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EPICOR SOFTWARE CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report. This
discussion contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a variety of factors,
including those set forth under "Risk Factors" in Part I, section IA. Unless the
context requires otherwise, references to "we," "our," "us" and "the Company"
are to Epicor Software Corporation and its consolidated subsidiaries, after the
consummation of the Acquisitions. Unless the context requires otherwise,
references to "Legacy Epicor" refer to legacy Epicor Software Corporation and
its consolidated subsidiaries prior to the acquisitions and references to
"Activant" or "Predecessor" refer to Activant Solutions Inc. and its
consolidated subsidiaries.
Overview
We are a leading global provider of enterprise application software and services
focused on small and mid-sized companies and the divisions and subsidiaries of
Global 1000 enterprises. We provide industry-specific solutions to the
manufacturing, distribution, retail, services and hospitality sectors. Our fully
integrated systems, which primarily include license, hardware, professional
services, support services and may include hardware products, are considered
"mission critical" to many of our customers, as they manage the flow of
information across the core business functions, operations and resources of
their enterprises. By enabling our customers to automate and integrate
information and critical business processes throughout their enterprise, as well
as across their supply chain and distribution networks, our customers can
increase their efficiency and productivity, resulting in higher revenues,
increased profitability and improved working capital.
Our fully integrated systems and services include one or more of the following
software applications: inventory and production management, supply chain
management ("SCM"), order management, point-of-sale ("POS") and retail
management, accounting and financial management, customer relationship
management ("CRM"), human capital management ("HCM") and service management,
among others. Our solutions also respond to our customers' need for increased
supply chain visibility and transparency by offering multichannel e-commerce and
collaborative portal capabilities that allow enterprises to extend their
business and more fully integrate their operations with those of their
customers, suppliers and channel partners. We believe this collaborative
approach distinguishes us from conventional enterprise resource planning ("ERP")
vendors, whose primary focus is predominately on internal processes and
efficiencies within a single plant, facility or business. For this reason, we
believe our products and services have become deeply embedded in our customers'
businesses and are a critical component to their success.
In addition to processing the transactional business information for the
vertical markets we serve, our data warehousing, business intelligence and
industry catalog and content products aggregate detailed business transactions
to provide our customers with advanced multi-dimensional analysis, modeling and
reporting of their enterprise-wide data.
We have developed strategic relationships with many of the well-known and
influential market participants across all segments in which we operate, and
have built a large and highly diversified base of more than 20,000 customers who
use our systems, maintenance and/or services offerings on a regular, ongoing
basis in over 33,000 sites and locations. Additionally, our automotive parts
catalog is used at approximately 27,000 locations, many of which are also our
systems customers.
We have a global customer footprint across more than 150 countries and have a
strong presence in both mature and emerging markets in North America, Europe,
Asia and Australia, with approximately 4,000 employees worldwide as of September
30, 2012. Our software is available in more than 30 languages and we continue to
translate and localize our systems to enter new geographical markets. In
addition, we have a growing network of over 400 global partners, value-added
resellers and systems integrators that provide a comprehensive range of
solutions and services based on our software. This worldwide coverage provides
us with economies of scale, higher capital productivity through lower cost
offshore operations, the ability to more effectively deliver our systems and
services to high-growth emerging markets, and to support increasingly global
businesses.
During the fourth quarter of fiscal 2012, we changed the composition of our
reportable segments by dividing our Retail reportable segment into two separate
reportable segments, Retail Solutions and Retail Distribution. We have
reclassified the revenues and contribution margin of prior periods to conform to
the new reportable segment structure. We specialize in and target three
application software segments: ERP, Retail Solutions and Retail Distribution,
which we consider our segments for reporting purposes. These segments are
determined in accordance with how our management views and evaluates our
business and based on the criteria as outlined in authoritative accounting
guidance regarding segments. The Predecessor had two reporting segments:
Wholesale Distribution Group, which is now included in our ERP segment, and
Retail Distribution Group,
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which is now included in our Retail Distribution segment. The prior periods of
the Predecessor have been reclassified to conform to the current period
presentation.
Because these segments reflect the manner in which our management views our
business, they necessarily involve judgments that our management believes are
reasonable in light of the circumstances under which they are made. These
judgments may change over time or may be modified to reflect new facts or
circumstances. Segments may also be changed or modified to reflect technologies
and applications that are newly created, change over time, or evolve based on
business conditions, each of which may result in reassessing specific segments
and the elements included within each of those segments. Future events,
including changes in our senior management, may affect the manner in which we
present segments in the future.
The Transactions
On March 25, 2011 ("Inception"), Eagle Parent, Inc. ("Eagle") was formed under
Delaware law at the direction of funds advised by Apax Partners, L.P. and Apax
Partners, LLP, together referred to as "Apax", solely for the purpose of
acquiring Activant Group Inc. ("AGI"), the parent company of Activant Solutions
Inc., the Predecessor for reporting purposes, (the "Predecessor" or "Activant"),
and Epicor Software Corporation ("Legacy Epicor"). On April 4, 2011, Eagle
entered into an Agreement and Plan of Merger with AGI, Activant and certain
other parties pursuant to which Eagle agreed to acquire AGI and Activant. Also
on April 4, 2011, Eagle entered into an Agreement and Plan of Merger with Legacy
Epicor and certain other parties, pursuant to which Eagle agreed to acquire
Legacy Epicor. Eagle had no activity from Inception to May 16, 2011, except for
activities related to its formation, the acquisitions and arranging the related
financing.
On May 16, 2011, pursuant to an Agreement and Plan of Merger, dated as of
April 4, 2011 between Eagle, Activant Group Inc. ("AGI"), the parent company of
Activant, Sun5 Merger Sub, Inc, a wholly-owned subsidiary of the Company ("A
Sub"), and certain other parties, A Sub was merged with and into AGI with AGI
surviving as a wholly-owned subsidiary of the Company. We paid net aggregate
consideration of $972.5 million for the outstanding AGI equity (including
"in-the-money" stock options outstanding immediately prior to the consummation
of the acquisition) consisting of $890.0 million in cash, plus $84.1 million
cash on hand (net of a $2.3 million agreed upon adjustment) and a payment of
$5.8 million for certain assumed tax benefits minus the amount of a final net
working capital adjustment of $7.4 million, as specified in the Activant
Agreement and Plan of Merger.
Also on May 16, 2011, pursuant to Agreement and Plan of Merger, dated as of
April 4, 2011 between us, Legacy Epicor and Element Merger Sub, Inc. ("E Sub"),
E Sub acquired greater than 90% of the outstanding capital stock of Legacy
Epicor pursuant to a tender offer and was subsequently merged with and into
Legacy Epicor, with Legacy Epicor surviving as a wholly-owned subsidiary of the
Company. We paid $12.50 per share, for a total of approximately 64.2 million
shares, to the holders of Legacy Epicor common stock and vested stock options,
which represented net aggregate merger consideration of $802.3 million
(including approximately $0.1 million for additional shares purchased at par
value to meet the tender offer requirements).
These acquisitions and the related transactions are referred to collectively as
the "Acquisition" or "Acquisitions."
The acquisitions were funded by a combination of an equity investment by funds
advised by Apax Partners, L.P. and Apax Partners, LLP together referred to as
"Apax", in us of approximately $647.0 million, an $870.0 million senior secured
term loan facility, $465.0 million in senior notes, $27.0 million drawn on
senior secured revolving credit facility, and acquired cash.
Activant was determined to be the Predecessor for financial reporting purposes
due to its relative total asset size to Legacy Epicor. Further, the majority of
Named Executive Officers and other executive officers of the Company were
employees of Activant.
Effective as of December 31, 2011, Legacy Epicor, AGI and Activant were merged
with and into Eagle under Delaware law, whereupon each of Legacy Epicor, AGI and
Activant ceased to exist and Eagle survived as the surviving corporation (the
"Reorganization"). In connection with the Reorganization, Eagle changed its name
to Epicor Software Corporation. Since Activant and Legacy Epicor were both
subsidiaries of Eagle, the Reorganization represented a change in legal entities
under common control which had no impact on the consolidated financial
statements of the Company.
Basis of Presentation
In this "Management's Discussion and Analysis of Financial Condition and Results
of Operations," we discuss our results for the year ended September 30, 2012 and
for the period from Inception to September 30, 2011. Additionally, we discuss
results for the Predecessor for the period from October 1, 2010 to May 15, 2011
and the year ended September 30,
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2010.
The following discussion of revenues and expenses has been prepared by comparing
combined results for the periods from Inception to September 30, 2011
(Successor) and October 1, 2010 to May 15, 2011 (Predecessor). The presentation
of combined Predecessor and Successor operating results (which is simply the
arithmetic sum of the Predecessor and Successor amounts) is a Non-GAAP
presentation, which is provided as a convenience solely for the purpose of
facilitating comparisons of the twelve month period ended September 30, 2011 as
compared to the years ended September 30, 2012 and 2010. However, this approach
may yield results that are not strictly comparable on a period-to-period basis
primarily due to the impact of including four and one half months of Legacy
Epicor results in the twelve month period ended September 30, 2011 and due to
purchase accounting entries recorded as a result of the Acquisitions. In
addition, the financial information has not been prepared as pro forma
information and does not reflect all adjustments that would be required if the
results for the period described above were reflected on a pro forma basis.
Components of Operations
The key components of our results of operations are as follows:
Revenues
Our revenues are primarily derived from sales of our systems and services to
customers that operate in three segments - ERP, Retail Solutions and Retail
Distribution.
• ERP segment - The ERP segment provides (1) distribution solutions designed
to meet the expanding requirement to support a demand driven supply
network by increasing focus on the customer and providing a more seamless
order-to-shipment cycle for a wide range of vertical markets including
electrical supply, plumbing, medical supply, heating and air conditioning,
tile, industrial machinery and equipment, industrial supplies, fluid
power, janitorial and sanitation, medical, value-added fulfillment, food
and beverage, redistribution and general distribution; (2) manufacturing
solutions designed for discrete and mixed-mode manufacturers with lean and
"to-order" manufacturing and distributed operations catering to several
verticals including industrial machinery, instrumentation and controls,
medical devices, printing and packaging, automotive, aerospace and
defense, energy and high tech; (3) hospitality solutions designed for the
hotel, resort, casino, food service, sports and entertainment industries
that can manage and streamline virtually every aspect of a hospitality
organization, from POS or property management system integration, to cash
and sales management, centralized procurement, food costing and beverage
management, core financials and business intelligence for daily reporting
and analysis by outlet and property, all within a single solution and
(4) financial management and professional services solutions designed to
provide the project accounting, time and expense management, and financial
analysis and reporting necessary to support the complex requirements of
serviced-based companies in the consulting, banking, financial services,
not-for-profit and software sectors.
• Retail Solutions segment - The Retail Solutions segment supports large,
distributed retail environments that require a comprehensive multichannel
retail solution including POS store operations, cross-channel order
management, CRM, loyalty management, merchandising, planning and
assortment planning, business intelligence and audit and operations
management capabilities. Our Retail Solutions segment caters to the general merchandise, specialty retailers, apparel and footwear, sporting
goods and department store verticals.
• Retail Distribution segment - The Retail Distribution segment supports
small- to mid-sized, independent or affiliated retailers that require
integrated POS or ERP offerings. Our Retail Distribution segment primarily
supports independent hardware retailers, lumber and home centers, lawn and
garden centers, farm and agriculture and other specialty hardlines
retailers, as well as customers involved in the manufacture, distribution,
sale and installation of new and remanufactured parts used in the
maintenance and repair of automobiles and light trucks primarily in North
America as well as the United Kingdom and Ireland, including several
retail chains in North America.
Within each segment, we generate revenues from systems and services.
Systems revenues are comprised primarily of:
• License revenues: Represent revenues from the sale or license of software
to customers. A substantial amount of our new license revenue is
characterized by long sales cycles and is therefore a somewhat less
predictable revenue stream in nature. License revenues are heavily
affected by the strength of general economic conditions and our
competitive
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position in the marketplace.
• Professional services revenues: Consist primarily of revenues generated
from implementation contracts to install and configure our software
products. Additionally, we generate revenues from training and educational
services to our customers regarding the use of our software products. Our
consulting revenues are dependent upon general economic conditions, the
level of our license revenues, as well as ongoing purchases of services by
our existing customer base.
