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INFOR, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and result of operations for the fiscal period ended November 30, 2012, should be read in conjunction with the audited financial statements of Infor, Inc. for our fiscal year ended May 31, 2012, which are included in the Registration Statement on Form S-4 that we filed with the SEC on August 23, 2012, and related notes thereto. Basis of Financial Statement Presentation The predecessor to Infor Global Solutions Intermediate Holdings Limited (IGS Intermediate Holdings) was formed in 2002 with the acquisition of certain assets of Systems & Computer Technology Corporation and completed through a series of subsequent acquisitions. On June 7, 2006, IGS Intermediate Holdings was formed as a Cayman Islands exempted company. The majority of IGS Intermediate Holdings' stock is indirectly owned by Golden Gate Capital. IGS Intermediate Holdings operates through a variety of direct and indirect wholly owned subsidiaries throughout the world. Infor, Inc. was formed on June 8, 2009, as Steel Holdings, Inc. (Steel Holdings, now known as Infor, Inc.) by Golden Gate Capital. Steel Holdings acquired SoftBrands, Inc. (SoftBrands) on August 13, 2009. Steel Holdings changed its name to GGC Software Holdings, Inc. (GGC Holdings, now known as Infor, Inc.) on April 25, 2011. GGC Holdings acquired Lawson Software, Inc. (Lawson) on July 5, 2011. Both SoftBrands and Lawson were publicly traded companies. We have maintained the SoftBrands and Lawson brands. On April 5, 2012, we completed the combination of GGC Holdings and its subsidiaries with the operating subsidiaries of IGS Intermediate Holdings (such subsidiaries prior to the combination defined here as Infor Global Solutions) and the operations of these entities were merged together under GGC Holdings (the Infor Combination). Both Infor Global Solutions and GGC Holdings were under common control of Golden Gate Capital, and accordingly the financial statements contained herein are presented on a consolidated basis as if Infor Global Solutions and GGC Holdings were combined from the date of inception of common control. Financial statements and financial information presented for prior years have been retrospectively adjusted to furnish comparative information for periods during which the entities were under common control. On April 26, 2012, we formally changed the name of GGC Software Holdings, Inc. to Infor, Inc. In addition, subsequent to year end, we changed the name of Lawson Software, Inc. to Infor (US), Inc. Transactions between Infor, Inc. and its subsidiaries, including subsidiaries obtained through the combining of GGC Holdings and Infor Global Solutions, have been eliminated for presentation. Hereafter, any reference to Infor, we, our, us or the Company refers to the combined company and the consolidated financial statements thereof presented under common control. Management Overview General Infor is a global provider of enterprise business applications software and services focused primarily on medium and large enterprises. We develop, market, distribute and service enterprise software applications that help organizations manage their businesses. We deliver integrated enterprise business solutions including customer relationship management (CRM), enterprise asset management (EAM), enterprise resource planning (ERP), financial management, human capital management (HCM), performance management, product lifecycle management, property management systems, central reservations systems, supplier relationship management and supply chain management (SCM), including business specific inventory management, transportation logistics, manufacturing and warehouse management software. Infor also offers software license updates and product support as well as other services including consulting, advanced product services, hosting and education. We offer a broad range of software applications and industry-specific solutions that we believe help our customers improve their business processes and reduce costs, resulting in better business or operational performance. Our solutions help automate and integrate critical business processes which enable our customers to better manage their suppliers, partners, customers and employees. We specialize in and target specific industries (or verticals), and have industry-specific business units that leverage our industry-oriented products and teams. We provide industry-specific ERP software products to companies in the manufacturing, distribution, healthcare, public sector, automotive, service industries, equipment services, management and rental (ESM&R), consumer products & retail and hospitality industries. Our industry-specific approach distinguishes us from larger competing ERP vendors, whose primary focus is on less specialized software programs that take more time and cost to tailor to our target customers' specific needs. 37-------------------------------------------------------------------------------- Table of Contents Augmenting our vertical-specific applications, we have leading horizontal software applications, including our CRM, EAM, HCM, SCM and financial application suites, which, through our proprietary light-weight middleware solution ION®, are integrated with our enterprise software applications and sold across verticals. We generate revenue primarily by licensing software, providing product updates and support and providing consulting services to our customers. We operate in three segments: License, Maintenance and Consulting. We market and sell our software and services primarily through a direct sales force, which is augmented by systems integrators and resellers. In addition to providing software products, we generate substantial recurring revenue by providing on-going software support services to our customers through our maintenance and support programs. The product updates and support we provide are valued by our customers as evidenced by our high annual maintenance retention rates. We also help our customers implement and use our applications effectively through our consulting services offerings, including training, implementation and consulting services. We serve customers across three geographic regions-the Americas, EMEA and APAC. We have over 12,400 employees worldwide and have offices in 38 countries. We have established a worldwide infrastructure for distribution, development and support of our enterprise software. This worldwide coverage provides us with both economies of scale and the ability to leverage our geographical expertise to effectively enter new markets and segments. In the first six months of fiscal 2013, our Americas, EMEA and APAC regions generated approximately 57.0%, 33.7% and 9.3% of our revenues, respectively. Though we have a considerable presence outside of the U.S. today, we believe we have significant opportunities to expand internationally and capture market share, especially in the EMEA and APAC regions. Acquisitions An active acquisition program is another important element of our corporate strategy. In recent years, we have invested billions of dollars to acquire a number of complementary companies, products, services and technologies. We believe our acquisition program strengthens our competitive position, enhances the products and services that we can offer to customers, expands our customer base, provides greater scale to accelerate innovation, grows our revenues and earnings, and increases our overall value. We expect to continue to acquire companies, products, services and technologies in furtherance of our corporate strategy. See Note 3, Acquisitions, for additional information related to our recent acquisitions. We believe we can fund our pending and future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations or additional borrowings. We estimate the financial