accounting treatment
and are marked-to-market each period, and an insurance settlement gain related to a pre-acquisition
matter.
Provision for Income Taxes.
Our effective tax rate was 31.4% in the first nine months of 2010 as
compared to 38.0% in the first nine months of fiscal 2009. The decrease in the effective tax rate
was due to a nonrecurring benefit of $2.5 million recorded in the second quarter of fiscal 2010.
The nonrecurring tax benefit related to a change in estimate of our foreign earnings and profits
utilized to determine the tax characterization of certain international cash repatriation,
partially offset by resolution of certain of our uncertain tax positions related to netting of
intercompany balances. The decrease was also due to changes in profit within certain tax
jurisdictions, partially offset by a reduced expectation for research and development credits in
fiscal 2010 as the credit provisions in the tax code expired at the end of December 2009.
Liquidity and Capital Resources
At the end of the third quarter of fiscal 2010, our cash and short-term investments totaled $269.2
million. The increase of $45.1 million since the end of fiscal 2009 was primarily due to cash
generated from operations and issuances of common stock upon exercise of stock options (net of
share repurchases), partially offset by cash used for the acquisition of Savvion.
In addition to the $269.2 million of cash and short-term investments, we had investments with a
fair value of $39.7 million related to ARS that are classified as long-term investments. These ARS
are floating rate securities with longer-term maturities that were marketed by financial
institutions with auction reset dates at primarily 28 or 35 day intervals to provide short-term
21
liquidity. The remaining contractual maturities of these securities range from 6 to 37 years. The
underlying collateral of the ARS consist of municipal bonds, which are insured by monoline
insurance companies, and student loans, which are supported by the federal government as part of
the Federal Family Education Loan Program (FFELP) and by the monoline insurance companies.
Beginning in February 2008, auctions for these securities began to fail, and the interest rates for
these ARS reset to the maximum rate per the applicable investment offering document. At November
30, 2009, our ARS investments classified as long-term investments totaled $47.4 million at par
value. During the first nine months of fiscal 2010, noncurrent ARS totaling $1.2 million were
redeemed at par by the issuers, resulting in a net reduction of the par value of our ARS
investments classified as long-term investments to $46.2 million. These ARS are classified as
available-for-sale securities. During the first nine months of fiscal 2010, a total of $17.7
million of ARS classified as trading securities were repurchased at par by UBS, the investment firm
that brokered the original purchases of these ARS.
For each of the ARS classified as available-for-sale, we evaluated the risks related to the
structure, collateral and liquidity of the investment, and forecasted the probability of issuer
default, auction failure and a successful auction at par or a redemption at par for each future
auction period. The weighted average cash flow for each period was then discounted back to present
value for each security. Based on this methodology, we determined that the fair value of our
non-current ARS investments is $39.7 million, and we recorded a temporary impairment charge in
accumulated other comprehensive income of $6.5 million to reduce the value of our
available-for-sale ARS investments.
We will not be able to access these remaining funds until a future auction for these ARS is
successful, we sell the securities in a secondary market, or they are redeemed by the issuer. As
such, these remaining investments currently lack short-term liquidity and are therefore classified
as long-term investments on the balance sheet at August 31, 2010. Based on our cash and short-term
investments balance of $269.2 million and expected operating cash flows, we do not anticipate the
lack of liquidity associated with these ARS to adversely affect our ability to conduct business and
believe we have the ability to hold the affected securities throughout the currently estimated
recovery period. Therefore, the impairment on these securities is considered only temporary in
nature. If the credit rating of either the security issuer or the third-party insurer underlying
the investments deteriorates significantly, we may be required to adjust the carrying value of the
ARS through an impairment charge.
We
generated $70.5 million in cash from operations in the first nine months of fiscal 2010 as
compared to $35.7 million in the first nine months of fiscal 2009. The increase in cash generated
from operations in the first nine months of fiscal 2010 over the first nine months of fiscal 2009
was primarily due to changes in working capital, especially lower levels of payments of liabilities
as fiscal 2009 included payments associated with liabilities assumed in the acquisition of IONA
Technologies in 2008 and improved collections of accounts receivable.