• Hardware revenues: Consist primarily of computer server, POS and storage
product offerings, as well as revenues generated from the installation of
hardware products. Our hardware revenues are dependent upon general
economic conditions, the level of our license revenues, as well as on
going purchases from our existing customer base.
• Other systems revenues: Consist primarily of sales of business products to
our existing customer base.
Services revenues consist primarily of maintenance services and content and
supply chain services (including recurring revenue such as software as a service
("SaaS"), hosting and managed services). These services are specific to the
markets we serve and can complement our software product offerings. Maintenance
services include customer support activities, including software, hardware and
network support through our help desk, web help, software updates, preventive
and remedial on-site maintenance and depot repair services. Content and supply
chain services are comprised of proprietary catalogs, data warehouses,
electronic data interchange, and data management products. We provide
comprehensive automotive parts catalogs, industry-specific analytics and
database services related to point-of-sale transaction activity or parts
information in other core verticals, as well as, e-Commerce connectivity
offerings, hosting, networking and security monitoring management solutions. We
generally provide services on a subscription basis, and accordingly these
revenues are generally recurring in nature. Of our total revenues for the year
ended September 30, 2012, approximately $480.0 million, or 56%, was derived from
services revenues, which have been a stable and predictable recurring revenue
stream for us. The Predecessor's services revenues consisted primarily of
maintenance services, content services and supply chain services.
Operating Expenses
Our operating expenses consist primarily of cost of systems revenues, costs of
services revenues, sales and marketing, product development, general and
administrative expenses, acquisition-related costs and restructuring as well as
non-cash expenses, including depreciation and amortization. We allocate overhead
expenses including facilities and information technology costs to all
departments based on headcount. As such, overhead expenses are included in costs
of revenues and each operating expense category. All operating expenses are
allocated to segments, except as otherwise noted below.
• Cost of systems revenues - Cost of systems revenues consists primarily of
direct costs of software duplication and delivery, third-party royalty
fees, salary related and third party consulting costs of providing
customers' system installation and integration and training services, our
logistics organization, cost of hardware, and allocated overhead expenses.
• Cost of services revenues - Cost of services revenues consists primarily
of salary related costs, third party maintenance costs and other costs
associated with product updates and providing support services, material
and production costs associated with our automotive catalog and other
content offerings and allocated overhead expenses.
• Sales and marketing - Sales and marketing expense consists primarily of
salaries and bonuses, commissions, share-based compensation expense,
travel, marketing promotional expenses and allocated overhead expenses.
Corporate marketing expenses are not allocated to our segments.
We sell, market and distribute our products and services worldwide, primarily
through a direct sales force and internal telesales, as well as through an
indirect channel including a network of VARs, distributors, national account
groups and authorized consultants who market our products on a predominately
nonexclusive basis. Our marketing approach includes developing strategic
relationships with many of the well-known and influential market participants in
the vertical markets that we serve. In addition to obtaining endorsements,
referrals and references, we have data licensing and supply chain service
agreements with many of these businesses that we believe are influential. The
goal of these programs is to enhance the productivity of the field and inside
sales teams and to create leveraged selling opportunities, as well as offering
increased benefits to our customers by providing access to common industry
business processes and best practices.
Incentive pay is a significant portion of the total compensation package for all
sales representatives and sales managers. Our field sales teams are generally
organized by new business sales, which focuses on identifying and selling to new
customers and teams focused on customers that are migrating from one of our
legacy systems to one of
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our new solution offerings. We also have dedicated inside sales teams that focus
on selling upgrades and new software applications to our installed base of
customers.
In recognition of global opportunities for our software products, we have
committed resources to a global sales and marketing effort. We have established
offices worldwide to further such sales and marketing efforts. We sell our
products in the America's, EMEA and APAC through a mix of direct operations,
VARs and certain third-party distributors. We translate and localize certain
products directly or on occasion through outside contractors, for sale in
Europe, the Middle East, Africa, Latin America and Asia Pacific.
• Product development - Product development expense consists primarily of
salaries and bonuses, share-based compensation expense, outside services
and allocated overhead expenses. Our product development strategy combines
innovative new software capabilities and technology architectures with our
commitment to the long-term support of our products to meet the unique
needs of our customers and vertical industries we serve. We seek to
enhance our existing product lines, offer streamlined upgrade and
migration options for our existing customers and develop compelling new products for our existing customer base and prospective new customers.
• General and administrative - General and administrative expense primarily
consists of salaries and bonuses, share-based compensation expense,
outside services, and facility and information technology allocations for
the executive, finance and accounting, human resources and legal service
functions. Bad debt expenses and legal settlement fees are allocated to
our segments and the remaining general and administrative expenses are not
allocated.
• Depreciation and amortization - Depreciation and amortization expense
consists of depreciation attributable to our fixed assets and amortization
attributable to our intangible assets. Depreciation and amortization are
not allocated to our segments.
• Acquisition-related costs - Acquisition-related costs consists primarily
of sponsor arrangement fees, legal fees, investment banker fees, bond
breakage fees, due diligence fees, costs to integrate acquired companies,
and costs related to contemplated business combinations and acquisitions.
Acquisition-related costs are not allocated to our segments.
• Restructuring costs - Restructuring costs relate to management approved
restructuring actions to eliminate certain employee positions and to
consolidate certain excess facilities with the intent to integrate
acquisitions and streamline and focus our operations to properly align our
cost structure with our projected revenue streams. Restructuring costs are
not allocated to our segments.
Non-Operating Expenses
Our non-operating expenses consist of the following:
• Interest expense - Interest expense represents interest and amortization
of our original issue discount and deferred financing fees related to our
outstanding debt.
• Other income (expense), net - Other income (expense), net consists
primarily of interest income, equity in earnings of equity method investees, other non-income based taxes, foreign currency gains or losses
and gains or losses on marketable securities.
• Income tax expense - Income tax expense is based on federal, state and
foreign taxes owed in these jurisdictions in accordance with current enacted laws and tax rates. Our income tax provision includes current and
deferred taxes for these jurisdictions, as well as the impact of uncertain
tax benefits for the estimated tax positions taken on tax returns.
General Business Trends
Demand for our systems and services offerings has generally been correlated with
the overall macroeconomic conditions. The global economic outlook remains
uncertain, primarily due to the unresolved European sovereign debt crisis,
slowing economy in China, volatile oil prices due to geopolitical risk, and
relatively weak United States ("U.S.") economic
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momentum. We expect these conditions will lead to continued IT spending weakness
in Europe into 2013, and these conditions could have a negative impact on IT
spending in the U.S. as well.
Despite the slower macroeconomic conditions, our segments performed well in the
year ended September 30, 2012 as compared to last year. Our ERP segment
experienced solid growth in Asia Pacific and the Americas, however, during the
year ended September 30, 2012 the soft European economy led to an unfavorable
impact on our revenues in the EMEA region. During the year ended September 30,
2012, systems revenues for our Retail Distribution segment was adversely
impacted by ongoing high unemployment, a weak residential housing market, and
weak consumer confidence which was offset by the closing of large strategic
deals in our Retail Solutions segment. We continue to evaluate the economic
situation, the business environment and our outlook for changes. We continue to
focus on executing in the areas we can control by providing high value products
and services while managing our expenses.
Results of Operations
Year Ended September 30, 2012 (Successor) compared to the combined Year Ended
September 30, 2011 (Predecessor/Successor)(Non-GAAP)
Total revenues
Our total revenues were $855.5 million in fiscal 2012. Our ERP, Retail Solutions
and Retail Distribution segments accounted for approximately 60%, 16% and 24%,
respectively, of our revenues during the year ended September 30, 2012. Total
revenues for the year ended September 30, 2011 were $532.1 million, which
consisted of $304.8 million for the period from Inception to September 30, 2011
and $227.3 million for the period from October 1, 2010 to May 15, 2011
(Predecessor). Total revenues increased by $323.4 million, or 61%, for the year
ended September 30, 2012 as compared to the year ended September 30, 2011. Of
this increase, $308.8 million was attributable to the inclusion of a full year
of Legacy Epicor revenues (net of a $7.8 million decrease in deferred revenue
purchase accounting adjustments), while Predecessor revenues increased by $14.6
million (net of $5.7 million in deferred revenue purchase accounting
adjustments), due to a $13.5 million increase in Predecessor services revenues,
and a $1.1 million increase in Predecessor systems revenues. During the year
ended September 30, 2011 our ERP, Retail Solutions and Retail Distribution
segments accounted for approximately 52%, 10% and 38%, respectively, of
revenues. The shift in ERP, Retail Solutions and Retail Distribution percentage
of total revenues was primarily attributable to the inclusion of twelve months
of Legacy Epicor revenues in the year ended September 30, 2012, as compared to
four and one half months in the year ended September 30, 2011. See Note 13 to
our audited consolidated financial statements for further information on our
segments, including a summary of our segment revenues and contribution margin.
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The following table sets forth, for the periods indicated, our segment revenues
by systems and services and the variance thereof:
Non-GAAP
Predecessor/
Successor
Combined Predecessor
Year Ended Year Ended Inception to October 1, 2010 to
(in thousands, except September 30,
percentages) September 30, 2012 September 30, 2011 2011 May 15, 2011 Variance $ Variance %
ERP revenues:
Systems:
License $ 100,395 $ 63,833 $ 46,796 $ 17,037 $ 36,562 57 %
Professional services 128,712 62,222 48,457 13,765 66,490 107 %
Hardware 15,489 12,251 5,913 6,338 3,238 26 %
Other 504 189 185 4 315 167 %
Total systems 245,100 138,495 101,351 37,144 106,605 77 %
Services 270,100 141,138 77,567 63,571 128,962 91 %
Total ERP revenues 515,200 279,633 178,918 100,715 235,567 84 %
Retail Solutions
revenues:
Systems:
License 20,698 6,310 6,310 - 14,388 228 %
Professional services 36,334 13,836 13,836 - 22,498 163 %
Hardware 19,708 8,785 8,785 - 10,923 124 %
Other - - - - - - %
Total systems 76,740 28,931 28,931 - 47,809 165 %
Services 61,374 23,437 23,437 - 37,937 162 %
Total Retail Solutions
revenues 138,114 52,368 52,368 - 85,746 164 %
Retail Distribution
revenues:
Systems:
License 18,078 17,085 5,930 11,155 993 6 %
Professional services 12,821 13,122 4,016 9,106 (301 ) (2 )%
Hardware 17,946 21,084 7,867 13,217 (3,138 ) (15 )%
Other 4,802 5,198 2,071 3,127 (396 ) (8 )%
Total systems 53,647 56,489 19,884 36,605 (2,842 ) (5 )%
Services 148,496 143,595 53,585 90,010 4,901 3 %
Total Retail
Distribution revenues 202,143 200,084 73,469 126,615 2,059 1 %
Total revenues:
Systems:
License 139,171 87,228 59,036 28,192 51,943 60 %
Professional services 177,867 89,180 66,309 22,871 88,687 99 %
Hardware 53,143 42,120 22,565 19,555 11,023 26 %
Other 5,306 5,387 2,256 3,131 (81 ) (2 )%
Total systems 375,487 223,915 150,166 73,749 151,572 68 %
Services 479,970 308,170 154,589 153,581 171,800 56 %
Total revenues $ 855,457 $ 532,085 $ 304,755 $ 227,330 $ 323,372 61 %
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The following table sets forth, for the periods indicated, our Non-GAAP segment
revenues by systems and services excluding the impact of the deferred revenue
purchase accounting adjustment. Segment revenues excluding the impact of the
deferred revenue purchase accounting adjustment do not represent GAAP revenues
for our segments and should not be viewed as alternatives for GAAP revenues. We
use segment revenues excluding the impact of the deferred revenue purchase
accounting adjustment in order to compare the results of our segments on a
comparable basis.