impact of any potential acquisition with regard to earnings, operating margin, cash flow and return on invested capital targets before deciding to move forward with an acquisition. Fiscal 2013 Acquisitions On December 3, 2012, we acquired strategic solution partner Orbis Global, a privately held company located in San Francisco, California, for approximately $15.3 million, net of cash acquired. In addition, in the first quarter of fiscal 2013, we made two acquisitions for an aggregate purchase price of $39.8 million, net of cash acquired. Operating results of these entities have been included in our results of operations since the applicable acquisition dates. These acquisitions were not significant, either individually or in the aggregate. Acquisition of Lawson On July 5, 2011, GGC Holdings (now known as Infor, Inc.) purchased 100% of the outstanding voting shares of Lawson Software, Inc., a publicly traded company located in St. Paul, MN, for approximately $1,958.2 million. Under the terms of the merger agreement, stockholders of Lawson received $11.25 per share in cash. We financed the merger, refinanced certain existing debt of Infor, and paid related fees and expenses through a combination of cash, new debt and bonds. Operating results of Lawson have been included in our results of operations since the acquisition date. Other Acquisitions - Fiscal 2012 During fiscal 2012 we completed four additional acquisitions for an aggregate purchase price of $29.3 million, net of cash acquired. Operating results of these entities have been included in our results of operations since the applicable acquisition dates. These acquisitions were not significant, either individually or in the aggregate. 38-------------------------------------------------------------------------------- Table of Contents Financing Activities In the second quarter of fiscal 2013, we entered into an amendment to our Credit Agreement pursuant which we refinanced the outstanding principal balance of our Tranche B Term Loan of $2,763.0 million with a new $2,793.1 million Tranche B-2 Term Loan and reduced the applicable interest rate margin by 1.0%. Proceeds from the Tranche B-2 Term Loan were used to refinance the outstanding principal of our Tranche B Term Loan, together with accrued and unpaid interest and applicable fees, including a prepayment premium of 1.0% of the principal amount thereof, in accordance with the terms of the Credit Agreement. In the fourth quarter of fiscal 2012, we completed the Infor Combination. As part of these transactions, investment funds affiliated with Golden Gate Capital and Summit Partners invested $550.0 million in Infor Enterprise, of which $325.0 million was contributed as equity to Infor, and $225.0 million was used to repay a portion of the Lux Bond Co PIK Term Loan. Additionally, $344.0 million owed to Lux Bond Co by Infor was forgiven and contributed as capital. We also successfully refinanced our debt structure by entering into a new credit agreement under which we borrowed $3,170.0 million in U.S. Dollar-denominated term loans and €250.0 million Euro-denominated term loans. In addition we issued $1,015.0 million in U.S. Dollar-denominated 9.375% senior notes and €250.0 million Euro-denominated 10.0% senior notes. We used the net proceeds from the issuance of these notes, borrowings under our new credit facilities, and the additional equity investments to repay certain of our existing debt balances, pay related fees and expenses and for general corporate purposes. In the first quarter of fiscal 2012, concurrent with the consummation of the Lawson transaction, Lawson and SoftBrands entered into new senior secured credit facilities under which Lawson and SoftBrands borrowed $1,040.0 million aggregate principal Term Loan and issued $560.0 million in aggregate principal amount of 11.5% Infor Senior Notes. Proceeds from the new debt and notes were used to fund the purchase of Lawson, to pay fees and expenses incurred in connection with the merger, and to repay the previously existing debt as well as the Lawson senior convertible notes assumed with the acquisition. With the Lawson transaction, we also assumed the liability relating to Lawson's senior convertible notes totaling $253.8 million. All of these notes were surrendered for purchase in the first quarter of fiscal 2012 or settled upon maturity during the fourth quarter of fiscal 2012. With the refinancing of our debt structure in the fourth quarter of fiscal 2012, the remaining balance of the $1,040.0 million Term Loan was repaid. In the first quarter of fiscal 2012, certain of the Infor Global Solutions subsidiaries entered into a refinancing amendment with respect to the Infor Global Solutions Original First Lien Term Loan. The primary objective of the Infor Global Solutions refinancing amendment was to extend the maturity date of the Infor Global Solutions Original First Lien Term Loan. Under the terms of the refinancing amendment, Infor Global Solutions refinanced $500.0 million, paid off $446.8 million of the Infor Global Solutions Original First Lien Term Loan and received $24.6 million in cash, net of transaction costs of $28.6 million. The remaining balance of the Infor Global Solutions Original First Lien Term Loan was also repaid in conjunction with our fourth quarter fiscal 2012 refinancing. See, Liquidity and Capital Resources - Long-Term Debt, below for further discussion of these financing activities. Non-GAAP Financial Measures Our results of operations in this Management's Discussion and Analysis are presented in accordance with GAAP. In addition to reporting our financial results in accordance with GAAP, we present certain non-GAAP financial measures as well. Presentation of these non-GAAP measures allows users to review our results of operations from the same perspective as management and our Board of Directors. These non-GAAP measures include non-GAAP revenues, non-GAAP income from operations and non-GAAP operating margin. See, Non-GAAP Financial Measure Reconciliations, below for additional information regarding our use of these non-GAAP financial measures and reconciliations to the corresponding GAAP measures. Foreign Currency A significant portion of our business is conducted in currencies other than the U.S. Dollar, particularly the Euro and British Pound. Our revenues and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. Downward fluctuations in the value of the U.S. Dollar compared to a foreign currency generally have the effect of increasing our revenues but also increasing our operating expenses denominated in currencies other than the U.S. Dollar. Similarly, strengthening in the U.S. Dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our operating expenses denominated in currencies other than the U.S. Dollar. In addition, we have certain intercompany transfer pricing transactions, intercompany loans and other intercompany transactions that are not considered permanent in nature. Fluctuations in applicable foreign currency exchange rates on these intercompany balances may impact our results of operations. For the second quarter of fiscal 2013, the average exchange rates for the U.S. Dollar against the Euro strengthened by approximately 5.8% and weakened against the British Pound by approximately 1.7% as compared to the average exchange rates for second quarter of fiscal 2012. For the six months ended November 30, 2012, the average exchange rates for the U.S. Dollar against the Euro and British Pound strengthened by approximately 9.7% and 1.1%, respectively, as compared to the average exchange rates for the similar period of fiscal 2012. 