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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2010
Commission file number 0-9993

MICROS SYSTEMS, INC.
 (Exact name of Registrant as specified in its charter)

MARYLAND
52-1101488
(State of incorporation)
(IRS Employer Identification Number)

7031 Columbia Gateway Drive, Columbia, Maryland
21046-2289
(Address of principal executive offices)
(Zip code)

443-285-6000
Registrant’s telephone number, including area code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ                      NO o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

YES þ                    NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ
Accelerated filer o
   
Non-accelerated filer o
Smaller Reporting Company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o                      NO þ

As of January 31, 2011, there were issued and outstanding 80,838,016 shares of Registrant’s Common Stock, $0.025 par value.

 
 

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

Form 10-Q
For the three and six months ended December 31, 2010

PART I – FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

 
2

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)

   
December 31,
   
June 30,
 
   
2010
   
2010
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 513,861     $ 377,205  
Short-term investments
    148,596       168,093  
Accounts receivable, net of allowance for doubtful accounts of $30,139 at December 31, 2010 and $28,392 at June 30, 2010
    145,280       153,066  
Inventory
    38,342       35,103  
Deferred income taxes
    18,863       19,624  
Prepaid expenses and other current assets
    32,442       27,004  
Total current assets
    897,384       780,095  
                 
Long-term investments
    57,885       59,884  
Property, plant and equipment, net
    26,913       27,349  
Deferred income taxes, non-current
    15,499       13,556  
Goodwill
    225,558       213,825  
Intangible assets, net
    18,349       19,590  
Purchased and internally developed software costs, net of accumulated amortization of $78,490 at December 31, 2010 and $71,985 at June 30, 2010
    17,845       17,468  
Other assets
    7,150       6,524  
Total assets
  $ 1,266,583     $ 1,138,291  
                 
LIABILITIES AND EQUITY
               
Current Liabilities:
               
Bank lines of credit
  $ -     $ 1,442  
Accounts payable
    51,165       44,783  
Accrued expenses and other current liabilities
    133,951       135,469  
Income taxes payable
    803       5,856  
Deferred revenue
    125,229       124,498  
Total current liabilities
    311,148       312,048  
                 
Income taxes payable, non-current
    25,973       22,737  
Deferred income taxes, non-current
    4,243       2,590  
Other non-current liabilities
    11,597       11,304  
      352,961       348,679  
Commitments and contingencies (Note 11)
               
                 
Equity:
               
MICROS Systems, Inc. Shareholders' Equity:
               
Common stock, $0.025 par value; authorized 120,000 shares; issued and outstanding 80,856 at December 31, 2010 and 80,042 at June 30, 2010
    2,021       2,001  
Capital in excess of par
    139,567       117,462  
Retained earnings
    753,724       689,750  
Accumulated other comprehensive income (loss)
    12,287       (25,833 )
Total MICROS Systems, Inc. shareholders' equity
    907,599       783,380  
Noncontrolling interest
    6,023       6,232  
Total equity
    913,622       789,612  
                 
Total liabilities and equity
  $ 1,266,583     $ 1,138,291  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
3

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue:
                       
Hardware
  $ 47,841     $ 45,793     $ 92,107     $ 89,099  
Software
    33,079       30,499       60,968       55,192  
Services
    166,197       149,355       327,456       292,757  
Total revenue
    247,117       225,647       480,531       437,048  
                                 
Cost of sales:
                               
Hardware
    31,353       30,364       61,308       58,416  
Software
    4,921       7,045       10,747       12,432  
Services
    73,473       63,259       144,686       125,396  
Total cost of sales
    109,747       100,668       216,741       196,244  
                                 
Gross margin
    137,370       124,979       263,790       240,804  
                                 
Selling, general and administrative expenses (1)
    75,515       71,359       140,190       136,478  
Research and development expenses
    10,931       9,703       21,718       20,720  
Depreciation and amortization
    4,243       4,319       8,362       8,161  
Total operating expenses
    90,689       85,381       170,270       165,359  
                                 
Income from operations
    46,681       39,598       93,520       75,445  
                                 
Non-operating income (expense):
                               
Interest income
    1,491       912       2,685       1,963  
Interest expense (1)
    (454 )     (87 )     (592 )     (86 )
Other income (expense), net (2)
    432       (427 )     (376 )     (822 )
Total non-operating income, net
    1,469       398       1,717       1,055  
                                 