Non-GAAP
Predecessor/
Successor
Combined Predecessor
Year Ended Year Ended Inception to October 1, 2010 to
(in thousands, except September 30,
percentages) September 30, 2012 September 30, 2011 2011 May 15, 2011 Variance $ Variance %
Systems revenues:
ERP $ 245,521 $ 139,795 $ 102,651 $ 37,144 $ 105,726 76 %
Retail Solutions 77,384 28,930 28,930 - 48,454 167 %
Retail Distribution 54,151 57,696 21,091 36,605 (3,545 ) (6 )%
Deferred revenue purchase
accounting adjustment (1,569 ) (2,506 ) (2,506 ) - 937 (37 )%
Total systems revenues 375,487 223,915 150,166 73,749 151,572 68 %
Services revenues:
ERP 282,843 166,606 103,035 63,571 116,237 70 %
Retail Solutions 62,497 23,437 23,437 - 39,060 167 %
Retail Distribution 148,850 144,893 54,883 90,010 3,957 3 %
Deferred revenue purchase
accounting adjustment (14,220 ) (26,766 ) (26,766 ) - 12,546 (47 )%
Total services revenues 479,970 308,170 154,589 153,581 171,800 56 %
Total revenues:
ERP 528,364 306,401 205,686 100,715 221,963 72 %
Retail Solutions 139,881 52,367 52,367 - 87,514 167 %
Retail Distribution 203,001 202,589 75,974 126,615 412 - %
Deferred revenue purchase
accounting adjustment (15,789 ) (29,272 ) (29,272 ) - 13,483 (46 )%
Total revenues $ 855,457 $ 532,085 $ 304,755 $ 227,330 $ 323,372 61 %
The following amounts are stated net of deferred revenue purchase accounting
adjustments.
• ERP revenues - ERP revenues were $515.2 million for the year ended
September 30, 2012 as compared to $279.6 million for the year ended
September 30, 2011. ERP revenues for the year ended September 30, 2011
included $178.9 million for the period from Inception to September 30, 2011 (Successor) and $100.7 million for the period from October 1, 2010 to
May 15, 2011 (Predecessor). ERP revenues increased by $235.6 million, or
84%, for the year ended September 30, 2012 as compared to the year ended
September 30, 2011, primarily due to a $223.1 million increase
attributable to the inclusion of a full year of Legacy Epicor ERP
revenues, while Predecessor ERP revenues increased by $12.5 million due primarily to an increase in professional and support services as well as a
$4.1 million decrease in deferred revenue purchase accounting adjustments.
ERP systems revenues for the year ended September 30, 2012 were
$245.1 million compared to $138.5 million for the year ended
September 30, 2011, an increase of $106.6 million, or 77%. ERP
systems revenues for the year ended September 30, 2011 included
$101.4 million for the period from Inception to September 30, 2011
(Successor) and $37.1 million for the period from October 1, 2010 to
May 15, 2011 (Predecessor).
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Of the $106.6 million increase, $102.6 million was attributable to the inclusion
of a full year of Legacy Epicor ERP systems revenues, while Predecessor ERP
systems revenues increased by $4.0 million primarily due to a $4.3 million
increase in professional services revenue and a $0.3 million decrease in
deferred revenue purchase accounting adjustments.
ERP services revenues were $270.1 million for the year ended
September 30, 2012 compared to $141.1 million for the year ended
September 30, 2011, an increase of $129.0 million, or 91%. ERP
services revenues for the year ended September 30, 2011 included
$77.5 million for the period from Inception to September 30, 2011
(Successor) and $63.6 million for the period from October 1, 2010 to
May 15, 2011 (Predecessor). Of the $129.0 million increase, $120.4
million was attributable to the inclusion of a full year of Legacy
Epicor ERP services revenues, while Predecessor ERP services
revenues increased by $8.5 million primarily due to a $3.8 million
decrease in deferred revenue purchase accounting adjustments as well
as support price increases and new customer maintenance support
revenues, partially offset by legacy platform attrition.
• Retail Solutions revenues - Retail Solutions revenues were $138.1 million
for the year ended September 30, 2012 as compared to $52.4 million for the
period ended September 30, 2011, an increase of $85.7 million, or 164%,
primarily as a result of the comparison of a twelve month period with a
four and one half month period. As the Predecessor did not have a Retail
Solutions segment, all Retail Solutions revenues for the year ended
September 30, 2011 occurred during the period from Inception to September
30, 2011 (Successor). Retail Solutions systems revenues increased by $47.8
million, and Retail Solutions services revenues increased by $37.9
million. These increases were primarily a result of the comparison of a
twelve month period with a four and one half month period.
• Retail Distribution revenues - Retail Distribution revenues were $202.1
million for the year ended September 30, 2012 compared to $200.1 million
for the year ended September 30, 2011, an increase of $2.1 million, or 1%,
primarily due to an increase in support services and a $1.6 million
decrease in deferred revenue purchase accounting adjustments, partially
offset by lower hardware revenue. Retail Distribution revenues for the
year ended September 30, 2011 included $73.5 million for the period from
Inception to September 30, 2011 (Successor) and $126.6 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Retail Distribution systems revenues decreased by $2.8 million primarily due to a
$3.1 million reduction in hardware, offset by a $0.7 million decrease in
deferred revenue purchase accounting adjustments. Retail Distribution
services revenues increased by $4.9 million, primarily due to support
price increases and new customer maintenance support revenues and a $0.9
million decrease in deferred revenue purchase accounting adjustments,
partially offset by legacy platform attrition.
Total operating and other expenses
The following table sets forth our operating and other expenses for the periods
indicated and the variance thereof:
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Non-GAAP
Predecessor/Successor
Combined Predecessor
Year Ended Year Ended Inception to October 1,
(in thousands, except
percentages) September 30, 2012 September 30, 2011 September 30, 2011 May 15, 2010 Variance $ Variance %
Cost of systems revenues $ 211,814 $ 121,194 $ 81,272 $ 39,922 $ 90,620 75 %
Cost of services revenues 144,590 100,106 52,240 47,866 44,484 44 %
Total cost of revenues 356,404 221,300 133,512 87,788 135,104 61 %
Sales and marketing 147,446 89,857 53,657 36,200 57,589 64 %
Product development 83,304 51,076 31,417 19,659 32,228 63 %
General and administrative 75,702 49,130 27,611 21,519 26,572 54 %
Depreciation and 138,985 76,038 50,716 25,322
amortization 62,947 83 %
Acquisition-related costs 8,845 59,427 42,581 16,846 (50,582 ) (85 )%
Restructuring costs 4,776 11,076 11,049 27 (6,300 ) (57 )%
Total other operating
expenses 459,058 336,604 217,031 119,573 122,454 36 %
Interest expense (90,483 ) (69,712 ) (36,643 ) (33,069 ) (20,771 ) 30 %
Other income (expense),
net (133 ) (34 ) (257 ) 223 (99 ) 291 %
Income tax benefit (11,535 ) (31,208 ) (26,720 ) (4,488 ) 19,673 (63 )%
• Cost of systems revenues - Cost of systems revenues was $211.8 million for
the year ended September 30, 2012 as compared to $121.2 million for the
year ended September 30, 2011, including $81.3 million for the period from
Inception to September 30, 2011 (Successor) and $39.9 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Cost of systems
revenues increased by $90.6 million, or 75%, for the year ended September
30, 2012 as compared to the year ended September 30, 2011, of which $91.2
million was attributable to the inclusion of a full year of Legacy Epicor
cost of systems revenue while Predecessor cost of systems revenues
decreased by $0.6 million primarily as a result of a lower mix of hardware
equipment sales in the year ended September 30, 2012.
• Cost of services revenues - Cost of services revenues was $144.6 million
for the year ended September 30, 2012 compared to $100.1 million for the
year ended September 30, 2011, including $52.2 million for the period from
Inception to September 30, 2011 (Successor) and $47.9 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Cost of
services revenues increased by $44.5 million or 44%, for the year ended
September 30, 2012 as compared to the year ended September 30, 2011, of
which $43.8 million was attributable to the inclusion of a full year of Legacy Epicor cost of services revenues while Predecessor cost of services
revenues increased by $0.7 million primarily as a result of an increase in
support and license fees related to growth in our content and connectivity
business.
Total other operating expenses were $459.1 million for the year ended September
30, 2012 as compared to $336.6 million for the year ended September 30, 2011,
including $217.0 million for the period from Inception to September 30, 2011
(Successor) and $119.6 million for the period from October 1, 2010 to May 15,
2011 (Predecessor). Total other operating expenses increased by $122.5 million,
or 36% for the year ended September 30, 2012, as compared to the year ended
September 30, 2011, driven primarily by incremental operating costs from Legacy
Epicor, and increased depreciation and amortization as a result of the
Acquisitions, offset by decreased acquisition related and restructuring costs.
• Sales and marketing - Sales and marketing expenses were $147.4 million for
the year ended September 30, 2012 as compared to $89.9 million for the
year ended September 30, 2011, consisting of $53.7 million for the period
from Inception to September 30, 2011 (Successor) and $36.2 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Sales and
marketing expenses increased by $57.6 million, or 64%, for the year ended
September 30, 2012 as compared to the year ended September 30, 2011, of
which $59.1 million was attributable to the inclusion of a full year of
Legacy Epicor sales and marketing expenses, while Predecessor sales and
marketing expenses decreased by $1.5 million primarily due to lower
share-based compensation expenses.
• Product development - Product development expenses were $83.3 million for
the year ended September 30, 2012, as compared to $51.1 million for the
year ended September 30, 2011, consisting of $31.4 million for the period
from Inception to September 30, 2011 (Successor) and $19.7 million for the
period from October 1, 2010 to May 15, 2011.
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Product development expenses increased by $32.2 million, or 63%, for the year
ended September 30, 2012 as compared to the year ended September 30, 2011, of
which $32.5 million was attributable to the inclusion of a full year of Legacy
Epicor product development expenses, while Predecessor product development
expenses decreased by $0.3 million due primarily to lower salary related and
outside service costs.
• General and administrative - General and administrative expenses were
$75.7 million for the year ended September 30, 2012 as compared to $49.1 million in the year ended September 30, 2011, consisting of $27.6 million
in the period from Inception to September 30, 2011 (Successor) and $21.5
million for the period from October 1, 2010 to May 15, 2011 (Predecessor).
General and administrative expenses increased by $26.6 million, or 54%,
for the year ended September 30, 2012 as compared to the year ended
September 30, 2011. The increase was primarily attributable to the
inclusion of a full year of Legacy Epicor general and administrative
expenses and a $3.8 million increase in employee related expenses
predominantly related to share-based compensation.
• Depreciation and amortization - Depreciation and amortization expense was
$139.0 million for the year ended September 30, 2012 as compared to $76.0
million for the year ended September 30, 2011, consisting of $50.7 million
for the period from Inception to September 30, 2011 (Successor) and $25.3
million for the period from October 1, 2010 to May 15, 2011 (Predecessor).
Depreciation and amortization expense increased by $62.9 million, or 83%,
for the year ended September 30, 2012 as compared to the year ended
September 30, 2011, primarily as a result of additional amortization on
increased intangible assets due to the Acquisitions.
• Acquisition-related costs - Acquisition-related costs were $8.8 million
for the year ended September 30, 2012, as compared to $59.4 million for
the year ended September 30, 2011. Acquisition-related costs for the year
ended September 30, 2011 consisted of $42.6 million for the period from
Inception to September 30, 2011 (Successor) and $16.8 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Acquisition-related costs for the year ended September 30, 2012 consisted
primarily of $4.9 million of integration activities due to the
Acquisitions and $3.9 million of acquisition costs, primarily due
diligence fees and legal fees related to the acquisition of SolarSoft
Business Systems, which was consummated in the first quarter of our fiscal
2013. Acquisition-related costs for the period from Inception to September
30, 2011 included sponsor arrangement fees, legal fees, investment banker
fees, bond breakage fees, due diligence fees, costs to integrate acquired
companies, and costs related to the Acquisitions completed in May 2011.
Acquisition-related costs for the period from October 1, 2010 to May 15, 2011 (Predecessor) included the Predecessor's acquisition costs incurred
prior to the acquisitions.
• Restructuring costs - During the year ended September 30, 2012, we incurred $4.8 million of management approved restructuring costs primarily
as a result of the Acquisitions to eliminate certain employee positions
and to consolidate certain excess facilities with the intent to integrate
acquisitions and streamline and focus our operations to properly align our
cost structure with our projected revenue streams. Restructuring costs
were $11.1 million for the year ended September 30, 2011, consisting of
$11.0 million for the period from Inception to September 30, 2011
(Successor) and less than $0.1 million for the period from October 1, 2010
to May 15, 2011 (Predecessor), attributable to the elimination of certain
employee positions in connection with the Acquisitions. See Note 11 to our
consolidated financial statements.