39 -------------------------------------------------------------------------------- Table of Contents Our international operations have provided and will continue to provide a significant portion of our total revenues and expenses. As a result, total revenues and expenses will continue to be affected by changes in the U.S. Dollar against major international currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the percent change in the results from one period to another period using constant currency disclosure. To present this information, the most current period results for our entities reporting in currencies other than the U.S. Dollar are converted into U.S. Dollars at constant exchange rates (i.e. the average rates in effect in the prior comparable period) rather than the actual exchange rates in effect during the respective periods. In each of the tables below, we present the percent change based on actual results in reported currency and in constant currency. The following tables summarize the period-over-period change, both in U.S. Dollars and percentages, in revenues and costs and expenses, isolating the fluctuations in exchange rates from changes in activity and pricing on a constant currency basis for the periods presented: (in millions, except percentages) Change Due Change in Total Change Due Change in Total Three Months Ended November 30, to Currency Constant Change to Currency Constant Change 2012 vs. 2011 Fluctuations Currency as Reported Fluctuations Currency as Reported Revenues: License fees $ (1.2 ) $ 2.3 $ 1.1 (1.0 )% 1.9 % 0.9 % Product updates and support fees (2.9 ) 44.8 41.9 (1.0 ) 14.0 13.0 Software revenues (4.1 ) 47.1 43.0 (0.9 ) 10.7 9.8 Consulting services and other fees (3.4 ) 2.0 (1.4 ) (1.7 ) 1.0 (0.7 ) Total revenues $ (7.5 ) $ 49.1 $ 41.6 (1.2 )% 7.7 % 6.5 % Total operating expenses $ (7.1 ) $ (27.7 ) $ (34.8 ) (1.2 )% (4.6 )% (5.8 )% (in millions, except percentages) Change Due Change in Total Change Due Change in Total Six Months Ended November 30, to Currency Constant Change to Currency Constant Change 2012 vs. 2011 Fluctuations Currency as Reported Fluctuations Currency as Reported Revenues: License fees $ (5.1 ) $ 14.1 $ 9.0 (2.4 )% 6.6 % 4.2 % Product updates and support fees (17.7 ) 116.0 98.3 (2.9 ) 18.7 15.8 Software revenues (22.8 ) 130.1 107.3 (2.7 ) 15.6 12.9 Consulting services and other fees (14.8 ) 19.6 4.8 (4.0 ) 5.3 1.3 Total revenues $ (37.6 ) $ 149.7 $ 112.1 (3.2 )% 12.5 % 9.3 % Total operating expenses $ (34.9 ) $ (22.4 ) $ (57.3 ) (3.0 )% (1.9 )% (4.9 )% Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in conformity with GAAP which requires us to make certain estimates, judgments and assumptions. We believe that these estimates, judgments and assumptions are reasonable based upon information available to us at the time that the estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of our assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. Our critical accounting policies are described in detail in our Management's Discussion and Analysis of Financial Condition and Results of Operations, as provided in our Registration Statement on Form S-4 that we filed with the SEC on August 23, 2012. These policies reflect those areas that require more significant judgments, and use of estimates and assumptions in the preparation of our financial statements and include the following: • Revenue Recognition; 40 -------------------------------------------------------------------------------- Table of Contents • Business Combinations; • Restructuring; • Valuation of Accounts Receivable; • Valuation of Goodwill and Intangible Assets; • Income Taxes and Valuation of Deferred Tax Assets; • Contingencies - Litigation Reserves; and • Stock-Based Compensation In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed our critical accounting policies and related disclosures with the Audit Committee of our Board of Directors. There have been no material changes to our critical accounting policies and estimates during the first six months of fiscal 2013 other than those discussed in Note 2, Summary of Significant Accounting Policies. Results of Operations The following tables set forth certain line items in our unaudited Condensed Consolidated Statements of Operations as the amounts reported in conformity with GAAP, the period-over-period actual percentage change (Actual) and the period-over-period constant currency percentage change (Constant Currency), for the periods indicated: Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012 Constant Constant (in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency Revenues: License fees $ 120.6 $ 119.5 0.9 % 1.9 % $ 221.4 $ 212.4 4.2 % 6.6 % Product updates and support fees 363.0 321.1 13.0 14.0 720.1 621.8 15.8 18.7 Software revenues 483.6 440.6 9.8 10.7 941.5 834.2 12.9 15.6 Consulting services and other fees 198.9 200.3 (0.7 ) 1.0 372.8 368.0 1.3 5.3 Total revenues 682.5 640.9 6.5 7.7 1,314.3 1,202.2 9.3 12.5 Operating expenses: Cost of license fees 20.2 22.2 (9.0 ) (8.1 ) 37.8 40.7 (7.1 ) (4.7 ) Cost of product updates and support fees 63.6 66.2 (3.9 ) (2.6 ) 125.9 128.0 (1.6 ) 1.6 Cost of consulting services and other fees 150.0 153.3 (2.2 ) (0.3 ) 290.1 286.2 1.4 5.7 Sales and marketing 114.1 107.3 6.3 7.6 212.6 200.2 6.2 9.5 Research and development 85.1 83.3 2.2 3.4 167.8 150.2 11.7 14.8 General and administrative 50.7 68.8 (26.3 ) (25.9 ) 100.8 120.2 (16.1 ) (14.1 ) Amortization of intangible assets and depreciation 68.8 85.9 (19.9 ) (19.6 ) 141.8 162.4 (12.7 ) (10.8 ) Restructuring costs 4.1 11.5 (64.3 ) (63.5 ) 9.6 52.4 (81.7 ) (80.2 ) Acquisition related and other costs 12.7 5.6 126.8 126.8 14.6 18.0 (18.9 ) (18.9 ) Total operating expenses 569.3 604.1 (5.8 ) (4.6 ) 1,101.0 1,158.3 (4.9 ) (1.9 ) Income from operations 113.2 36.8 207.6 208.7 213.3 43.9 385.9 392.0 Interest expense, net 103.4 119.7 (13.6 ) (13.6 ) 211.6 236.7 (10.6 ) (10.6 ) Loss on extinguishment of debt 1.8 - NM NM 1.8 8.7 (79.3 ) (79.3 ) Other (income) expense, net 25.0 (45.9 ) NM NM 20.8 (28.9 ) NM NM Loss before income tax (17.0 ) (37.0 ) (54.1 ) (56.8 ) (20.9 ) (172.6 ) (87.9 ) (90.4 ) Income tax provision (benefit) 5.7 10.9 (47.7 ) (47.7 ) 35.1 (25.8 ) NM NM Net loss $ (22.7 ) $ (47.9 ) (52.6 )% (54.7 )% $ (56.0 ) $ (146.8 ) (61.9 )% (64.7 )% * NM - Percentage not meaningful 41 -------------------------------------------------------------------------------- Table of Contents The discussion that follows relating to our results of operations for the comparable three and six-month periods ended November 30, 2012 and 2011 should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes and with the information presented in the above table. This analysis addresses the actual changes in our results of operations for the comparable fiscal periods as presented in accordance with GAAP as well as changes excluding the impact of foreign currency fluctuations, as reflected in the constant currency percentages in the above table and the tables that follow. See the Foreign Currency discussion, above, for further explanation of the impact on our results of operations. Revenue Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012 Constant Constant (in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency Revenues: License fees $ 120.6 $ 119.5 0.9 % 1.9 % $ 221.4 $ 212.4 4.2 % 6.6 % Product updates and support fees 363.0 321.1 13.0 14.0 720.1 621.8 15.8 18.7 Software revenues 483.6 440.6 9.8 10.7 941.5 834.2 12.9 15.6 Consulting services and other fees 198.9 200.3 (0.7 ) 1.0 372.8 368.0 1.3 5.3 Total revenues $ 682.5 $ 640.9 6.5 % 7.7 % $ 1,314.3 $ 1,202.2 9.3 % 12.5 % Total Revenues. We generate revenues from licensing software, providing product updates and support related to our licensed products and providing consulting services. We generally utilize written contracts as the means to establish the terms and conditions by which our products, product updates and support and consulting services are sold to our customers. As our product updates and support and consulting services are primarily attributable to our licensed products, growth in our product updates and support and consulting services is