Income before taxes
    48,150       39,996       95,237       76,500  
Income tax provision
    15,649       13,334       31,042       25,471  
Net income
    32,501       26,662       64,195       51,029  
Less:  Net income attributable to noncontrolling interest
    (173 )     (532 )     (251 )     (755 )
Net income attributable to MICROS Systems, Inc.
  $ 32,328     $ 26,130     $ 63,944     $ 50,274  
                                 
Net income per common share attributable to MICROS Systems, Inc. common shareholders:
                               
Basic
  $ 0.40     $ 0.33     $ 0.79     $ 0.63  
Diluted
  $ 0.39     $ 0.32     $ 0.78     $ 0.62  
                                 
Weighted-average number of shares outstanding:
                               
Basic
    80,748       79,700       80,479       79,724  
Diluted
    82,717       81,234       82,390       81,283  

 
The details of total other-than-temporary impairment losses ("OTTI") of long-term investments and a reconciliation to OTTI change included in other non-operating income (expense) (2):

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
Total other-than-temporary impairment losses (gains)
  $ -     $ (119 )   $ (317 )   $ 236  
Adjustment:
                               
Change in non-credit based OTTI recognized in other comprehensive income
    -       119       -       151  
Change in credit based OTTI due to redemption
    -       -       342     $ -  
Change in non-credit based OTTI due to redemption
    -       -       32       -  
Credit based OTTI recognized in non-operating income/expense
  $ -     $ -     $ 57     $ 387  

The accompanying notes are an integral part of the condensed consolidated financial statements.

(1) See Note 11 "Contingencies" in Notes to Condensed Consolidated Financial Statements.
(2) See Note 4 "Financial Instruments and Fair Value Measurements" in Notes to Condensed Consolidated Financial Statements.

 
4

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
   
Six Months Ended
 
   
December 31,
 
   
2010
   
2009
 
             
Net cash flows provided by operating activities
  $ 81,795     $ 85,921  
                 
Cash flows from investing activities:
               
Proceeds from sales and maturities of investments
    128,020       175,428  
Purchases of investments
    (98,875 )     (156,615 )
Net cash paid for acquisitions
    (4,316 )     (29,034 )
Purchases of property, plant and equipment
    (5,357 )     (4,111 )
Internally developed software costs
    (2,757 )     (933 )
Disposal of property, plant and equipment
    52       106  
Net cash flows provided by (used in) investing activities
    16,767       (15,159 )
                 
Cash flows from financing activities:
               
Proceeds from stock option exercises
    16,479       6,963  
Realized tax benefits from stock option exercises
    4,870       2,667  
Repurchases of common stock
    (6,397 )     (34,973 )
Proceeds from line of credit
    1,131       -  
Principal payments on line of credit
    (2,658 )     -  
Exercise of non-controlling put option
    (1,041 )     -  
Other
    (437 )     372  
Net cash flows provided by (used in) financing activities
    11,947       (24,971 )
                 
Effect of exchange rate changes on cash and cash equivalents
    26,147       2,492  
                 
Net increase in cash and cash equivalents
    136,656       48,283  
                 
Cash and cash equivalents at beginning of year
    377,205       292,257  
Cash and cash equivalents at end of period
  $ 513,861     $ 340,540  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
5

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
    
   
MICROS Systems, Inc. Shareholders
             
                           
Accumulated
             
               
Capital
         
Other
   
Non-
       
   
Common Stock
   
in Excess
   
Retained
   
Comprehensive
   
controlling
       
   
Shares
   
Amount
   
of Par
   
Earnings
   
Income
   
Interest
   
Total
 
Balance, June 30, 2010
    80,042     $ 2,001     $ 117,462     $ 689,750     $ (25,833 )   $ 6,232     $ 789,612  
Net income
    -       -       -       63,944       -       251       64,195  
Foreign currency translation adjustments, net of tax of $0
    -       -       -       -       37,452       514       37,966  
Non-credit other-than-temporary losses on long-term investments, net of tax of $410
    -       -       -       -       668       -       668  
Non-controlling interest put arrangement
    -       -       -       30       -       -       30  
Purchase of minority interest
    -       -       -       -       -       (682 )     (682 )
Dividends to non-controlling interest
                                            (292 )     (292 )
Share-based compensation
    -       -       6,961       -       -       -       6,961  
Stock issued upon exercise of options
    959       24       16,455       -       -       -       16,479  
Repurchases of stock
    (145 )     (4 )     (6,393 )     -       -       -       (6,397 )
Income tax benefit from options exercised
    -       -       5,082       -       -       -       5,082  
Balance, December 31, 2010
    80,856     $ 2,021     $ 139,567     $ 753,724     $ 12,287     $ 6,023     $ 913,622  