Interest expense
Interest expense for the year ended September 30, 2012 was $90.5 million as
compared to $69.7 million for the year ended September 30, 2011, consisting of
$36.6 million for the period from Inception to September 30, 2011(Successor) and
$33.1 million for the period from October 1, 2010 to May 15, 2011 (Predecessor).
The increase in interest expense was primarily a result of increased debt levels
after the Acquisitions, partially offset by the 2011 write-off of deferred
financing fees of approximately $7.8 million and $4.1 million for retired debt
instruments of the Predecessor and Legacy Epicor, respectively.
Other income (expense), net
Other income (expense) for the year ended September 30, 2012 was $0.1 million of
expense compared to less than $0.1 million of expense for the year ended
September 30, 2011, consisting of $0.3 million of expense for the period from
Inception to September 30, 2011 (Successor) and $0.2 million of income for the
period from October 1, 2010 to May 15, 2011(Predecessor), respectively. Other
income (expense) net for the year ended September 30, 2012 included $0.8 million
of foreign exchange losses, a $0.7 million sales tax assessment and a loss on
disposal of fixed assets of $0.5 million partially offset by $0.9 million of
earnings from our previous minority interest in Internet Auto Parts, Inc. and
$0.7 million of interest income. Other income (expense), net for the year ended
September 30, 2011 included $1.4 million of earnings from our previous minority
interest in Internet Auto Parts Inc. partially offset by a loss on disposal of
fixed assets of $1.5 million.
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Income tax expense (benefit)
We recognized an income tax benefit of $11.5 million, or 22.8% of pre-tax loss,
for the year ended September 30, 2012. We recognized an income tax benefit of
$31.2 million, or 37.4% of pre-tax loss, in the year ended September 30, 2011,
including $26.7 million in the period from Inception to September 30, 2011
(Successor) and $4.5 million in the period from October 1, 2010 to May 15, 2011
(Predecessor). Our income tax rate for the year ended September 30, 2012
differed from the federal statutory rate primarily due to tax benefits related
to income tax returns filed in the quarter and the impact of changes in the
foreign exchange on deferred income taxes, offset by non-deductible expenses
including restricted unit compensation, changes in our reserve for uncertain tax
positions, and lower tax rates in foreign jurisdictions. In the period from
Inception to September 30, 2011, the tax rate was higher than the federal
statutory rate due to taxes related to the repatriation of earnings of a foreign
subsidiary and increases to unrecognized tax benefits, partially offset by the
release of a valuation allowance recorded against certain state deferred tax
assets as a result of a merger of the Predecessor and a domestic subsidiary.
See Note 9 - Income Taxes to our audited consolidated financial statements for
additional information about income taxes.
Contribution margin
The results of the reportable segments are derived directly from our management
reporting system. The results are based on our method of internal reporting
using segment contribution margin as a measure of operating performance and are
not necessarily in conformity with United States generally accepted accounting
principles ("GAAP"). Our management measures the performance of each segment
based on several metrics, including contribution margin as defined below, which
is not a financial measure calculated in accordance with GAAP. Asset data is not
reviewed by our management at the segment level and therefore is not included.
Segment contribution margin includes all segment revenues less the related cost
of sales, direct marketing, sales, and product development expenses as well as
certain general and administrative expenses, including bad debt expenses and
direct legal costs. A significant portion of each segment's expenses arises from
shared services and centrally managed infrastructure support costs that we
allocate to the segments to determine segment contribution margin. These
expenses primarily include information technology services, facilities, and
telecommunications costs.
Certain operating expenses are not allocated to segments because they are
separately managed at the corporate level. These unallocated costs include
marketing costs (other than direct marketing), general and administrative costs,
such as human resources, finance and accounting, share-based compensation
expense, depreciation and amortization of intangible assets, acquisition-related
costs, restructuring costs, interest expense, and other income (expense).
There are significant judgments that our management makes with respect to the
direct and indirect allocation of costs that may affect the calculation of
contribution margin. While our management believes these and other related
judgments are reasonable and appropriate, others could assess such matters in
ways different than our management.
The exclusion of costs not considered directly allocable to individual business
segments results in contribution margin not taking into account substantial
costs of doing business. We use contribution margin, in part, to evaluate the
performance of, and allocate resources to, each of the segments. While our
management may consider contribution margin to be an important measure of
comparative operating performance, this measure should be considered in addition
to, but not as a substitute for, net income (loss), cash flow and other measures
of financial performance prepared in accordance with GAAP that are otherwise
presented in our financial statements. In addition, our calculation of
contribution margin may be different from the calculation used by other
companies and, therefore, comparability may be affected.
Contribution margin for the year ended September 30, 2012, the period from
Inception to September 30, 2011 and the period from October 1, 2010 to May 15,
2011 (Predecessor) is as follows:
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Non-GAAP
Predecessor/Successor
Combined Predecessor
Year Ended Year Ended Inception to October 1, 2010 to
September 30,
(in thousands, except percentages) September 30, 2012 September 30, 2011 2011 May 15, 2011 Variance $ Variance %
ERP $ 154,127 $ 84,836 $ 40,787 $ 44,049 $ 69,291 82 %
Retail Solutions 47,042 16,959 16,959 - 30,083 177 %
Retail Distribution 65,787 65,171 24,190 40,981 616 1 %
Total segment contribution margin $ 266,956 $ 166,966 $ 81,936 $ 85,030 $ 99,990 60 %
• ERP contribution margin - ERP contribution margin for the year ended September 30, 2012 was $154.1 million as compared to $84.8 million for the
year ended September 30, 2011, consisting of $40.8 million for the period
from Inception to September 30, 2011 (Successor) and $44.0 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Contribution
margin for ERP increased by $69.3 million, or 82%, for the year ended
September 30, 2012. Of this increase, $54.2 million was attributable to
the inclusion of a full year of Legacy Epicor while Predecessor contribution margin increased by $15.1 million as a result of increased
gross margins of approximately $11.0 million primarily due to increased
professional and support services revenues (including a $4.1 million
decrease in deferred revenue purchase accounting adjustments) as well as a
$3.2 million reduction in sales and marketing and product development
salary related expenses and a $0.7 million reduction in legal related
costs.
• Retail Solutions contribution margin - Retail Solutions contribution
margin for the year ended September 30, 2012 was $47.1 million as compared
to $17.0 million for the year ended September 30, 2011. As the Predecessor
did not have a Retail Solutions segment, there was no contribution margin
for the period from October 1, 2010 to May 15, 2011 (Predecessor).
Contribution margin for Retail Solutions increased by $30.1 million, or
177%, for the year ended September 30, 2012, primarily attributable to the
inclusion of a full year of Legacy Epicor.
• Retail Distribution contribution margin - Retail Distribution contribution
margin for the year ended September 30, 2012 was $65.8 million as compared
to $65.2 million for the year ended September 30, 2011 consisting of $24.2
million for the period from Inception to September 30, 2011 (Successor)
and $41.0 million for the period from October 1, 2010 to May 15, 2011
(Predecessor). Contribution margin for Retail Distribution increased by $0.6 million, or 1%, for the year ended September 30, 2012. The increase
was primarily due to a $2.9 million increase in gross margins (including a
$1.8 million decrease in deferred revenue purchase accounting adjustments)
primarily as a result of support price increases and new customer
maintenance support revenues and a $0.5 million decrease in product
development outside services partially offset by salary related increases
of $1.4 million in sales and marketing and $1.4 million in product
development.
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The reconciliation of total segment contribution margin to loss before income
taxes is as follows:
Non-GAAP
Predecessor/Successor
Combined Predecessor
Year Ended Year Ended Inception to October 1, 2010 to
September 30,
(in thousands) September 30, 2012 September 30, 2011 2011 May 15, 2011
Segment contribution margin $ 266,956 $ 166,966 $ 81,936 $ 85,030
Corporate and unallocated costs (66,047 ) (40,531 ) (23,378 ) (17,153 )
Share-based compensation expense (8,308 ) (5,713 ) - (5,713 )
Depreciation and amortization (138,985 ) (76,038 ) (50,716 ) (25,322 )
Acquisition-related costs (8,845 ) (59,427 ) (42,581 ) (16,846 )
Restructuring costs (4,776 ) (11,076 ) (11,049 ) (27 )
Interest expense (90,483 ) (69,712 ) (36,643 ) (33,069 )
Other income (expense), net (133 ) (34 ) (257 ) 223
Loss before income taxes $ (50,621 ) $ (95,565 ) $ (82,688 ) $ (12,877 )
Combined Year Ended September 30, 2011 (Predecessor/Successor)(Non-GAAP)
compared to the Year Ended September 30, 2010 (Predecessor)
Total revenues
Our total revenues were $532.1 million for the year ended September 30, 2011
which consisted of $304.8 million for the period from Inception to September 30,
2011 and $227.3 million for the period from October 1, 2010 to May 15, 2011
(Predecessor). Our ERP, Retail Solutions and Retail Distribution segments
accounted for approximately 52%, 10% and 38%, respectively, of our revenues
during the year ended September 30, 2011. Total revenues for the year ended
September 30, 2010 were $369.2 million. Total revenues increased by $162.9
million, or 44%, in the year ended September 30, 2011 as compared to the year
ended September 30, 2010. Of this increase, $170.6 million was attributable to
the inclusion of four and one half months of Legacy Epicor revenues, while
Predecessor revenues decreased by $7.7 million. The Predecessor decrease was
primarily attributed to an $8.9 million deferred revenue purchase accounting
adjustment as well as lower hardware revenues, partially offset by higher
license revenues. During the year ended September 30, 2010 our ERP, Retail
Solutions and Retail Distribution segments accounted for approximately 41%, 0%
and 59%, respectively, of the Predecessor's revenues. The shift in ERP, Retail
Solutions and Retail Distribution percentage of total revenues is attributable
to the inclusion of four and one half months of Legacy Epicor revenues in the
year ended September 30, 2011. See Note 13 to our audited consolidated financial
statements for further information on our segments, including a summary of our
segment revenues and contribution margin.
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The following table sets forth, for the periods indicated, our segment revenues
by systems and services and the variance thereof:
Non-GAAP
Predecessor/
Successor Combined Predecessor Predecessor
Year Ended Inception to October 1, 2010 to Year Ended
(in thousands, except September 30, September 30,
percentages) 2011 2011 May 15, 2011 September 30, 2010 Variance $ Variance %
ERP revenues:
Systems:
License $ 63,833 $ 46,796 $ 17,037 $ 22,459 $ 41,374 184 %
Professional services 62,222 48,457 13,765 21,944 40,278 184 %
Hardware 12,251 5,913 6,338 8,488 3,763 44 %
Other 189 185 4 6 183 3,050 %
Total systems 138,495 101,351 37,144 52,897 85,598 162 %
Services 141,138 77,567 63,571 99,233 41,905 42 %
Total ERP revenues 279,633 178,918 100,715 152,130 127,503 84 %
Retail Solutions revenues:
Systems:
License 6,310 6,310 - - 6,310 100 %
Professional services 13,836 13,836 - - 13,836 100 %
Hardware 8,785 8,785 - - 8,785 100 %
Other - - - - - 100 %
Total systems 28,931 28,931 - - 28,931 100 %
Services 23,437 23,437 - - 23,437 100 %
Total Retail Solutions
revenues 52,368 52,368 - - 52,368 100 %
Retail Distribution
revenues:
Systems:
License 17,085 5,930 11,155 21,931 (4,846 ) (22 )%
Professional services 13,122 4,016 9,106 14,341 (1,219 ) (9 )%
Hardware 21,084 7,867 13,217 31,934 (10,850 ) (34 )%
Other 5,198 2,071 3,127 5,321 (123 ) (2 )%
Total systems 56,489 19,884 36,605 73,527 (17,038 ) (23 )%
Services 143,595 53,585 90,010 143,565 30 - %
Total Retail Distribution
revenues 200,084 73,469 126,615 217,092 (17,008 ) (8 )%
Total revenues:
Systems:
License 87,228 59,036 28,192 44,390 42,838 97 %
Professional services 89,180 66,309 22,871 36,285 52,895 146 %
Hardware 42,120 22,565 19,555 40,422 1,698 4 %
Other 5,387 2,256 3,131 5,327 60 1 %
Total systems 223,915 150,166 73,749 126,424 97,491 77 %
Services 308,170 154,589 153,581 242,798 65,372 27 %
Total revenues $ 532,085 $ 304,755 $ 227,330 $ 369,222 $ 162,863 44 %
The following table sets forth, for the periods indicated, our Non-GAAP segment
revenues by systems and services excluding the impact of the deferred revenue
purchase accounting adjustment. Segment revenues excluding the impact of the
deferred revenue purchase accounting adjustment do not represent GAAP revenues
for our segments. We use segment revenues
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excluding the impact of the deferred revenue purchase accounting adjustment in
order to compare the results of our segments on a comparable basis.