generally tied to the level of our license contracting activity. We recognize revenues pursuant to specific and detailed guidelines applicable to the software industry. License fees revenues from end-users are generally recognized when the software product has been shipped and certain conditions are met. Revenues from customer product updates and support contracts are deferred and recognized ratably over the term of the agreements. Revenues from consulting services (including training and implementation services) are recognized as services are provided to customers. See Note 2, Summary of Significant Accounting Policies - Revenue Recognition, in our financial statements related to our fiscal year ended May 31, 2012, for a more complete description of our revenue recognition policy. Total revenues increased by 7.7% in the second quarter of fiscal 2013 compared to the similar period of fiscal 2012, excluding the unfavorable foreign currency impact of 1.2%. On a constant currency basis, the increase was due to broad growth of software licenses, including increased SaaS revenues, significant growth in our product updates and support fees and growth in the volume of our consulting services and other fees. Excluding the unfavorable foreign currency rate impact of 3.2%, total revenues increased by 12.5% in the six-month period ended November 30, 2012 compared to the six month period ended November 30, 2011. Our year-to-date results were positively impacted by our acquisitions, particularly the impact of Lawson's business in the first quarter of fiscal 2012. The results of Lawson have been included in our results for the full year-to-date period in fiscal 2013 compared to approximately five months in the first six months of fiscal 2012. License Fees. Our license fees primarily consist of fees resulting from products licensed to customers on a perpetual basis. Product license fees result from a customer's licensing of a given software product for the first time or with a customer's licensing of additional users for previously licensed products. License fees also include revenues related to our SaaS offerings. Second quarter license fees revenues increased by 1.9%, excluding a 1.0% unfavorable foreign currency rate impact, compared to the second quarter last year. At constant currency, the increase was primarily due to additional revenues of 4.4% related to increased SaaS revenues (which contributed 2.3%) and a decrease in the purchase accounting revenue adjustments related to license fees in the current quarter compared to the similar period last year primarily as a result of our acquisition of Lawson in the first quarter last year. These increases were somewhat offset by a 2.5% decrease related to license fees revenues as a result of fewer licensing transactions in the current quarter compared to the similar quarter last year. Excluding the unfavorable foreign currency rate impact of 2.4%, license fees increased by 6.6% in the six-month period ended November 30, 2012 compared to the six-month period ended November 30, 2011. At constant currency, the year-to-date increase was primarily due to additional revenues of 7.1% related to increased SaaS revenues (which contributed 4.4%) and a decrease in the purchase accounting revenue adjustments related to license fees in fiscal 2013 compared to the similar period last year resulting from our acquisition of Lawson. These increases were somewhat offset by a 0.5% decrease related to license fees revenues as a result of fewer licensing transactions in the first six months of fiscal 2013 compared to the similar quarter last year. 42-------------------------------------------------------------------------------- Table of Contents Product Updates and Support Fees. Our product updates and support fees revenues represent the ratable recognition of fees to enroll and renew licensed products in our maintenance programs. These fees are typically charged annually and are based on the license fees initially paid by the customer. Product updates and support revenues can fluctuate based on the number and timing of new license contracts, renewal rates and price increases. Product updates and support fees increased by 14.0%, excluding the unfavorable foreign currency impact of 1.0%, in the current quarter compared to the second quarter last year. At constant currency, the increase was primarily the result of a decrease in the purchase accounting revenue adjustments related to Lawson product updates and support fees in the current quarter compared to the similar period last year which accounted for an increase of 12.4%. The remaining increase was largely attributable to increases in revenues related to new maintenance pull-through from new license transactions which more than offset customer attrition. Product updates and support fees increased by 18.7%, excluding the unfavorable foreign currency impact of 2.9%, in the six-month period ended November 30, 2012 compared to the six-month period ended November 30, 2011. At constant currency, the increase was primarily the result of our acquisition of Lawson the results of which have been included in our results for the full year-to-date period in fiscal 2013 compared to approximately five months in the first six months of fiscal 2012 which accounted for an increase of 7.0%. In addition, the purchase accounting revenue adjustments related to Lawson product updates and support fees decreased in the current year-to-date period compared to the similar period last year accounting for an increase of 10.7%. The remaining increase is attributable to increases in revenues related to new maintenance pull-through from new license sales and price increases offsetting customer attrition. Consulting Services and Other Fees. Our consulting services and other fees revenues consist primarily of software-related services, including systems implementation and integration services, consulting, custom modification, hardware education, hosting services, application managed services and education and training services for customers who have licensed our products. Consulting services and other fees revenues also includes revenues related to hardware systems products. Consulting services and other fees increased by 1.0%, excluding the unfavorable foreign currency impact of 1.7% in the current quarter compared to the second quarter last year. At constant currency, second quarter consulting services and other fees increased primarily as a result of slightly higher volumes in our EMEA region as compared to the second quarter last year. Consulting services and other fees increased by 5.3%, excluding the unfavorable foreign currency impact of 4.0% in the six-month period ended November 30, 2012 compared to the six month period ended November 30, 2011. At constant currency, consulting services and other fees increased primarily as a result of our acquisition of Lawson the results of which have been included in our results for the full year-to-date period in fiscal 2013 compared to approximately five months in the first six months of fiscal 2012. Deferred Revenue. Certain of our revenues are deferred when all conditions of revenue recognition have not been met. Deferred revenue represents revenue that is to be recognized in future periods when such conditions have been satisfied related to certain license agreements, maintenance contracts and certain consulting arrangements, as discussed above. We had total deferred revenues of $691.8 million at November 30, 2012, compared to $870.6 million at May 31, 2012. The following table sets forth the components of deferred revenue: November 30, May 31, (in millions) 2012 2012 License fees $ 32.7 $ 29.5 Product updates and support fees 592.7 766.1 Consulting services and other fees 66.4 75.0 Total deferred revenue 691.8 870.6 Less: current portion 673.2 851.9 Deferred revenue - non-current $ 18.6 $ 18.7 In general, changes in the balance of our deferred revenue are cyclical and primarily driven by the timing of our maintenance services renewal cycles. Our renewal dates primarily occur in the third and fourth quarters of our fiscal year with revenues being recognized ratably over the applicable service periods. 