   
MICROS Systems, Inc. Shareholders
             
                           
Accumulated
             
               
Capital
         
Other
   
Non-
       
   
Common Stock
   
in Excess
   
Retained
   
Comprehensive
   
controlling
       
   
Shares
   
Amount
   
of Par
   
Earnings
   
Income
   
Interest
   
Total
 
Balance, June 30, 2009
    80,310     $ 2,008     $ 125,640     $ 575,095     $ 16,254     $ 6,034     $ 725,031  
Net income
    -       -       -       50,274       -       755       51,029  
Foreign currency translation adjustments, net of tax of $0
    -       -       -       -       10,382       (61 )     10,321  
Non-credit other-than-temporary losses on long-term investments, net of tax of $286
    -       -       -       -       468       -       468  
Non-controlling interest put arrangement
    -       -       -       233       -       -       233  
Dividends to non-controlling interest
                                            -       -  
Share-based compensation
    -       -       7,429       -       -       -       7,429  
Stock issued upon exercise of options
    606       15       6,948       -       -       -       6,963  
Repurchases of stock
    (1,262 )     (32 )     (34,941 )     -       -       -       (34,973 )
Income tax benefit from options exercised
    -       -       2,809       -       -       -       2,809  
Balance, December 31, 2009
    79,654     $ 1,991     $ 107,885     $ 625,602     $ 27,104     $ 6,728     $ 769,310  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
6

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
   
Six Months Ended
 
   
December 31,
 
   
2010
   
2009
 
             
Net income
  $ 64,195     $ 51,029  
Other comprehensive income, net of taxes:
               
Foreign currency translation adjustments
    37,966       10,321  
Change in unrealized loss on long-term investments, net of taxes of $410 and $286
    668       468  
Total other comprehensive income, net of taxes
    38,634       10,789  
                 
Comprehensive income
    102,829       61,818  
                 
Comprehensive income attributable to non-controlling interest
    (765 )     (694 )
                 
Comprehensive income attributable to MICROS Systems, inc.
  $ 102,064     $ 61,124  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
7

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of MICROS Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2010.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X, promulgated by the Securities and Exchange Commission.  Accordingly, they do not include all disclosures required by U.S. generally accepted accounting principles for complete financial statements.

The condensed consolidated financial statements included in this report reflect all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position of the Company, its results of operations and cash flows for the interim periods set forth herein.  The results for the three and six months ended December 31, 2010 are not necessarily indicative of the results to be expected for the full year or any future periods.  Certain prior period amounts have been reclassified in the accompanying financial statements to conform to the current period presentation.

2.
ACQUISITIONS
On October 4, 2010, the Company acquired Fortech Italia S.r.l. (“Fortech”), a supplier of point of sale software for the specialty retail market, headquartered in Italy, for a total cash purchase price of approximately $5.1 million, net of cash acquired.  Approximately $0.7 million of the total purchase price has been held back and, if specified claims against Fortech arise, such amounts may be used to satisfy those claims.  The amounts held back, net of any payments to satisfy any such claims, will be paid to the Fortech sellers in several installments over the next five years. The selling Fortech members may receive up to an additional $1.1 million based upon achievement of specified financial targets for fiscal years ending September 30, 2011 and 2012 and approximately $0.9 million of the $1.1 million has been included in the purchase price allocation based on fair value.  In connection with the acquisition, the Company recorded goodwill of approximately $7.3 million and intangible assets of approximately $0.4 million, principally comprised of customer relationships which will be amortized over 5 years.  The acquisition of Fortech has been included in the Company’s results beginning on the October 4, 2010 acquisition date.  The purchase price allocation is not finalized and is subject to the final working capital adjustments, which are not expected to be material.  The pro forma effect of this acquisition was not material to the consolidated financial position and results of operations presented in this report.