Non-GAAP
Predecessor/Successor
Combined Predecessor Predecessor
Year Ended Inception to October 1, 2010 to Year Ended
(in thousands, except September 30,
percentages) September 30, 2011 2011 May 15, 2011 September 30, 2010 Variance $ Variance %
Systems revenues:
ERP $ 139,795 $ 102,651 $ 37,144 $ 52,897 $ 86,898 164 %
Retail Solutions 28,930 28,930 - - 28,930 100 %
Retail Distribution 57,696 21,091 36,605 73,527 (15,831 ) (22 )%
Deferred revenue purchase
accounting adjustment (2,506 ) (2,506 ) - - (2,506 ) (100 )%
Total systems revenues 223,915 150,166 73,749 126,424 97,491 77 %
Services revenues: -
ERP 166,606 103,035 63,571 99,233 67,373 68 %
Retail Solutions 23,437 23,437 - - 23,437 (100 )%
Retail Distribution 144,893 54,883 90,010 143,565 1,328 1 %
Deferred revenue purchase
accounting adjustment (26,766 ) (26,766 ) - - (26,766 ) (100 )%
Total services revenues 308,170 154,589 153,581 242,798 65,372 27 %
Total revenues:
ERP 306,401 205,686 100,715 152,130 154,271 101 %
Retail Solutions 52,367 52,367 - - 52,367 100 %
Retail Distribution 202,589 75,974 126,615 217,092 (14,503 ) (7 )%
Deferred revenue purchase
accounting adjustment (29,272 ) (29,272 ) - - (29,272 ) (100 )%
Total revenues $ 532,085 $ 304,755 $ 227,330 $ 369,222 $ 162,863 44 %
The following amounts are stated net of deferred revenue purchase accounting
adjustments.
• ERP revenues - ERP revenues were $279.6 million for the year ended
September 30, 2011 as compared to $152.1 million for the year ended
September 30, 2010. ERP revenues for the year ended September 30, 2011
included $178.9 million for the period from Inception to September 30, 2011 (Successor) and $100.7 million for the period from October 1, 2010 to
May 15, 2011 (Predecessor). ERP revenues increased by $127.5 million, or
84%, in the year ended September 30, 2011 as compared to the year ended
September 30, 2010, primarily due to an increase of $118.2 million
increase attributable to the inclusion of four and one half months of Legacy Epicor revenues. Predecessor revenues increased by $9.3 million due
primarily to an increase in license revenue attributed to large strategic
deals partially and support price increases and new customer maintenance
support revenues partially offset by $6.4 million deferred revenue
purchase accounting adjustments.
ERP systems revenues for the year ended September 30, 2011 were
$138.5 million compared to $52.9 million for the year ended
September 30, 2010. ERP systems revenues for the year ended
September 30, 2011 included $101.4 million for the period from
Inception to September 30, 2011 (Successor) and $37.1 million for
the period from October 1, 2010 to May 15, 2011 (Predecessor). ERP
systems revenues increased by $86.6 million, or 162% for the year
ended September 30, 2011 as compared to the year endedSeptember 30,
2010, primarily due to an increase of $73.4 million attributable to
the inclusion of four and one half months of Legacy Epicor ERP
systems revenues, while Predecessor ERP systems revenues increased
by $12.2 million. The increase in the Predecessor systems revenue
was primarily due to a $9.1 million increase license
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revenue, a $1.4 million increase in professional services revenue and a $1.7
million increase in hardware (all net of $0.3 million deferred revenue purchase
accounting adjustments) primarily due to large strategic deals.
ERP services revenues were $141.1 million for the year ended
September 30, 2011 compared to $99.2 million for the year ended
September 30, 2010. ERP services revenues for the year ended
September 30, 2011 included $77.5 million for the period from
Inception to September 30, 2011 (Successor) and $63.6 million for
the period from October 1, 2010 to May 15, 2011 (Predecessor). ERP
services revenues increased by $41.9 million, or 42% in the year
ended September 30, 2011 as compared to the year endedSeptember 30,
2010, primarily due to an increase of $44.9 million attributable to
the inclusion of four and one half months of Legacy Epicor ERP
services revenues, while Predecessor ERP services revenues decreased
by $3.0 million, primarily due to a $6.1 million deferred revenue
purchase accounting adjustment and legacy platform attrition
partially offset by support price increases and new customer
maintenance support revenues.
• Retail Solutions revenues - Retail Solutions revenues were $52.4 million
for the year ended September 30, 2011, all of which occurred for the
period from Inception to September 30, 2011. The Retail Solutions segment
originated in Legacy Epicor, and as such, for the year ended September 30,
2010, the Predecessor's results do not include revenues from Retail
Solutions. Retail Solutions systems and services revenues were $28.9
million and $23.4 million, respectively, in the year ended September 30,
2011 as compared to $0 for the year ended September 30, 2010.
• Retail Distribution revenues - Retail Distribution revenues were $200.1
million for the year ended September 30, 2011 compared to $217.1 million
for the year ended September 30, 2010. Retail Distribution revenues for
the year ended September 30, 2011 included $73.5 million for the period
from Inception to September 30, 2011 (Successor) and $126.6 million for
the period from October 1, 2010 to May 15, 2011 (Predecessor). Retail
Distribution revenues decreased by $17.0 million, or 8%, for the year
ended September 30, 2011, as compared to the year ended September 30, 2010, primarily due lower systems revenues and a $2.5 million deferred
revenue purchase accounting adjustment. Retail Distribution systems
revenues decreased by $17.0 million primarily due to large strategic deals
in 2010 and a $1.2 million deferred revenue purchase accounting adjustment. Retail Distribution services revenues were flat primarily as a
result of support price increases and new customer maintenance support
revenues offset by $1.3 million deferred revenue purchase accounting
adjustments and legacy platform attrition.
Total operating and other expenses
The following table sets forth our operating and other expenses for the periods
indicated and the variance thereof:
Non-GAAP
Predecessor/
Successor Combined Predecessor Predecessor
Year Ended Inception to October 1, Year Ended
(In thousands, except
percentages) September 30, 2011 September 30, 2011 May 15, 2010 September 30, 2010 Variance $ Variance %
Cost of systems revenues $ 121,194 $
81,272 $ 39,922 $ 67,986 $ 53,208 78 %
Cost of services revenues 100,106 52,240 47,866 77,143 22,963 30 %
Total cost of revenues 221,300 133,512 87,788 145,129 76,171 52 %
Sales and marketing 89,857 53,657 36,200 56,390 33,467 59 %
Product development 51,076 31,417 19,659 30,917 20,159 65 %
General and 49,130 27,611 21,519 28,116
administrative 21,014 75 %
Depreciation and 76,038 50,716 25,322 39,611
amortization 36,427 92 %
Acquisition-related costs 59,427 42,581 16,846 2,862 56,565 1,976 %
Restructuring costs 11,076 11,049 27 2,981 8,095 272 %
Total other operating
expenses 336,604 217,031 119,573 160,877 175,727 109 %
Interest expense (69,712 ) (36,643 ) (33,069 ) (30,427 ) (39,285 ) 129 %
Other income (expense),
net (34 ) (257 ) 223 (101 ) 67 (66 )%
Income tax expense
(benefit) (31,208 ) (26,720 ) (4,488 ) 13,948 (45,156 ) (324 )%
• Cost of systems revenues - Cost of systems revenues was $121.2 million for
the year ended September 30, 2011, as compared to $68.0 million for the
year ended September 30, 2010. Costs of systems revenues for the year
ended
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September 30, 2011 included $81.3 million for the period from Inception to
September 30, 2011 (Successor) and $39.9 million for the period from October 1,
2010 to May 15, 2011 (Predecessor). Cost of systems revenues increased by $53.2
million, or 78%, for the year ended September 30, 2011 as compared to the year
ended September 30, 2010, primarily as a result of incremental cost of systems
revenues from Legacy Epicor of $57.8 million, partially offset by a decrease in
Predecessor costs of systems revenues of $4.6 million which was primarily
attributed to a lower mix of hardware revenues.
• Cost of services revenues - Cost of services revenues was $100.1 million
for the year ended September 30, 2011 as compared to $77.1 million for the
year ended September 30, 2010. Cost of services revenues for the year
ended September 30, 2011 included $52.2 million for the period from
Inception to September 30, 2011 (Successor) and $47.9 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Cost of
services revenues increased by $23.0 million, or 30% in the year ended
September 30, 2011 as compared to the year ended September 30, 2010,
primarily as a result of incremental cost of services revenues from Legacy
Epicor of $24.9 million, partially offset by a $1.9 million decrease in
Predecessor cost of services revenues which was primarily attributed to
lower salary related costs.
Total other operating expenses were $336.6 million for the year ended September
30, 2011 compared to $160.9 million for the year ended September 30, 2010.
Operating expenses for the year ended September 30, 2011 included $217.0 million
for the period from Inception to September 30, 2011 (Successor) and $119.6
million for the period from October 1, 2010 to May 15, 2011 (Predecessor). Total
other operating expenses increased by $175.7 million, or 109%, for the year
ended September 30, 2011 as compared to the year ended September 30, 2010,
driven primarily by $120.4 million of incremental operating costs from Legacy
Epicor as well as increased depreciation and amortization and
acquisition-related expenses.
• Sales and marketing - Sales and marketing expenses were $89.9 million for
the year ended September 30, 2011 as compared to $56.4 million for the
year ended September 30, 2010. Sales and marketing expense for the year
ended September 30, 2011 included $53.7 million for the period from
Inception to September 30, 2011 (Successor) and $36.2 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Sales and
marketing expenses increased by $33.5 million, or 59%, in the year ended
September 30, 2011 as compared to the year ended September 30, 2010, which
was primarily attributable to an incremental $33.7 million of Legacy
Epicor sales and marketing expenses.
• Product development - Product development expenses were $51.1 million for
the year ended September 30, 2011 as compared to $30.9 million for the
year ended September 30, 2010. Product development expense for the year
ended September 30, 2011 included $31.4 million for the period from
Inception to September 30, 2011 (Successor) and $19.7 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor). Product
development expenses increased by $20.2 million, or 65%, in the year ended
September 30, 2011 as compared to the year ended September 30, 2010, which
was primarily attributable to $20.4 million of incremental product
development costs from Legacy Epicor.
• General and administrative - General and administrative expenses were
$49.1 million for the year ended September 30, 2011 as compared to $28.1 million for the year ended September 30, 2010. General and administrative
expenses for the year ended September 30, 2011 included $27.6 million for
the period from Inception to September 30, 2011 (Successor) and $21.5
million for the period from October 1, 2010 to May 15, 2011 (Predecessor).
General and administrative expenses increased by $21.0 million, or 75%, in
the year ended September 30, 2011 as compared to the year ended September
30, 2010. The increase was primarily attributable to the inclusion of
incremental general and administrative expenses from Legacy Epicor, as
well as $0.9 million of non-income based tax assessments, as well as a $0.3 million increase in board fees and $1.0 million of one-time related
costs.
• Depreciation and amortization - Depreciation and amortization expense was
$76.0 million for the year ended September 30, 2011 as compared to $39.6
million for the year ended September 30, 2010. General and administrative
expenses for the year ended September 30, 2011 included $50.7 million for
the period from Inception to September 30, 2011 (Successor) and $25.3
million for the period from October 1, 2010 to May 15, 2011 (Predecessor).
Depreciation and amortization expense increased by $36.4 million, or 92%,
in the year ended September 30, 2011 as compared to the year ended
September 30, 2010, primarily as a result of additional amortization on
increased intangible assets due to the Acquisitions.
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• Acquisition-related costs - Acquisition-related costs were $59.4 million
for the year ended September 30, 2011, which consisted of $42.6 million
for the period from Inception to September 30, 2011 (Successor) and $16.8
million for the period from October 1, 2010 to May 15, 2011 (Predecessor).