43 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012 Constant Constant (in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency Operating expenses: Cost of license fees $ 20.2 $ 22.2 (9.0 )% (8.1 )% $ 37.8 $ 40.7 (7.1 )% (4.7 )% Cost of product updates and support fees 63.6 66.2 (3.9 ) (2.6 ) 125.9 128.0 (1.6 ) 1.6 Cost of consulting services and other fees 150.0 153.3 (2.2 ) (0.3 ) 290.1 286.2 1.4 5.7 Sales and marketing 114.1 107.3 6.3 7.6 212.6 200.2 6.2 9.5 Research and development 85.1 83.3 2.2 3.4 167.8 150.2 11.7 14.8 General and administrative 50.7 68.8 (26.3 ) (25.9 ) 100.8 120.2 (16.1 ) (14.1 ) Amortization of intangible assets and depreciation 68.8 85.9 (19.9 ) (19.6 ) 141.8 162.4 (12.7 ) (10.8 ) Restructuring costs 4.1 11.5 (64.3 ) (63.5 ) 9.6 52.4 (81.7 ) (80.2 ) Acquisition related and other costs 12.7 5.6 126.8 126.8 14.6 18.0 (18.9 ) (18.9 ) Total operating expenses $ 569.3 $ 604.1 (5.8 )% (4.6 )% $ 1,101.0 $ 1,158.3 (4.9 )% (1.9 )% Cost of License Fees. Cost of license fees includes royalties to third-parties, channel partner commissions and other software delivery expenses. Our software solutions may include embedded components of third-party vendors for which a fee is paid to the vendor upon the sale of our products. In addition, we resell third-party products in conjunction with the license of our software solutions, which also results in a fee. We also resell our software solutions through our third-party channel relationships which require us to pay applicable commissions to our channel partners. The cost of license fees is generally higher, as a percentage of revenues, when we resell products of third-party vendors. As a result, license fees gross margins will vary depending on the proportion of third-party product sales in our revenue mix. Cost of license fees decreased by 8.1%, excluding the favorable foreign currency impact of 0.9%, in the current quarter compared to the second quarter of fiscal 2012. At constant currency, this decrease was primarily due to lower third-party costs which accounted for a decrease of 13.4%. This decrease was somewhat offset by a 4.8% increase related to higher SaaS costs in-line with our higher SaaS revenues in the quarter. Cost of license fees for the first six months of fiscal 2013 decreased by 4.7%, excluding the favorable foreign currency impact of 2.4%, compared to the first six months of fiscal 2012. At constant currency, this decrease was primarily due to lower third-party costs which accounted for a decrease of 9.7%. This decrease was somewhat offset by a 5.5% increase related to higher SaaS costs again in-line with our higher SaaS revenues in the first six months of fiscal 2012. Cost of Product Updates and Support Fees. Cost of product updates and support fees includes salaries, employee benefits, related travel, third-party maintenance costs associated with embedded and non-embedded third-party products, related channel partner commissions, and the overhead costs of providing our customers product updates and support. Cost of product updates and support fees decreased by 2.6%, excluding the favorable foreign currency impact of 1.3%, in the current quarter compared to the corresponding prior period. At constant currency, this decrease was primarily due to a decrease in employee-related support costs in the quarter which was somewhat offset by an increase in our channel partner commissions compared to the second quarter last year. For the first six months of fiscal 2013, cost of product updates and support fees increased by 1.6%, excluding the favorable foreign currency impact of 3.2%, compared to the corresponding prior period. At constant currency, this increase was primarily due to an increase in our channel partner commissions and third-party royalties. These increases were somewhat offset by decreased employee-related support cost. Cost of Consulting Services and Other Fees. Cost of consulting services and other fees includes salaries, employee benefits, third-party consulting costs, related travel, and the overhead costs of providing our customers systems implementation and integration services, consulting, custom modification, hardware education, hosting services, application managed services and education and training services. Cost of consulting services and other fees also includes costs associated with our hardware business. Cost of consulting services and other fees decreased by 0.3%, excluding the favorable foreign currency impact of 1.9%, in the current quarter compared to the corresponding prior period. At constant currency, cost consulting services and other fees was generally in-line with the prior quarter, with a slight decrease. 44 -------------------------------------------------------------------------------- Table of Contents For the first six months of fiscal 2013, cost of consulting services and other fees increased by 5.7%, excluding the favorable foreign currency impact of 4.3%, compared to the corresponding prior period. At constant currency, cost of consulting services and other fees increased primarily as a result of our acquisition of Lawson the results of which have been included in our results for the full year-to-date period in fiscal 2013 compared to approximately five months in the first six months of fiscal 2012. Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, employee benefits, travel, trade show activities, advertising and branding costs and overhead costs related to our sales and marketing personnel. Sales and marketing expenses increased by 7.6%, excluding the favorable foreign currency impact of 1.3%, in the current quarter compared to the corresponding prior period. On a constant currency basis, sales and marketing expenses increased primarily as a result of increased employee-related sales costs due to an increase in headcount in our sales and marketing organizations in the current quarter of approximately 109, or 5.5%, compared to the similar period last year. Sales and marketing expenses increased by 9.5%, excluding the favorable foreign currency impact of 3.3%, in the six-month period ended November 30, 2012 compared to the six-month period ended November 30, 2011. On a constant currency basis, sales and marketing expenses increased primarily as a result of increased employee-related sales costs due to the increase in headcount in our sales and marketing organizations in fiscal 2013. In addition, the inclusion of Lawson for the full year-to-date period of fiscal 2013 also contributed to the increase. Research and Development. Research and development expenses consist primarily of personnel related expenditures. Research and development expense increased by 3.4%, excluding the favorable foreign currency impact of 1.2%, in the current quarter compared to the second quarter last year. On a constant currency basis, research and development expenses increased primarily as a result of higher employee-related costs due to a net increase of 110, or 3.3%, in our developer headcount in the second quarter of fiscal 2013 as compared to last year as we continue to make significant investment in our development capacity. Research and development expense, excluding the favorable foreign currency impact of 3.1%, increased by 14.8% in the six-month period ended November 30, 2012 compared to the six-month period ended November 30, 2011. On a constant currency basis, research and development expenses increased primarily as a result of higher employee-related costs and overhead allocations due to increased headcount as well as an increase in professional fees. In addition, the inclusion of Lawson for