3.
INVENTORY
The components of inventory are as follows:

(in thousands)
 
December 31,
2010
   
June 30,
2010
 
Raw materials
  $ 2,024     $ 1,807  
Finished goods
    36,318       33,296  
Total inventory
  $ 38,342     $ 35,103  

4.
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Short-term and long-term investments consist of the following:

   
December 31, 2010
   
June 30, 2010
 
(in thousands)
 
Amortized
Cost Basis
   
Aggregate
Fair Value
   
Amortized
Cost Basis
   
Aggregate
Fair Value
 
Time deposit - international
  $ 93,006     $ 93,006     $ 56,270     $ 56,270  
Auction rate securities
    57,625       47,971       64,275       53,258  
U.S. government debt securities
    50,113       50,113       108,323       108,323  
Foreign corporate debt securities
    15,391       15,391       10,126       10,126  
Total investments
  $ 216,135     $ 206,481     $ 238,994     $ 227,977  

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  Under applicable accounting standards, the following hierarchy prioritizes the inputs (generally, assumptions that market participants use in pricing an asset or liability) used to measure fair value based on the quality and reliability of the information provided by the inputs:
 
8

 
·
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.  The Company considers active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
·
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and inputs that are derived principally from or corroborated by observable market data or other means.
·
Level 3 - Measured based on prices or valuation models using unobservable inputs to the extent relevant observable inputs are not available (i.e., where there is little or no market activity for the asset or liability).

The following table provides information regarding the financial assets accounted for at fair value and the type of inputs used to value the assets (excludes cash and cash equivalents of approximately $513.9 million and $377.2 million as of December 31, 2010 and June 30, 2010):

(in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Balance at December 31, 2010:
                       
Short-term and long-term investments:
                       
Time deposit - international
  $ -       93,006     $ -     $ 93,006  
Auction rate securities
    -       -       47,971       47,971  
U.S. government debt securities
    50,113       -       -       50,113  
Foreign corporate debt securities
    15,391       -       -       15,391  
Total short-term and long-term investments
  $ 65,504     $ 93,006     $ 47,971     $ 206,481  
                                 
Balance at June 30, 2010:
                               
Short-term and long-term investments:
                               
Time deposit - international
  $ -     $ 56,270     $ -     $ 56,270  
Auction rate securities
    -       -       53,258       53,258  
U.S. government
    108,323       -       -       108,323  
Foreign corporate debt security
    10,126       -       -       10,126  
Total short-term and long-term investments
  $ 118,449     $ 56,270     $ 53,258     $ 227,977  

At December 31, 2010 and June 30, 2010, all of the Company’s investments other than the Company’s investments in auction rate securities were recognized at fair value based upon observable input information provided by the Company’s pricing service vendors for identical or similar assets.  For these investments, cost approximated fair value.  During the six months ended December 31, 2010 and 2009, the Company did not recognize any gains or losses on its investments, other than related to the redemptions of two of its auction rate securities during the six months ended December 31, 2010.  See “Auction Rate Securities” below for further discussion on the valuation of the Company’s investments in auction rate securities.

The contractual maturities of investments held at December 31, 2010 are as follows:

(in thousands)
 
Amortized
Cost Basis
   
Aggregate
Fair Value
 
Due within one year
  $ 148,596     $ 148,596  
Due 1 - 2 years
    9,914       9,914  
Due after 10 years - auction rate securities
    57,625       47,971  
Balance at December 31, 2010
  $ 216,135     $ 206,481  

AUCTION RATE SECURITIES
The Company’s investments in auction rate securities, carried at estimated fair values, were its only assets valued on the basis of Level 3 inputs.  Auction rate securities are long-term debt instruments with variable interest rates that are designed to reset to prevailing market interest rates every 7 to 35 days through the auction process.  The auction rate securities held by the Company are supported by student loans for which repayment is either guaranteed by the Federal Family Education Loan Program or insured by AMBAC Financial Group.  Before February 2008, based on the liquidity previously provided by the interest rate reset mechanism and the short-term nature of the Company’s investment, the auction rate securities were classified as short-term investments available-for-sale in the Company’s consolidated balance sheets.  Beginning in February 2008, auctions for these securities failed to obtain sufficient bids to establish a clearing rate and the securities were not saleable in auction, thereby no longer providing short-term liquidity.  As a result, the auction rate securities have been classified as long-term investments available-for-sale as of December 31, 2010 and June 30, 2010 instead of being classified as short-term investments, as was the case prior to February 2008.