The acquisition costs for the period from Inception to September 30, 2011
included sponsor arrangement fees, legal fees, investment banker fees,
bond breakage fees, due diligence fees, costs to integrate acquired
companies, and costs related to the Acquisitions completed in May 2011.
The acquisition costs for the period from October 1, 2010 to May 15, 2011
(Predecessor) included the Predecessor's acquisition costs incurred prior
to the acquisitions. Acquisition-related costs were $2.9 million for the year ended September 30, 2010 which consisted primarily of acquisition
related activities for the Predecessor.
• Restructuring costs - Restructuring costs for the year ended September 30,
2011 were $11.1 million, including $11.0 million in the period from
Inception to September 30, 2011 (Successor) and were less than $0.1
million in the period from October 1, 2010 to May 15, 2011 (Predecessor).
Restructuring costs during the period from Inception to September 30, 2011
were attributable to our management approved restructuring actions as a
result of the Acquisitions primarily related to eliminating certain
employee positions and consolidating certain excess facilities with the
intent to streamline and focus our operations and more properly align our
cost structure with our projected revenue streams. During the year ended
September 30, 2010, the Predecessor incurred $3.0 million of restructuring
related charges, primarily related to the elimination of certain employee
positions. See Note 11 to our consolidated financial statements.
Interest Expense
Interest expense for the year ended September 30, 2011 was $69.7 million as
compared to $30.4 million for the year ended September 30, 2011. Interest
expense for the year ended September 30, 2011 included $36.6 million for the
period from Inception to September 30, 2011(Successor) and $33.1 million for the
period from October 1, 2010 to May 15, 2011 (Predecessor), respectively. The
increase in interest expense was primarily a result of increased debt levels
after the Acquisitions as well as the write-off of deferred financing fees of
approximately $7.8 million and $4.1 million for retired debt instruments of the
Predecessor and Legacy Epicor, respectively.
Other income (expense), net
Other income (expense) for the year ended September 30, 2011 was less than $0.1
million of expense compared $0.1 million expense for the year ended September
30, 2010. For the year ended September 30, 2011 other income (expense) net
consisted of $0.3 million of expense for the period from Inception to September
30, 2011 (Successor) and $0.2 million income for the period from October 1, 2010
to May 15, 2011 (Predecessor), respectively. The year ended September 30, 2011
included $1.4 million of earnings from our previous minority interest in
Internet Auto Parts Inc., partially offset by a loss on disposal of fixed assets
of $1.5 million. The year ended September 30, 2010 consisted primarily of a $0.7
million franchise tax charge offset by a $0.7 million favorable foreign exchange
gain.
Income tax expense (benefit)
Income tax benefit was $31.2 million, or 32.7% of pretax income, for the year
ended September 30, 2011, including $26.7 million for the period from Inception
to September 30, 2011 (Successor) and $4.5 million for the period from October
1, 2010 to May 15, 2011 (Predecessor). We recognized income tax expense of $13.9
million, or 42.7% of pre-tax income, for the year ended September 30, 2010. The
change in income tax expense (benefit) was attributable primarily to the change
from pre-tax income in the year ended September 30, 2010 to pre-tax loss in the
year ended September 30, 2011. The change in the income tax rate was due
primarily to increases in tax reserves recorded in the period from October 1,
2010 to May 15, 2011. See Note 9 - Income Taxes in our consolidated financial
statements for additional information about income taxes.
Contribution margin
Contribution margin for the period from Inception to September 30, 2011 and the
year ended September 30, 2010 (Predecessor) is as follows:
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Non-GAAP
Predecessor/
Successor Combined Predecessor Predecessor
Year Ended Inception to October 1, 2010 to Year Ended
(in thousands, except September 30,
percentages) September 30, 2011 2011 May 15, 2011 September 30, 2010 Variance $ Variance %
ERP $ 84,836 $ 40,787 $ 44,049 $ 65,987 $ 18,849 29 %
Retail Solutions 16,959 16,959 - - 16,959 100 %
Retail Distribution $ 65,171 $ 24,190 $ 40,981 $ 70,351 $ (5,180 ) (7 )%
Total segment contribution
margin $ 166,966 $ 81,936 $ 85,030 $ 136,338 $ 30,628 22 %
• ERP contribution margin - ERP contribution margin for the year ended
September 30, 2011 was $84.8 million as compared to $66.0 million for the
year ended September 30, 2010. ERP contribution margin for the year ended
September 30, 2011 consisted of $40.8 million for the period from
Inception to September 30, 2011 (Successor) and $44.0 million for the period from October 1, 2010 to May 15, 2011 (Predecessor). Contribution
margin for ERP increased by $18.8 million, or 29%, for the year ended
September 30, 2011, of which $13.1 million was attributable to the
inclusion of four and one half months of Legacy Epicor while Predecessor
contribution margin increased by $5.7 million as a result of increased
gross margins of approximately $7.6 million (including $6.4 million of
deferred revenue purchase accounting adjustments) primarily due to
increased license revenues partially offset by $1.7 million increase in
sales and marketing related expenses.
• Retail Solutions contribution margin-Retail Solutions contribution margin
for the year ended September 30, 2011 was $17.0 million. As the
Predecessor did not have a Retail Solutions segment, there were no Retail
Solutions operations in the period from October 1, 2010 to May 15, 2011 or
for the year ended September 30, 2010.
• Retail Distribution contribution margin - Retail Distribution contribution
margin for the year ended September 30, 2011 was $65.2 million as compared
to $70.4 million for the year ended September 30, 2010. Retail
Distribution contribution margin for the year ended September 30, 2011
consisted of $24.2 million for the period from Inception to September 30,
2011 (Successor) and $41.0 million for the period from October 1, 2010 to
May 15, 2011 (Predecessor). Contribution margin for Retail Distribution
decreased by $5.2 million, or 7%, for the year ended September 30, 2011,
primarily due to an $8.3 million decrease in gross margins (including a
$2.5 million decrease in deferred revenue purchase accounting adjustments)
primarily as a result of lower system revenues due to large strategic
deals in 2010 partially offset by support price increases and new customer
maintenance support revenues and a $2.7 million decrease in sales and
marketing salary related expenses.
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The reconciliation of total segment contribution margin to income (loss) from
continuing operations before income taxes is as follows:
Non-GAAP
Predecessor/
Successor Combined Predecessor Predecessor
Year Ended Inception to October 1, 2010 to Year Ended
September 30,
(in thousands) September 30, 2011 2011 May 15, 2011 September 30, 2010
Segment contribution margin $ 166,966 $ 81,936 $ 85,030 $ 136,338
Corporate and unallocated costs (40,531 ) (23,378 ) (17,153 ) (23,918 )
Share-based compensation expense (5,713 ) - (5,713 ) (3,750 )
Depreciation and amortization (76,038 ) (50,716 ) (25,322 ) (39,611 )
Acquisition-related costs (59,427 ) (42,581 ) (16,846 ) (2,862 )
Restructuring costs (11,076 ) (11,049 ) (27 ) (2,981 )
Interest expense (69,712 ) (36,643 ) (33,069 ) (30,427 )
Other income (expense), net (34 ) (257 ) 223 (101 )
Income (loss) from continuing
operations before income taxes $ (95,565 ) $ (82,688 ) $ (12,877 ) $ 32,688
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows provided by operating activities
and borrowings under our Senior Secured Credit Facilities (the "2011 credit
agreement") and senior notes. We believe that these sources will provide
sufficient liquidity for us to meet our working capital, capital expenditure and
other cash requirements for the next twelve months. We believe that the costs
associated with implementing our business strategy will not materially impact
our liquidity. We are dependent upon our future financial performance, which is
subject to many economic, commercial, financial and other factors that are
beyond our control, including the ability of financial institutions to meet
their lending obligations to us. If those factors
significantly change, our business may not be able to generate sufficient cash
flow from operations and additional capital may not be available to meet our
liquidity needs. We anticipate that to the extent that we require additional
liquidity as a result of these factors or in order to execute our strategy, it
would be financed either by borrowings under our 2011 credit agreement, by other
indebtedness, additional equity financings or a combination of the foregoing. We
may be unable to obtain any such additional financing on terms acceptable to us
or at all.
As a result of completing the Acquisitions, we have significant leverage. As of
September 30, 2012, our total indebtedness was $1,324.1 million ($1,316.6
million, net of original issue discount). We also had an additional undrawn
revolving credit facility of $75.0 million. Our cash requirements will be
significant, primarily due to our debt service requirements. Our interest
expense for the year ended September 30, 2012 was $90.5 million.
In connection with our acquisition of SolarSoft Business Systems Inc. in October
2012, we borrowed $69 million under our revolving credit facility.
Contractual Obligations
The following table summarizes our contractual obligations at September 30, 2012
(in thousands):
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Payments Due by Fiscal Year
Contractual
Obligations: Total 2013 2014 2015 2016 2017 2018 and Beyond
Long-term debt
obligations (1) $ 1,324,140 $ 8,700 $ 8,700 $ 8,700 $ 8,700 $ 8,700 $ 1,280,640
Operating lease
obligations(2) 70,268 15,776 12,993 10,320 7,394 6,835 16,950
Interest obligations
(3) 605,157 83,153 84,277 83,836 83,395 82,781 187,715
Pension benefit
payments 2,850 431 421 421 421 421 735
Purchase obligations 29 29 - - - - -
Total $ 2,002,444 $ 108,089 $ 106,391 $ 103,277 $ 99,910 $ 98,737 $ 1,486,040
(1) Includes current portion of long-term debt. See Note 6 - Debt in the notes
to our audited consolidated financial statements
for additional information regarding our long-term debt obligations.
(2) See Note 16 - Commitments and Contingencies in the notes to our audited
consolidated financial statements for additional information regarding our
operating lease obligations.
(3) Represents interest payment obligations related to our long-term debt as
specified in the applicable debt
agreements. A portion of our long-term debt has variable interest rates due to
either existing swap
agreements or interest arrangements. We have estimated our variable interest
payment obligations by using
the interest rate forward curve where practical. Given the uncertainties in
future interest rates we have not
included the beneficial impact of interest rate swaps.
We have current contractual obligations and commercial commitments of
approximately $100 million per year from fiscal 2013 through fiscal 2017.
Additionally, we expect capital expenditures from fiscal 2013 through fiscal
2017 to range from three to four percent of revenues.
In October 2012, we acquired SolarSoft Business Systems for $155 million of
cash. We financed the acquisition by utilizing $86 million of our cash and cash
equivalents and by drawing $69 million on our senior secured credit facility.
We believe that our projected cash flow from operations will be sufficient to
cover the liquidity needs listed above for at least the next 12 months.
We expect that the predictable revenue stream generated by our services revenues
as well as other cash flows from operations, as well as the available borrowings
on our senior secured credit facility will be sufficient to cover our liquidity
needs for the foreseeable future.
Off Balance Sheet Arrangements
The Securities Exchange Commission rules require disclosure of off-balance sheet
arrangements with unconsolidated entities which are reasonably likely to have a
material effect on the company's financial position, capital resources, results
of operations, or liquidity. We did not have any such off-balance sheet
arrangements as of September 30, 2012.
2011 Credit Agreement
As of September 30, 2012, we had $859.2 million (before $7.6 million unamortized
original issue discount as of September 30, 2012) outstanding under our 2011
credit agreement. In addition, at September 30, 2012, we had $75 million of
available borrowing capacity on our revolving credit facility. During October
2012, we borrowed $69 million on our revolving credit facility in connection
with our acquisition of Solarsoft Business Systems. We currently have an
outstanding balance of $69 million and $6 million of available borrowing
capacity on the revolving credit facility.
The borrowings under the 2011 credit agreement bear variable interest based on
corporate rates, the federal funds rates and Eurocurrency rates. As of
September 30, 2012, the interest rate applicable to the term loans was 5.0%.
Substantially all of our assets and those of our domestic subsidiaries are
pledged as collateral to secure our obligations under the 2011 credit agreement
and each of our material wholly-owned domestic subsidiaries guarantee our
obligations thereunder. The terms of the 2011 credit agreement require
compliance with various covenants and amounts repaid under the term loans may
not be re-borrowed.
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For more information, see Note 6 in the audited consolidated financial
statements included elsewhere in this filing.
Covenant Compliance
The terms of the 2011 credit agreement and the senior notes restrict certain
activities, the most significant of which include limitations on the incurrence
of additional indebtedness, liens or guarantees, payment or declaration of
dividends, sales of assets and transactions with affiliates. The 2011 credit
agreement also contains certain customary affirmative covenants and events of
default.