the full year-to-date period of fiscal 2013 also contributed to the increase. General and Administrative. General and administrative expenses consist primarily of personnel related expenditures for information technology, finance, legal and human resources support functions. General and administrative expenses decreased by 25.9%, excluding the favorable foreign currency impact of 0.4%, in the current quarter compared to the corresponding quarter last year. On a constant currency basis, general and administrative expenses decreased 14.9% primarily as a result of a decrease in our consulting expenses due to lower legal costs related to certain patent litigation matters. In addition, general and administrative expenses decreased 7.7% due to a decrease in employee-related costs as a result of a net decrease of 213, or 12.4%, in our administrative functions' headcount in the second quarter of fiscal 2013 as compared to last year primarily due to our restructuring activities. General and administrative expenses decreased by 14.1%, excluding the favorable foreign currency impact of 2.0%, in the six-month period ended November 30, 2012 compared to the six-month period ended November 30, 2011. On a constant currency basis, general and administrative expenses decreased 6.9% primarily as a result of lower professional fees including legal costs related to certain patent litigation matters. In addition, general and administrative expenses decreased 2.6% and 2.1%, respectively, due to a decrease in bad debt expense and a decrease in employee-related costs as a result of lower administrative headcount primarily due to our restructuring activities. Amortization of Intangible Assets and Depreciation. Amortization of intangibles assets primarily relates to the on-going amortization of intangible assets acquired in acquisitions. Depreciation expense relates primarily to our computer equipment and purchased software, furniture and fixtures as well as amortization of leasehold improvements. Amortization of intangibles assets and depreciation decreased by 19.6%, excluding the favorable impact of foreign currency of 0.3%, in the current quarter compared to the second quarter last year. This decrease was primarily a result of certain assets being fully amortized /depreciated in fiscal 2012 with no corresponding expense recorded in the second quarter of fiscal 2013. Amortization of intangible assets and depreciation decreased by 10.8% in the six-month period ended November 30, 2012 compared with the six-month period ended November 30, 2011 excluding the favorable impact of foreign currency of 1.9%. The year-to-date decrease resulted primarily from certain assets being fully amortized /depreciated in fiscal 2012 with no corresponding expense recorded in the first six months of fiscal 2013. The decrease was somewhat offset by the increase in intangible asset amortization related to the inclusion of Lawson for the full period of fiscal 2013. 45-------------------------------------------------------------------------------- Table of Contents Restructuring. We have recorded restructuring charges related to our acquisitions and in the ordinary course of business to eliminate redundancies, improve our operational efficiency and reduce our operating costs. These cost reduction measures included workforce reductions relating to restructuring our workforce, the exiting of certain leased facilities and the consolidation of space in certain other facilities. These restructuring charges represent severance associated with redundant positions and costs related to redundant office locations. See Note 10, Restructuring Charges. We recorded restructuring charges of $4.1 million in the current quarter compared to restructuring charges of $11.5 million in the second quarter last year. We incurred restructuring charges of $9.6 million in the six-month period ended November 30, 2011 compared with $52.4 million in the six-month period ended November 30, 2010. The restructuring charges recorded in the three and six months ended November 30, 2012, were primarily for employee severance costs related to actions taken in connection with the combination of certain of our operations including GGC Holdings and Infor Global Solutions. The restructuring charges recorded in the corresponding periods last year were primarily for employee severance costs related to our acquisition of Lawson. Acquisition Related and Other Costs. Acquisition related and other costs include transaction and integration costs related to our acquisitions primarily professional services fees and certain employee costs related to transitional and certain other employees. Acquisition related and other costs also include certain costs incurred in financing our acquisitions, reorganizing our operations and other debt financing activities. Second quarter fiscal 2013 acquisition related and other costs of $12.7 million increased by approximately $7.1 million compared to $5.6 million in the second quarter last year. For the first six months of fiscal 2013 acquisition related and other costs of $14.6 million decreased by approximately $3.4 million compared to $18.0 million in the comparable period last year. For the three and six-months ended November 30, 2012, acquisition related and other costs include costs related primarily to our refinancing activities. The fiscal 2012 costs were primarily related to our acquisition of Lawson, the integration of Lawson's operations into Infor and cost incurred for related financing activities. Non-Operating Income and Expenses Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2012 vs. 2011 Constant Constant(in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency Interest expense, net $ 103.4 $ 119.7 (13.6 )% (13.6 )% $ 211.6 $ 236.7 (10.6 )% (10.6 )% Loss on extinguishment of debt 1.8 - NM NM 1.8 8.7 (79.3 ) (79.3 ) Other (income) expense, net 25.0 (45.9 ) NM NM 20.8 (28.9 ) NM NM Total non-operating expenses $ 130.2 $ 73.8 76.4 % 75.6 % $ 234.2 $ 216.5 8.2 % 7.4 % * NM - Percentage not meaningful Interest Expense, Net. Interest expense, net consists of the interest expense related to our debt less the interest income on cash, marketable securities, and other investments. Interest expense, net decreased by $16.3 million, or 13.6% to $103.4 million in the current quarter compared to $119.7 million in the corresponding prior period. The decrease in interest expense was due to a decrease in outstanding debt balances as a result of the recapitalization of our debt structure in the fourth quarter of last year and the refinancing of our Tranche B Term Loan at favorable interest rates in the second quarter of fiscal 2013. As a result of these financing transactions, interest expense decreased by $6.6 million due to lower interest rates and $3.3 million due to lower amortization of deferred financing fees and debt discounts. In addition, we had a $4.8 million decrease in interest expense related to affiliate loans as the outstanding balance on these loans was contributed as equity as part of the recapitalization of our debt structure in fiscal 2012 and a $1.3 million increase in interest income in the current quarter as compared to the similar period last year. 46-------------------------------------------------------------------------------- Table of Contents Interest expense decreased by $25.1 million, or 10.6% to $211.6 million in the six-month period ended November 30, 2012 compared to $236.7 million in the six-month period ended November 30, 2011. Year-to-date interest expense, net decreased as a result of our recapitalization and refinancing transactions including a decrease of $14.9 million due to lower amortization of deferred financing fees and debt discounts and a $9.7 million decrease in interest expense related to affiliate loans. Loss on Extinguishment of Debt. The $1.8 million loss on extinguishment of debt recorded in the second quarter