 
9

 

As of December 31, 2010, the Company updated its assessment as to whether it would likely recover the entire cost basis of each of the auction rate securities to determine whether the securities had incurred an other-than-temporary impairment. Determination of whether the impairment is temporary or other-than-temporary requires significant judgment.  The primary factors that are considered in assessing the nature of the impairment include (a) the credit quality of the underlying security, (b) the extent to which and time period during which the fair value of each investment has been below cost, (c) the expected holding or recovery period for each investment, (d) the Company’s intent to hold each investment until recovery and likelihood that the Company will not be required to sell the security prior to recovery, and (e) the existence of any evidence of default by the issuer. The Company engaged an independent valuation firm to perform a valuation of its auction rate securities in conjunction with the Company's assessment of whether any impairment is temporary or other-than-temporary. The valuation firm used a discounted cash flow model that considered various inputs including:  (a) the coupon rate specified under the debt instruments, (b) the current credit ratings of the underlying issuers, (c) collateral characteristics, (d) discount rates, (e) severity of default and (f) probability that the securities will be sold at auction or through early redemption.  The valuation firm used a mark to model approach to arrive at this valuation, which the Company reviewed and with which it agreed.

Based on its fair value assessments, the Company determined that its investments in auction rate securities as of December 31, 2010 were impaired by approximately $9.7 million as compared to an impairment of approximately $11.0 million as of June 30, 2010.  Approximately $5.8 million and $6.1 million of this impairment at December 31, 2010 and June 30, 2010, respectively, were deemed to be other-than-temporary.  The fair value assessment also included an evaluation of the amount of the other-than-temporary impairment attributable to credit loss.  The factors considered in making an evaluation of the amount attributable to credit loss included the following:  (a) default probability and the likelihood of restructuring of the security, (b) payment structure of the security to determine how the expected underlying collateral cash flows will be distributed to holders of the issuer’s securities and (c) performance indicators of the underlying assets in the trust (including default and delinquency rates).  These assumptions are subject to change as the underlying market conditions change.  Based on its evaluations, the Company determined that approximately $5.8 million of the cumulative other-than-temporary impairment losses as of December 31, 2010 were credit based.  Of this amount, approximately $0.1 million has been recorded in its consolidated statements of operations for the six months ended December 31, 2010 and the remaining amount previously was recorded in the Company’s prior fiscal years’ consolidated statements of operations.

The remaining cumulative impairment losses of approximately $3.9 million (approximately $2.4 million, net of tax) were recorded in accumulated other comprehensive income, net of tax, as of December 31, 2010.

During the six months ended December 31, 2010, the Company redeemed approximately $6.7 million (at original cost) of its auction rate securities which had a carrying value of approximately $6.0 million and received approximately $6.4 million.  The redemptions resulted in a recognized gain of less than $0.1 million as the securities redeemed were previously determined to have a $0.3 million credit based other than temporary impairment loss.

A reconciliation of changes in the fair value of auction rate securities, and the related unrealized losses were as follows:

(in thousands)
 
Cost
   
Temporary
Impairment
Loss (1)
   
OTTI -
Non-Credit
Loss (1)
   
OTTI - Credit
Loss (2)
   
Fair
Value
 
Balance at June 30, 2010
  $ 64,275     $ (4,936 )   $ (32 )   $ (6,049 )   $ 53,258  
Changes in losses related to investments
    -       797       -       (57 )     740  
Redemptions
    (6,650 )     249       32       342       (6,027 )
Balance at December 31, 2010
  $ 57,625     $ (3,890 )   $ -     $ (5,764 )   $ 47,971  

(1) Recorded in the accumulated other comprehensive income component of stockholders' equity.
(2) Recorded in the condensed consolidated statement of operations.

The Company plans to continue to monitor its investments, including the liquidity of and creditworthiness of the issuers of its auction rate securities, on an ongoing basis for indications of further impairment and, if an impairment is identified, for proper classification of the impairment.  Based on the Company’s expected operating cash flows and sources of cash, the Company does not believe that any reduction in the liquidity of its auction rate securities will have a material impact on its overall ability to meet its liquidity needs.