A summary of our cash flows from operations for the first nine months of fiscal years 2010 and 2009
is as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Net income
|
|
$
|
27,295
|
|
|
$
|
16,079
|
|
|
Depreciation, amortization and other noncash charges
|
|
|
44,552
|
|
|
|
47,465
|
|
|
Tax benefit (deficiency) from stock plans
|
|
|
2,572
|
|
|
|
(521
|
)
|
|
Changes in operating assets and liabilities
|
|
|
(3,884
|
)
|
|
|
(27,301
|
)
|
|
|
|
Total
|
|
$
|
70,535
|
|
|
$
|
35,722
|
|
|
|
Accounts receivable decreased by $13.9 million from the end of fiscal 2009. Accounts receivable
days sales outstanding, or DSO, decreased four days to 59 days at the end of the third quarter of
fiscal 2010 as compared to the end of the third quarter of fiscal 2009 and decreased six days from
the end of fiscal 2009. We target a DSO range of 60 to 80 days.
On January 8, 2010, we acquired all of the equity interests in Savvion, a privately-held company,
through a merger of Savvion with a wholly-owned subsidiary for an aggregate purchase price of
approximately $49 million. Savvion is a provider of business process management software. The
Savvion product lines became part of our Enterprise Business Solutions business unit. The
acquisition was accounted for as a purchase, and accordingly, the results of operations of Savvion
are included in our operating results from the date of acquisition. The purchase price was paid in
cash from available funds.
We purchased property and equipment totaling $7.1 million in the first nine months of fiscal 2010
as compared to $6.1 million in the first nine months of fiscal 2009. The purchases consisted
primarily of computer equipment and software and building and leasehold improvements.
22
We purchased and retired approximately 997,000 shares and 261,000 shares of our common stock for
$29.3 million and $5.1 million in the first nine months of fiscal 2010 and fiscal 2009,
respectively. We have repurchased substantially all available shares under our previous Board
authorized share repurchase program. On October 1, 2010, the Board of Directors authorized, for the
period from October 1, 2010 through September 30, 2011, the purchase of up to $100 million of our
common stock, at such times that management deems such purchases to be an effective use of cash.
We received $67.8 million in the first nine months of fiscal 2010 from the exercise of stock
options and the issuance of shares under our Employee Stock Purchase Plan as compared to $7.4
million in the first nine months of fiscal 2009.
We believe that existing cash balances together with funds generated from operations will be
sufficient to finance our operations and meet our foreseeable cash requirements (including planned
capital expenditures, lease commitments, debt payments, restructuring and non-recurring expenses
and other long-term obligations) through at least the next twelve months. To the extent that we
complete any future acquisitions, our cash position could be reduced.
Revenue Backlog
— Our aggregate revenue backlog at August 31, 2010 was approximately $159 million,
of which $138 million was included on our balance sheet as deferred revenue, primarily related to
unexpired maintenance and support contracts. At August 31, 2010, the remaining amount of backlog of
approximately $21 million was composed of multi-year licensing arrangements of approximately $16
million and open software license orders received but not shipped of approximately $5 million. Our
backlog of orders not included on the balance sheet is not subject to our normal accounting
controls for information that is either reported in or derived from our basic financial statements.
We typically fulfill most of our software license orders within 30 days of acceptance of a
purchase order. Assuming all other revenue recognition criteria have been met, we recognize
software license revenue upon shipment of the product, or if delivered electronically, when the
customer has the right to access the software. Because there are many elements governing when
revenue is recognized, including when orders are shipped, credit approval, completion of internal
control processes over revenue recognition and other factors, management has some control in
determining the period in which certain revenue is recognized. We frequently have open software
license orders at the end of the quarter which have not shipped or have otherwise not met all the
required criteria for revenue recognition. Although the amount of open software license orders may
vary at any time, we generally do not believe that the amount, if any, of such software license
orders as well as the other elements of the backlog at the end of a particular quarter is a
reliable indicator of future performance. In addition, there is no industry standard for the
definition of backlog and there may be an element of estimation in determining the amount. As
such, direct comparisons with other companies may be difficult or potentially misleading.
Guarantees and Indemnification Obligations
We include standard intellectual property indemnification provisions in our licensing agreements in
the ordinary course of business. Pursuant to our product license agreements, we will indemnify,
hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties with respect to our
products. Other agreements with our customers provide indemnification for claims relating to
property damage or personal injury resulting from the performance of services by us or our
subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such
indemnity agreements have been insignificant. Accordingly, the estimated fair value of these
indemnification provisions is immaterial.
Legal and Other Regulatory Matters
See discussion regarding legal and other regulatory matters in Part II, Item 1. — Legal
Proceedings.