of fiscal 2013 represented the net book value of deferred financing fees written off in the three-month period ended November 30, 2012, and other costs incurred in connection with our refinancing transactions during the period for those lenders treated as an extinguishment rather than a modification of debt. There was no similar activity in the second quarter of fiscal 2012. For the first six months of fiscal 2012, the $8.7 million loss on extinguishment of debt recorded represented the net book value of deferred financing fees and the remaining debt discount written off in the first quarter of fiscal 2012 in connection with our debt transactions during the period. Other (Income) Expense, Net. Other (income) expense, net consists of the effects of foreign currency fluctuations, gain/loss on the sale of fixed assets, and other costs. Other (income) expense, net was net expense of $25.0 million in the current quarter compared to $45.9 million net gain in the corresponding prior period. The change in other (income) expense, net was primarily due to fluctuations in foreign currency exchange rates. For the first six months of fiscal 2013, other (income) expense, net was a net expense of $20.8 million compared to net income of $28.9 million in the six-month period ended November 30, 2011. The decrease in other (income) expense, net was primarily due to fluctuations in foreign currency exchange rates. Income Tax Provision (Benefit) Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012 Constant Constant (in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency Income tax provision (benefit) $ 5.7 $ 10.9 (47.7 )% (47.7 )% $ 35.1 $ (25.8 ) NM % NM % Effective income tax rate (33.5 )% (29.5 )% (167.9 )% 14.9 % * NM - Percentage not meaningful Our quarterly income tax expense or benefit is measured using an estimated annual effective tax rate for the period. We estimate our annual effective tax rate on a quarterly basis and make any necessary changes to adjust the rate for the applicable year-to-date period based upon the annual estimate. The estimated annual tax rate may fluctuate due to changes in forecasted annual operating income, acquisitions, changes in the jurisdictional mix of the forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets, changes to actual or forecasted permanent book to tax differences, impacts from future tax settlements with state, federal or foreign tax authorities or impacts from enacted tax law changes. We identify items which are unusual and nonrecurring in nature and treat these as discrete events. The tax effect of discrete items is recorded entirely in the quarter in which the discrete event occurs. The change in the effective tax rate for the three months ended November 30, 2012, compared to the similar periods last year was primarily due to the change in earnings levels as a result of the acquisition of Lawson, a shift in the jurisdictional mix of operating income in the respective periods, current year Subpart F inclusions, the establishment of a valuation allowance for nondeductible interest under IRC Section 163(j) in the previous year period, tax law changes in Sweden and the United Kingdom in the current year, the change in recorded liabilities for unrecognized tax benefits related to uncertain tax positions in various jurisdictions, changes in various withholding taxes, and changes in the valuation allowances recorded for various foreign subsidiary net operating losses. The items accounting for the difference between income taxes computed at the statutory rate and the expense from income taxes primarily relate to Subpart F income inclusions, tax law changes in Sweden and the United Kingdom, losses not providing benefits, nondeductible expenses, foreign withholding taxes, differences in foreign statutory rates, state income taxes and unrecognized tax benefits. 47-------------------------------------------------------------------------------- Table of Contents The change in the effective tax rate for the first six months of fiscal 2012, compared to the similar periods last year was primarily due to the change in earnings levels as a result of the acquisition of Lawson, a shift in the jurisdictional mix of operating income in the respective periods, the establishment of a valuation allowance for nondeductible interest under IRC Section 163(j), Subpart F inclusions, a tax law change in Australia, Sweden and the United Kingdom, the change in recorded liabilities for unrecognized tax benefits related to uncertain tax positions in various jurisdictions, changes in various withholding taxes, and changes in the valuation allowances recorded for various foreign subsidiary net operating losses. Following the Infor combination transaction that occurred on April 5, 2012, the Company is evaluating various tax structuring alternatives to rationalize various legal entities and reduce our overall global tax liability. While the Company has not finalized any specific plans at this time, we expect to finalize such plans during the second half of fiscal 2013. At that time, the Company expects to evaluate the impact of any restructuring actions on the realizability of available deferred tax assets in the various jurisdictions in which we operate. The American Taxpayer Relief Act of 2012 was signed into law by President Obama on January 2, 2013 and included retroactive extensions through December 31, 2013 of certain business tax provisions that had expired, including the controlled foreign corporation look-through exception to the U.S. subpart F anti-deferral rules. As the exception had not been signed into law as of November 30, 2012, our estimated annual effective tax rate for the period presented does not reflect the benefit of the controlled foreign corporation look-through exception. As a result, the legislation will be treated as a type 2 subsequent event and the related tax benefit will be recorded in our fiscal third quarter. We are in the process of measuring the impact of the legislation on both the third quarter and full year fiscal 2013 tax expense. While this analysis is expected to be completed in the third quarter, we expect that the application of the controlled foreign corporation look-through exception may materially affect our tax expense for the third quarter and full year fiscal 2013. Non-GAAP Financial Measure Reconciliations We believe our presentation of non-GAAP revenues, operating income and operating margin provide meaningful insight into our operating performance and an alternative perspective of our results of operations. We use these non-GAAP measures to assess our operating performance, to develop budgets, to serve as a measurement for incentive compensation awards and to manage expenditures. Presentation of these non-GAAP measures allows users to review our results of operations from the same perspective as management and our Board of Directors. We believe these non-GAAP financial measures provide users an enhanced understanding of our operations, facilitate analysis and comparisons of our current and past results of operations, facilitate comparisons of our operating results with those of our competitors and provide insight into the prospects of our future performance. We also believe that the non-GAAP measures are useful to users because they provide supplemental information that research analysts frequently use to analyze software companies including those that have recently made significant acquisitions. Additionally, certain non-GAAP disclosures are required and/or permitted by our lenders in our reporting to them. The method we use to produce non-GAAP results is not in accordance with GAAP and may differ from the methods used by other companies. These non-GAAP results should not be regarded as a substitute for corresponding GAAP measures but instead should be utilized as a supplemental measure of operating performance in evaluating our