5.
GOODWILL AND INTANGIBLE ASSETS
The Company completed its annual impairment tests as of July 1, 2010 on its goodwill and its indefinite-lived trademarks.  Based on its annual impairment test results, the Company determined an impairment loss existed for one of its subsidiary’s trademarks as of July 1, 2010 and recognized the associated impairment loss of approximately $0.1 million during the three months ended September 30, 2010.  There were no other impairment losses related to the Company’s goodwill or other intangible assets.  Subsequent to July 1, 2010, there have not been any events or changes in circumstances indicating that it is more likely than not that goodwill or indefinite-lived trademarks have been impaired.

 
10

 

6.
LINE OF CREDIT
The Company has two credit agreements (the “Credit Agreements”) that, through July 31, 2010, provided an aggregate $65.0 million multi-currency committed line of credit.  The lenders under the Credit Agreements are Bank of America, N.A., Wells Fargo N.A. and US Bank N.A. (“Lenders”).  The international facility is secured by 65% of the capital stock of the Company’s main operating Ireland subsidiary and 100% of the capital stock of all of the remaining major foreign subsidiaries.  The U.S. facility is secured by 100% of the capital stock of the Company’s major U.S. subsidiaries as well as inventory and receivables located in the U.S.  On July 31, 2010, the Credit Agreements were amended to extend the maturity date until July 31, 2013, with some further modifications to the terms and conditions, including the addition and deletion of certain subsidiaries as co-borrowers, a reduction in the overall limit on the line to $50.0 million (a change made at the Company’s request), and reduction in certain fees payable to the Lenders under certain circumstances.

For borrowings in U.S. currency, the interest rate under the Credit Agreements is equal to the higher of the federal funds rate plus 50 basis points or the prime rate.  For borrowings in foreign currencies, the interest rate is determined by a LIBOR-based formula, plus an additional margin of 125 to 200 basis points, depending upon the Company’s consolidated earnings before interest, taxes, depreciation and amortization for the immediately preceding four calendar quarters.  Under the terms of the Credit Agreements, the Company is required to pay to the Lenders insignificant commitment fees on the unused portion of the line of credit.  The Credit Agreements also contain certain financial covenants and restrictions on the Company’s ability to assume additional debt, repurchase stock, sell subsidiaries or acquire companies.  In case of an event of default, as defined in the Credit Agreements including those not cured within the applicable cure period, if any, the Lenders’ remedies include their ability to declare all outstanding loans, plus interest and other related amounts owed, to be immediately due and payable in full, and to pursue all rights and remedies available to them under the Credit Agreements or under applicable law.

As of December 31, 2010, the Company had no balance outstanding under the Credit Agreements and applied approximately $0.4 million to guarantees.  A total of approximately $49.6 million was available for future borrowings as of December 31, 2010.

The Company also has a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.3 million at the December 31, 2010 exchange rate).  Under the terms of this facility, the Company may borrow in the form of either a line of credit or term debt.  As of December 31, 2010, there were no balances outstanding on this credit facility, but approximately EUR 0.6 million (approximately $0.8 million at the December 31, 2010 exchange rate) of the credit facility has been used for guarantees.

As of December 31, 2010, the Company had a borrowing capacity of approximately $50.1 million under all of the credit facilities described above.

7.
SHARE-BASED COMPENSATION
The non-cash share-based compensation expenses included in the consolidated statements of operations are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
Selling, general and administrative
  $ 4,164       4,204     $ 6,648       7,069  
Research and development
    125       143       251       290  
Cost of sales
    27       31       62       70  
Total non-cash share-based compensation expense
    4,316       4,378       6,961       7,429  
Income tax benefit
    (1,866 )     (1,464 )     (2,655 )     (2,406 )
Total non-cash share-based compensation expense, net of tax benefit
  $ 2,450     $ 2,914     $ 4,306     $ 5,023  
Impact on diluted net income per share attributable to MICROS Systems, Inc. common shareholders
  $ 0.03     $ 0.03     $ 0.05     $ 0.05  

No non-cash share-based compensation expense has been capitalized for the six months ended December 31, 2010 and 2009, as stock options were not granted to employees whose labor cost was capitalized as software development costs or inventory.

As of December 31, 2010, there was approximately $19.0 million (net of estimated forfeitures) in non-cash share-based compensation related to non-vested awards, which is expected to be recognized in the Company’s consolidated statements of operations over a weighted-average period of 2.0 years.