Off-Balance Sheet Arrangements
Our only significant off-balance sheet commitments relate to operating lease obligations. Future
annual minimum rental lease payments are detailed in Note 11 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended November 30, 2009. We have
no “off-balance sheet arrangements” within the meaning of Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the first nine months of fiscal 2010, there were no significant changes to our quantitative
and qualitative disclosures about market risk. Please refer to Part II, Item 7A. Quantitative and
Qualitative Disclosures about Market Risk included in our
23
Annual Report on Form 10-K for our fiscal year ended November 30, 2009 for a more complete
discussion of the market risks we encounter.
Item 4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures
. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of the design and operation of our “disclosure
controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and
procedures were effective at the reasonable assurance level to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b)
Changes in internal control over financial reporting.
No changes in our internal control over
financial reporting occurred during the quarter ended August 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise
in the ordinary course of business. While the outcome of these claims cannot be predicted with
certainty, management does not believe that the outcome of any of these legal matters will have a
material adverse effect on our consolidated financial position or results of operations.
On January 21, 2010, JuxtaComm Technologies (JuxtaComm) filed a complaint in the Eastern District
of Texas against Progress Software, two of our subsidiaries and 19 other defendants, alleging
infringement of JuxtaComm’s US patent 6,195,662 (“System for Transforming and Exchanging Data
Between Distributed Heterogeneous Computer Systems”). In its complaint, JuxtaComm seeks
unspecified monetary damages and permanent injunctive relief. In May 2010, we filed a response to
this complaint in which we denied all claims. The discovery phase of this litigation has commenced.
We cannot predict the outcome of this matter and an adverse resolution of this lawsuit could have
a material adverse effect on our financial position or results of operations. We intend to
vigorously defend ourselves.
We operate in a rapidly changing environment that involves certain risks and uncertainties, some of
which are beyond our control. In addition to the information provided in this report, please refer
to Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended
November 30, 2009 for a more complete discussion regarding certain factors that could materially
affect our business, financial condition or future results.
24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and 2(b) are not applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Shares that May
|
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
|
Of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Under the Plans or
|
|
|
Period:
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs
|
|
|
Programs (1)
|
|
|
|
|
June 2010
|
|
|
168
|
|
|
$
|
30.43
|
|
|
|
168
|
|
|
|
430
|
|
|
July 2010
|
|
|
271
|
|
|
$
|
29.78
|
|
|
|
271
|
|
|
|
159
|
|
|
August 2010
|
|
|
159
|
|
|
$
|
29.10
|
|
|
|
159
|
|
|
|
0
|
|
|
|
|
Total
|
|
|
598
|
|
|
$
|
29.78
|
|
|
|
598
|
|
|
|
0
|
|
|
|
|
|
|
|
|
(1)
|
|
In September 2009, the Board of Directors authorized, for the period from October 1, 2009
through September 30, 2010, the purchase of up to 1,000,000 shares of our common stock, at such
times that management deems such purchases to be an effective use of cash.
|
The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:
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|
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|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
|
31.1
|
*
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act — Richard D. Reidy
|
|
|
|
|
|
|
|
|
31.2
|
*
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act — Norman R. Robertson
|
|
|
|
|
|
|
|
|
32.1
|
**
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
|
|
|
101***
|
|
The following materials from Progress
Software Corporation’s Quarterly Report on Form
10-Q for the three months ended August 31, 2010,
formatted in XBRL (eXtensible Business Reporting
Language): (i) Condensed Consolidated Balance
Sheets as of August 31, 2010 and November 30,
2009; (ii) Condensed Consolidated Statements of
Operations for the three and nine months ended
August 31, 2010 and August 31, 2009; (iii)
Condensed Consolidated Statements of Cash Flows
for the nine months ended August 31, 2010 and
August 31, 2009 and (iv) Notes to Condensed
Consolidated Financial Statements.
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|
|
|
|
*
|
|
Filed herewith
|
|
|
|
**
|
|
Furnished herewith
|
|
|
|
***
|
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data
Files on Exhibit 101 hereto are deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11
or 12 of the Securities Act of 1933, as amended, are deemed not
filed for purposes of Section 18 of the Securities and Exchange
Act of 1934, as amended, and otherwise are not subject to
liability under those sections.
|
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
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|
|
PROGRESS SOFTWARE CORPORATION
(Registrant)
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|
|
Dated: October 11, 2010
|
/s/ Richard D. Reidy
|
|
|
|
Richard D. Reidy
|
|
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
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|
|
Dated: October 11, 2010
|
/s/ Norman R. Robertson
|
|
|
|
Norman R. Robertson
|
|
|
|
Senior Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial
Officer)
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Dated: October 11, 2010
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/s/ David H. Benton, Jr.
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David H. Benton, Jr.
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Vice President and Corporate Controller
(Principal Accounting Officer)
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