Under the 2011 credit agreement, if at any time we have an outstanding balance
under the revolving credit facility, our first lien senior secured leverage,
consisting of amounts outstanding under the 2011 credit agreement and other
secured borrowings, may not exceed the applicable ratio to our consolidated
Adjusted EBITDA for the preceding 12-month period. At September 30, 2012, the
applicable ratio is 5.00 to 1.00, which ratio incrementally steps down to 3.25
to 1.00 over the term of the revolving loan facility.
At September 30, 2012, we did not have an outstanding balance under the
revolving credit facility, we were not subject to the maximum first lien senior
secured leverage ratio requirement, and we were in compliance with all covenants
included in the terms of the 2011 credit agreement and the senior notes.
We use consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as further adjusted, a non-GAAP financial measure, to
determine our compliance with certain covenants contained in the 2011 credit
agreement and the senior notes. For covenant calculation purposes, "adjusted
EBITDA" is defined as consolidated net income (loss) adjusted to exclude
interest, taxes, depreciation and amortization, and further adjusted to exclude
unusual items and other adjustments permitted in calculating covenant compliance
under our senior secured credit facilities. The breach of covenants in our 2011
credit agreement that are tied to ratios based on Adjusted EBITDA could result
in a default under that agreement and under our indenture governing the senior
notes, which would result in the acceleration of our indebtedness which would
materially adversely affect our liquidity.
Calculation of Excess Cash Flow
The 2011 credit agreement requires us to make certain mandatory prepayments when
we generate excess cash flow. The calculation of excess cash flow per the 2011
credit agreement includes net income, adjusted for non-cash charges and credits,
changes in working capital and other adjustments, less the sum of debt principal
repayments, capital expenditures, and other adjustments. The excess cash flow
calculation may be reduced based on our attained ratio of consolidated total
debt to EBITDA (consolidated earnings before interest, taxes, depreciation and
amortization, further adjusted to exclude unusual items and other adjustments
permitted in calculating covenant compliance under the indenture governing the
senior notes and our 2011 credit agreement), all as defined in the 2011 credit
agreement. We did not generate excess cash flow during fiscal 2012, as a result
of entering into a definitive agreement to purchase SolarSoft Business Systems,
Inc. for $155 million in cash. As such, we were not required to make a mandatory
prepayment for fiscal 2012.
Senior Notes
As of September 30, 2012, we had senior notes due 2019 outstanding of $465.0
million in principal amount at an interest rate of 8 5/8%. The indenture that
governs the senior notes contains certain covenants, agreements and events of
default that are customary with respect to non-investment grade debt securities,
including limitations on mergers, consolidations, sale of substantially all of
our assets, incurrence of indebtedness, restricted payments liens and affiliates
transactions by us or our restricted subsidiaries. The terms of the senior notes
require us to make an offer to repay the senior notes upon a change of control
or upon certain asset sales. The terms of the indenture also significantly
restrict us and our restricted subsidiaries from paying dividends and otherwise
transferring assets. For more information, see Senior Notes Due 2019 ("Senior
Notes") in Note 6 in the audited consolidated financial statements included
elsewhere in this filing.
Cash Flows
Operating Activities
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Net cash provided by operating activities for the year ended September 30, 2012
was $133.6 million and included net loss of $39.1 million, add-backs for
non-cash charges of $160.8 million, and cash provided by changes in operating
assets and liabilities of $32.4 million, offset by a deferred tax benefit of
$20.6 million. Cash provided by operating activities for the year ended
September 30, 2011 (Non-GAAP Predecessor/Successor Combined) was $23.5 million
and included cash used in operating activities of $3.9 million for the period
from Inception to September 30, 2011 and cash provided by operating activities
of $27.4 million for the period from October 1, 2010 to May 15, 2011
(Predecessor). Cash used in operating activities for the period from Inception
to September 30, 2011 was $3.9 million and included a net loss of $56.0 million
and a deferred tax benefit of $30.6 million, offset by add-backs for non-cash
charges of $57.5 million, and cash provided by changes in operating assets and
liabilities of $25.2 million. Cash provided by the Predecessor's operating
activities for the period from October 1, 2010 to May 15, 2011 included net loss
of $8.4 million, cash used by changes in operating assets and liabilities of
$8.4 million, offset by add-backs for non-cash charges of $42.0 million and a
deferred tax provision of $2.2 million. Cash provided by the Predecessor's
operating activities from continuing operations was $58.5 million for the fiscal
year ended September 30, 2010, and included net income from continuing
operations of $18.7 million plus cash provided by non-cash expenses of $47.8
million, offset by deferred tax benefit of $5.6 million and cash used by changes
in operating assets and liabilities of $2.4 million.
Investing Activities
Net cash used in investing activities for the year ended September 30, 2012 was
$41.1 million, and was primarily for purchases of $25.8 million of property and
equipment, $11.1 million for capitalization of database and software costs, and
$4.9 million for acquisitions of businesses, offset by cash provided by sales of
short term investments of $0.7 million. Cash used in investing activities for
the year ended September 30, 2011 (Non-GAAP Predecessor/Successor Combined) was
$1,625.2 million and included cash used in investing activities of $1,614.6
million for the period from Inception to September 30, 2012 and cash used in
investing activities of $10.6 million for the period from October 1, 2010 to May
15, 2011 (Predecessor). The cash used in investing activities for the period
from Inception to September 30, 2011 was primarily used to fund the acquisitions
of Activant and Legacy Epicor as well as for purchases of $7.4 million of
property and equipment and $4.3 million for capitalization of database and
software costs. Net cash used in investing activities for the Predecessor for
the period from October 1, 2010 through May 15, 2011 was $10.6 million, and was
primarily for purchases of $3.9 million of property and equipment and $6.8
million for capitalization of database and software costs. Net cash used in
investing activities for the Predecessor for the year ended September 30, 2010
was $16.2 million, and was primarily for purchases of $5.1 million of property
and equipment and $11.1 million for capitalization of database and software
costs.
Financing Activities
Net cash provided by financing activities was $6.5 million for the year ended
September 30, 2012, and consisted of $8.7 million of cash used for payments of
long term debt, offset by $2.2 million of cash provided by loan from an
affiliate, Eagle Topco, Ltd. Cash provided by financing activities for the year
ended September 30, 2011 (Non-GAAP Predecessor/Successor Combined) was $1,661.3
million and included cash provided by financing activities of $1,665.9 million
for the period from Inception to September 30, 2011 and cash used in financing
activities of $4.7 million for the period from October 1, 2010 to May 15, 2011
(Predecessor). The cash provided by financing activities for the period from
Inception to September 30, 2011, was primarily related to funding from a $647.0
million equity investment from funds advised by Apax, and proceeds from our 2011
credit agreement, senior notes and revolving credit facility of $860.9 million,
$465.0 million and $27.0 million, respectively, reduced by the payment of
deferred financing fees of $39.7 million and the repayment of Legacy Epicor and
Activant debt of $294.3 million. Net cash used in financing activities by the
Predecessor for the period from October 1, 2010 through May 15, 2011 was $4.7
million which was primarily due to $2.6 million of costs associated with
amending and extending the Predecessor's senior secured credit agreement and
$2.6 million of principal payments on the Predecessor's long term debt partially
offset by $0.5 million of an excess tax benefit on stock based compensation.
Cash used in the Predecessor's financing activities was $23.5 million during the
year ended September 30, 2010, and consisted of payments of long term debt.
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
We believe that EBITDA and Adjusted EBITDA are useful financial metrics to
assess our operating performance from period to period by excluding certain
items that we believe are not representative of our core business. We believe
that these non-GAAP financial measures provide investors with useful tools for
assessing the comparability between periods of our ability to generate cash from
operations sufficient to pay taxes, to service debt and to undertake capital
expenditures. We use EBITDA and Adjusted EBITDA for business planning purposes
and in measuring our performance relative to that of our
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competitors.
We believe EBITDA and Adjusted EBITDA are measures commonly used by investors to
evaluate our performance and that of our competitors. EBITDA and Adjusted EBITDA
are not presentations made in accordance with GAAP and our use of
the terms EBITDA and Adjusted EBITDA varies from others in our industry. EBITDA
and Adjusted EBITDA should not be considered as alternatives to net income
(loss), operating income or any other performance measures derived in accordance
with GAAP as measures of operating performance or operating cash flows or as
measures of liquidity.
EBITDA and Adjusted EBITDA have important limitations as analytical tools and
you should not consider them in isolation or as substitutes for analysis of our
results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:
• exclude certain tax payments that may represent a reduction in cash
available to us;
• exclude amortization of intangible assets, which were acquired in
acquisitions of businesses in exchange for cash;
• do not reflect any cash capital expenditure requirements for the assets
being depreciated and amortized that may have to be replaced in the
future;
• do not reflect changes in, or cash requirements for, our working capital
needs; and
• do not reflect interest expense, or the cash requirements necessary to
service interest or principal payments, on our debt.
Although we were not required to meet a maximum first lien senior secured
leverage ratio as of September 30, 2012, due to the factors discussed above, our
management believes that Adjusted EBITDA is a key performance indicator for us.
As such, the calculation of Adjusted EBITDA for the periods indicated below is
as follows:
Non-GAAP
Predecessor/Successor
Combined Predecessor Predecessor
Year Ended Year Ended Inception to October 1, 2010 to Year Ended
(in thousands) September 30, 2012 September 30, 2011 September 30, 2011 May 15, 2011 September 30, 2010
Reconciliation of net income (loss)
to Adjusted EBITDA
Net income (loss) $ (39,086 ) $ (64,357 ) $ (55,968 ) $ (8,389 ) $ 24,561
Interest expense 90,483 69,712 36,643 33,069 30,427
Income tax expense (benefit) (11,535 ) (31,208 ) (26,720 ) (4,488 ) 13,948
Depreciation and amortization 138,985 76,038 50,716 25,322 39,611
EBITDA 178,847 50,185 4,671 45,514 108,547
Acquisition-related costs 8,845 59,427 42,581 16,846 2,862
Restructuring costs 4,776 11,076 11,049 27 2,981
Deferred revenue and other purchase
accounting adjustments 16,070 29,826 29,826 - -
Share-based compensation expense 8,308 5,713 - 5,713 3,750
Management fees paid to Apax 1,943 868 868 - 122
Other 4,819 3,287 1,044 2,243 (4,569 )
Adjusted EBITDA $ 223,608 $ 160,382 $ 90,039 $ 70,343 $ 113,693
Maximum First Lien Senior Secured Leverage Ratio
Our senior secured credit facility contains a maximum first lien senior secured
leverage ratio covenant which is effective if we have an outstanding balance on
our revolving credit facility as of the end of the period. As of September 30,
2012, we did not have a balance outstanding on our revolving credit facility.
As a result, we were not required to meet this covenant as of and for the twelve
months ended September 30, 2012.
In October 2012, we drew $69 million on the revolving credit facility to finance
the acquisition of SolarSoft Business Systems. We expect to have a balance
outstanding on the revolving credit facility as of December 31, 2012, and as
such we will be required to meet the maximum first lien senior secured leverage
ratio covenant in effect at December 31, 2012.
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The maximum first lien senior secured leverage ratio covenant is calculated
using Adjusted EBITDA for the previous twelve month period. The table below
presents the first lien senior secured leverage ratio which would have been
required by the covenant at September 30, 2012 if we had a balance outstanding
on our revolving credit facility, as well as the actual ratio attained as of
September 30, 2012.
Covenant
Requirements Our Ratio
Maximum first lien senior secured leverage ratio 5.00x 3.26x
Critical Accounting Policies
Our accompanying consolidated financial statements have been prepared in
conformity with U.S. generally
accepted accounting principles ("GAAP") as set forth in the Financial Accounting
Standard Board's ("FASB") Accounting Standards Codification ("ASC"). GAAP
requires us to make certain estimates, judgments and assumptions. These
estimates, judgments and assumptions can affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reported period. We believe that the estimates,
judgments and assumptions upon which we rely are reasonable based upon
information available to us at the time that they are made. To the extent there
are material differences between these estimates, judgments or assumptions and
actual results, our consolidated financial statements will be affected. The
significant accounting
policies which are most critical to aid in fully understanding and evaluating
reported financial results include the
following:
Revenue Recognition
Our primary sources of revenue are comprised of: licenses, which include the
sale or license of software, professional services, which include revenue
generated from installation and configuration of our software as well as
training and education services; hardware, which consist primarily of computer
server, POS and storage product offerings and installation; other, which
consists primarily of the sale of business products to our customers; and
services, which includes maintenance services and content and supply chain
services.