business. Non-GAAP measures do have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. As such, these non-GAAP measures should be viewed in conjunction with both our financial statements prepared in accordance with GAAP and the reconciliation of the supplemental non-GAAP financial measures to the comparable GAAP results provided for each period presented below. Non-GAAP Revenues Three Months Ended Quarterly Change Six Months Ended Year-to-Date Change November 30, Fiscal 2013 vs. 2012 November 30, Fiscal 2013 vs. 2012 Constant Constant (in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency GAAP revenues $ 682.5 $ 640.9 6.5 % 7.7 % $ 1,314.3 $ 1,202.2 9.3 % 12.5 % Non-GAAP revenue adjustments: Purchase accounting impact on license fees 3.5 5.4 8.3 12.5 Purchase accounting impact on product updates and support fees 0.5 40.3 1.1 67.8 Purchase accounting impact on consulting services and other fees 1.5 0.7 2.9 1.8 Total non-GAAP revenue adjustments 5.5 46.4 12.3 82.1 Non-GAAP revenues $ 688.0 $ 687.3 0.1 % 1.2 % $ 1,326.6 $ 1,284.3 3.3 % 6.2 % 48 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Income from Operations Quarterly Six Months Three Months Ended Change Ended Year-to-Date Change Fiscal 2013 vs. November 30, 2012 November 30, Fiscal 2013 vs. 2012 Constant Constant (in millions, except percentages) 2012 2011 Actual Currency 2012 2011 Actual Currency GAAP income from operations $ 113.2 $ 36.8 207.6 % 208.7 % $ 213.3 $ 43.9 385.9 % 392.0 % GAAP operating margin 16.6 % 5.7 % 16.2 % 3.7 % Non-GAAP revenue adjustments 5.5 46.4 12.3 82.1 Non-GAAP costs and operating expense adjustments: Purchase accounting impact on deferred costs (0.4 ) (1.3 ) (0.8 ) (2.3 ) Amortization 60.2 73.6 126.4 141.6 Stock-based compensation 1.5 0.2 2.8 0.3 Acquisition related and other costs 12.7 5.6 14.6 18.0 Restructuring costs 4.1 11.5 9.6 52.4 Total non-GAAP costs and operating expense adjustments 78.1 89.6 152.6 210.0 Non-GAAP income from operations $ 196.8 $ 172.8 13.9 % 14.3 % $ 378.2 $ 336.0 12.6 % 14.4 % Non-GAAP operating margin 28.6 % 25.1 % 28.5 % 26.2 % The non-GAAP adjustments we make to our reported GAAP results are primarily related to purchase accounting and other acquisition matters, significant non-cash accounting charges and restructuring charges. Our primary non-GAAP reconciling items are as follows: Purchase Accounting Impact on Revenue. Our non-GAAP financial results include pro forma adjustments to increase license fees, product updates and support fees, and consulting services and other fees that we would have recognized if we had not adjusted acquired deferred revenues to their fair values as required by GAAP. Certain deferred revenue for license fees, product updates and support fees, and consulting services and other fees on the acquired entity's balance sheet, at the time of the acquisition, were eliminated from our GAAP results as part of the purchase accounting for the acquisition as they do not reflect the fair value of performance obligations to us. As a result, our GAAP results do not, in management's view, reflect all of our license fees, product updates and support fees, and consulting services and other fees. We believe the inclusion of the pro forma revenue adjustment provides users a helpful alternative view of our operations. Amortization of Intangibles. We have excluded amortization of acquisition-related intangible assets including purchased technology and customer relationships from our non-GAAP results. The fair value of the intangible assets, which was allocated to these assets through purchase accounting, is amortized using accelerated or straight-line methods which approximate the proportion of future cash flows estimated to be generated each period over the estimated useful lives of the applicable assets. While these non-cash amortization charges are recurring in nature and the underlying assets benefit our operations, this amortization expense can fluctuate significantly based on the nature, timing and size of our past acquisitions and may be affected by future acquisitions. This makes comparisons of our current and historic operating performance difficult. Therefore, we exclude such expenses when analyzing the results of our operations including those of acquired entities. We believe that the exclusion of the amortization expense of acquired intangible assets provides users helpful information facilitating comparison of our results period-over-period and with other companies in the software industry as they each have their own acquisition histories and related non-GAAP adjustments. Stock-Based Compensation. Expenses related to stock-based compensation have been excluded from our non-GAAP results of operations. These charges consist of the estimated fair value of stock-based awards. While the charges for stock-based compensation are of a recurring nature, as we grant stock-based awards to attract and retain quality employees and as an incentive to help achieve financial and other corporate goals, we exclude them from our results of operations in assessing our operating performance. These charges are typically non-cash and are often the result of complex calculations using an option pricing model that estimates stock-based awards' fair value based on factors such as volatility and risk-free interest rates that are beyond our control. As such, we do not include such charges in our operating plans that we use to manage our business. In addition, we believe the exclusion of these charges facilitates comparisons of our operating results with those of our competitors who may have different policies regarding the use of stock-based awards. 49-------------------------------------------------------------------------------- Table of Contents Acquisition Related and Other Costs. We have incurred various transaction and integration costs related to our acquisitions as well as costs associated with our debt financing. The costs of acquiring and integrating the operations of acquired businesses as well as costs associated with our debt financing are incremental to our historical costs and are charged to our GAAP results of operations in the periods incurred. We do not consider these costs in our assessment of our operating performance. While these costs are not recurring with respect to our past acquisitions and debt activities, we may incur similar costs in the future if we pursue other acquisitions and debt activities. These costs are primarily reflected in acquisition related and other costs in our Consolidated Statements of Operations. Included in these costs are certain costs incurred in financing our acquisitions, reorganizing our operations and other debt financing activities. We believe that the exclusion of the non-recurring acquisition related and other costs provides users a useful alternative view of our results of operations and facilitates comparisons of our results period-over-period. Restructuring. We have recorded various restructuring charges related to actions taken to reduce our cost structure to enhance operating effectiveness, improve profitability and to eliminate certain redundancies in connection with acquisitions. These restructuring activities impacted different functional areas of our operations in different locations and were undertaken to meet specific business objectives in light of the facts and circumstances at the time of each restructuring event. These charges include costs related to severance and other termination benefits as well as costs to exit leased facilities. These restructuring charges are excluded from management's assessment of our operating performance. We believe that the exclusion of the restructuring charges provides users an alternative view of the cost structure of our operations and facilitates comparisons with the results of other periods that may not reflect such charges or may reflect different levels of such charges. |