Revenue Recognition of Software Products and Software Related Services
Our revenue recognition for software elements is based on ASC
985-605-Software-Revenue Recognition. Revenue for sales of software licenses is
recognized when persuasive evidence of an arrangement exists, delivery of the
product has occurred, the fee is fixed or determinable and collection is
probable.
For multiple-element software arrangements (software and software related
services), we use the residual method of revenue recognition. Under the residual
method, consideration is allocated to undelivered elements based upon vendor
specific objective evidence (VSOE) of the fair value of those elements, with the
residual of the arrangement fee allocated to the software components. We have
established VSOE of fair value for each undelivered software element of the sale
through independent transactions not sold in connection with a software license.
VSOE of fair value of the maintenance services is determined by reference to the
price our customers are required to pay for the services when sold-separately.
For professional services, VSOE of fair value is based on the hourly or daily
rate at which these services were sold without any other product or service
offerings.
License Revenues: Amounts allocated to software license revenues that do not
require significant customization are recognized at the time of delivery of the
software when VSOE of fair value for all undelivered elements exists and all the
other revenue recognition criteria have been met. If VSOE of fair value does not
exist for all undelivered elements, license revenue is deferred and recognized
when delivery or performance of the undelivered element(s) has occurred or when
VSOE is established for the undelivered element(s). If maintenance or consulting
is the only remaining element for which VSOE of fair value does not exist, then
the related license revenue is recognized over the performance period of the
service.
Professional Service Revenues: Professional services are sold on a fixed fee and
time-and-materials basis. Consulting engagements can last anywhere from one day
to several months and are based strictly on the customer's requirements and
complexities. Our software, as delivered, can typically be used by the customer.
Our professional services are generally not essential to the functionality of
the software, as delivered, and do not result in any material changes to the
underlying software code.
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For services performed on a time-and-materials basis, revenue is recognized when
the services are performed. On occasion, we enter into fixed or "not to exceed"
fee arrangements. In these types of arrangements, revenue is recognized as
services are proportionally performed as measured by hours incurred to date, as
compared to total estimated hours to be incurred to complete the work. If, in
the services element of the arrangement we perform significant production,
modification or customization of our software, we account for the entire
arrangement, inclusive of the software license revenue, using contract
accounting as the software and services do not meet the criteria for separation.
Revenue from training engagements is generally recognized as the services are
performed.
Maintenance Revenues: Maintenance revenues consist primarily of fees for
providing unspecified software upgrades on a when-and-if-available basis and
technical support over a specified term. Maintenance revenues are typically paid
in advance and are recognized on a straight-line basis over the term of the
contract.
Revenue Recognition for Hardware and Other Products and Services (Non-software
Elements)
Our revenue recognition for non-software elements is based on ASC 605-Revenue
Recognition. Revenue for sales of hardware products and other products and
services are recognized when persuasive evidence of an arrangement exists,
delivery of the product has occurred, the fee is fixed or determinable and
collection is probable.
For multi-element arrangements that include non-software elements and software
essential to the hardware's functionality, we allocate revenue to all
deliverables based on their relative selling prices. In order to allocate
revenue based on each deliverable's relative selling price, we have established
the best estimated selling price for each item using a hierarchy of VSOE,
third-party evidence (TPE), and estimated selling price (ESP). VSOE generally
only exists when we sell the deliverable separately and is the price actually
charged for that deliverable. TPE of selling price represents the price charged
by other vendors of largely interchangeable products in standalone sales to
similar customers. ESPs reflect our best estimate of what the selling prices
would be if they were sold regularly on a stand-alone basis. We determine ESP
for a product or service by considering multiple factors, including, but not
limited to, transaction size, market conditions, competitive landscape, internal
costs, gross margin objectives and pricing practices.
Revenue Recognition for Multiple Element Arrangements with Software and
Non-software Elements
For multi-element arrangements that include non-software elements and software
not essential to the hardware's functionality, we first allocate the total
arrangement consideration based on the relative selling prices of the software
group of elements as a whole and to the non-software elements. In order to
allocate revenue based on each deliverables relative selling price, we have
established the best estimated selling price for each item using a hierarchy of
VSOE, third-party evidence (TPE), and estimated selling price (ESP). VSOE
generally only exists when we sell the deliverable separately and is the price
actually charged for that deliverable. TPE of selling price represents the price
charged by other vendors of largely interchangeable products in standalone sales
to similar customers. ESPs reflect our best estimate of what the selling prices
would be if they were sold regularly on a stand-alone basis. We determine ESP
for a product or service by considering multiple factors, including, but not
limited to, transaction size, market conditions, competitive landscape, internal
costs, gross margin objectives and pricing practices. Then we further allocate
the consideration within the software group to the respective elements within
that group following the residual method. After the arrangement consideration
has been allocated to the elements, we account for each respective element in
the arrangement as described above.
Allowance for Doubtful Accounts
We record allowances for doubtful accounts receivable based upon expected
collectability. The reserve is generally established based upon an analysis of
our aged receivables. Additionally, if necessary, a specific reserve for
individual accounts is recorded when we become aware of a customer's inability
to meet its financial obligations, such as in the case of a bankruptcy filing or
deterioration in the customer's operating results or financial position. We also
regularly review the allowance by considering factors such as historical
collections experience, credit quality, age of the accounts receivable balance,
and current economic conditions that may affect a customer's ability to pay. If
actual bad debts differ from the reserves calculated, we record an adjustment to
bad debt expense in the period in which the difference occurs. Such adjustment
could result in additional charges to our results of operations.
Software and Database Development Costs
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In accordance with relevant authoritative accounting principles, costs incurred
internally in creating computer software products are expensed until
technological feasibility has been established which is typically evidenced by a
working model. Thereafter and until general release, applicable software
development costs are capitalized and subsequently reported at the lower of
amortized cost or net realizable value. Costs incurred related to the
development of databases are capitalized and subsequently reported at the lower
of amortized cost or net realizable value. Capitalized costs are amortized using
the greater of the amount computed using (a) the ratio that current gross
revenues to the total anticipated future gross revenues or (b) the straight-line
method over the estimated economic life of the product not to exceed five years.
Currently, we amortize our software and database development costs using the
straight-line method over a period of three years. We are required to use our
professional judgment in determining whether software development costs meet the
criteria for immediate expense or capitalization using the criteria described
above and evaluate software and database development costs for impairment at
each balance sheet date by comparing the unamortized capitalized costs to the
net realizable value. The net realizable value is based on the estimated future
gross revenue from that product reduced by the estimated future costs of
completing, maintaining and disposing of the product.
Business Combinations
We account for acquisitions using the acquisition method of accounting based on
ASC 805 - Business Combinations, which requires recognition and measurement of
all identifiable assets acquired and liabilities assumed at their full fair
value as of the date control is obtained. We determine the fair value of assets
acquired and liabilities assumed based upon our best estimates of the fair
values of assets acquired and liabilities assumed in the acquisition. Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired. While we use our best
estimates and assumptions to measure the fair value of the identifiable assets
acquired and liabilities assumed at the acquisition date, our estimates are
inherently uncertain and subject to refinement. As a result, during the
measurement period, not to exceed one year from the date of acquisition, any
changes in the estimated fair values of the net assets recorded for acquisitions
will result in an adjustment to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to our
consolidated statements of comprehensive income (loss).
Costs to exit or restructure certain activities of the acquired companies or our
internal operations are accounted for as one-time termination and exit costs
pursuant to ASC 420 and are accounted for separately from the business
combination. A liability for a cost associated with an exit or disposal activity
is recognized and measured at its estimated fair value in our consolidated
statement of comprehensive income (loss) in the period in which the liability is
incurred. When estimating the fair value of facility restructuring activities,
assumptions are applied regarding estimated sub-lease payments to be received,
which can differ materially from actual results. This may require us to revise
our initial estimates which may materially affect our consolidated results of
operations and financial position in the period the revision is made.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price in a business combination
over the fair value of net tangible and intangible assets acquired in a business
combination. Goodwill is tested for impairment on an annual basis in the fourth
fiscal quarter of each year, and between annual tests if indicators of potential
impairment exist, using a fair-value-based approach. See Note 4 - Goodwill in
the audited consolidated financial statements included elsewhere in this filing
for additional information regarding goodwill.
Intangible assets that are not considered to have an indefinite useful life are
amortized using the straight-line method over their estimated period of benefit,
which generally ranges from one to ten years. Each period we evaluate the
estimated remaining useful life of intangible assets and assess whether events
or changes in circumstances warrant a revision to the remaining period of
amortization or indicate that impairment exists. No impairments of finite-lived
intangible assets have been identified during any of the periods presented. See
Note 5 - Intangible Assets in the audited consolidated financial statements
included elsewhere in this filing for additional information regarding
intangible assets.
Income Taxes
We account for income taxes in accordance with relevant authoritative accounting
principles. Deferred income taxes are provided for all temporary differences
between the financial reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Factors affecting the recoverability of our
deferred tax assets include our ability to meet future income projections and
the success of our tax planning strategies. The effects of tax rate changes on
future deferred tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in the period such changes are
enacted. A valuation allowance is established against
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deferred tax assets if the future realization of these assets is not likely
based on the weight of the available evidence. Income taxes are provided on the
undistributed earnings of foreign subsidiaries that are not considered to be
permanently reinvested. As of September 30, 2012, we held $64.1 million of cash
in foreign jurisdictions whose earnings are deemed permanently reinvested, and
accordingly, we do not plan to repatriate this cash to the U.S. We recognize and
measure benefits for uncertain tax positions which requires significant judgment
from management. We evaluate our uncertain tax positions on a quarterly basis
and base these evaluations upon a number of factors, including changes in facts
or circumstances, changes in tax law, correspondence with tax authorities during
the course of audits and effective settlement of audit issues. Changes in the
recognition or measurement of uncertain tax positions could result in material
increases or decreases in our income tax expense in the period in which we make
the change, which could have a material impact on our effective tax rate and
operating results.
Share Based Payments
We account for share-based payments to employees, including grants of restricted
units in Eagle Topco, L.P. (Eagle Topco), our indirect parent, in accordance
with ASC 718, Compensation - Stock Compensation, which require that share based
payments (to the extent they are compensatory) be recognized in our consolidated
statements of comprehensive income (loss) based on their fair values. In
addition, we have applied the applicable provisions of the SEC's guidance
contained in ASC 718 in our accounting for share based compensation awards.
As required by ASC 718, we recognize stock-based compensation expense for
share-based payments awards that are expected to vest. In determining whether an
award is expected to vest, we use an estimated, forward-looking forfeiture rate
based upon our historical forfeiture rates. Share-based payments expense
recorded using an estimated forfeiture rate is updated for actual forfeitures
quarterly. To the extent our actual forfeitures are different than our
estimates, we record a true-up for the differences in the period that the awards
vest, and such true-ups could materially affect our operating results. We also
consider on a quarterly basis whether there have been any significant changes in
facts and circumstances that would affect our expected forfeiture rate. In
addition, for restricted units with performance conditions we recognize
share-based compensation expense in the period when it becomes probable that the
performance condition will be achieved and reverse cumulative stock compensation
expense in the event that such performance conditions are no longer deemed
probable of being achieved. We recognize expense on a ratable basis over the
requisite service period, which is generally four years for awards with explicit
service periods and is derived from valuation models for awards with market
conditions.
We are also required to determine the fair value of share based payments awards
at the grant date. For restricted units in Eagle Topco, which are subject to
service conditions and/or performance conditions, we estimate the fair values of
such units based on their intrinsic value. Some of our restricted units in Eagle
Topco included a market condition for which we used a Monte Carlo pricing model
to establish the grant date fair value. These determinations require judgment,
including estimating expected volatility. If actual results differ significantly
from these estimates, share-based compensation expense and our results of
operations could be impacted.
Recently Issued Accounting Pronouncements
See Note 1 - Basis of Presentation and Accounting Policy Information in our
audited consolidated financial statements for a summary of recently issued
accounting pronouncements.
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