 
11

 


8.
NET INCOME PER SHARE ATTRIBUTABLE TO MICROS SYSTEMS, INC. COMMON SHAREHOLDERS
Basic net income per share attributable to MICROS Systems, Inc. common shareholders is computed by dividing net income available to MICROS Systems, Inc. by the weighted-average number of shares outstanding.  Diluted net income per share attributable to MICROS Systems, Inc. common shareholders includes the dilutive effect of stock options.  A reconciliation of the net income available to MICROS Systems, Inc. and the weighted-average number of common shares outstanding assuming dilution is as follows:

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
(in thousands, except per share data)
 
2010
   
2009
   
2010
   
2009
 
Net income attributable to MICROS Systems, Inc.
  $ 32,328     $ 26,130     $ 63,944     $ 50,274  
Effect of minority put arrangement
          173       30       233  
Net income available to MICROS Systems, Inc. common shareholders
  $ 32,328     $ 26,303     $ 63,974     $ 50,507  
                                 
Average common shares outstanding
    80,748       79,700       80,479       79,724  
Dilutive effect of outstanding stock options
    1,969       1,534       1,911       1,559  
Average common shares outstanding assuming dilution
    82,717       81,234       82,390       81,283  
                                 
Basic net income per share attributable to MICROS Systems, Inc. common shareholders
  $ 0.40     $ 0.33     $ 0.79     $ 0.63  
Diluted net income per share attributable to MICROS Systems, Inc. common shareholders
  $ 0.39     $ 0.32     $ 0.78     $ 0.62  
                                 
Anti-dilutive weighted shares excluded from reconciliation
    477       1,786       358       1,695  

Results for the three months ended December 31, 2010 and 2009 include approximately $4.3 million ($2.4 million, net of tax) and $4.4 million ($2.9 million, net of tax), in non-cash share-based compensation expense, respectively.  These non-cash share-based compensation expenses reduced diluted net income per share attributable to MICROS Systems, Inc. common shareholders by $0.03 for the three months ended December 31, 2010 and 2009.

Results for the six months ended December 31, 2010 and 2009 include approximately $7.0 million ($4.3 million, net of tax) and $7.4 million ($5.0 million, net of tax), in non-cash share-based compensation expense, respectively.  These non-cash share-based compensation expenses reduced diluted net income per share attributable to MICROS Systems, Inc. common shareholders by $0.05 for each of the six month periods ended December 31, 2010 and 2009.

9.
RECENT ACCOUNTING GUIDANCE

On July 1, 2010, the Company adopted authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of software revenue recognition guidance.  Under the guidance, when vendor-specific objective evidence or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”).  The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

On July 1, 2010, the Company adopted authoritative guidance on revenue recognition for arrangements that include software elements.  Under the guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of software revenue recognition guidance and will be subject to other relevant revenue recognition guidance.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

10.
SEGMENT INFORMATION
The Company is organized and operates in four operating segments:  U.S., Europe, the Pacific Rim, and Latin America regions.  The Company has identified U.S. as a separate reportable segment and has aggregated its three international operating segments into one reportable segment, international, as the three international operating segments share many similar economic characteristics.  Management views the U.S. and international segments separately in operating its business, although the products and services are similar for each segment.  The Company’s chief operating decision maker is the Company’s Chief Executive Officer.  Historically, all of the Company’s new business acquisitions have been incorporated into the existing operating segments, based on their respective geographic locations, and are subsequently operated and managed as part of the applicable operating segment.

 
12

 

A summary of certain financial information regarding the Company’s reportable segments is set forth below:

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
Revenues (1):
                       
United States
  $ 131,492     $ 117,026     $ 261,573     $ 228,416  
International
    126,765       118,530       239,940       226,626  
Intersegment eliminations (2)
    (11,140 )     (9,909 )     (20,982 )     (17,994 )
Total revenues
  $ 247,117     $ 225,647     $ 480,531     $ 437,048  

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
Income before taxes (1):
                       
United States
  $ 25,594     $ 19,906     $ 53,869     $ 37,814  
International
    30,660       27,492       56,551       51,804  
Intersegment eliminations (2)
    (8,104 )     (7,402 )     (15,183 )     (13,118 )
Total income before taxes
  $ 48,150     $ 39,996     $ 95,237     $ 76,500  

   
As of
 
(in thousands)
 
December 31,
2010
   
June 30,
2010
 
Identifiable assets (3):
           
United States
  $ 592,997     $ 569,629  
International
    673,586       568,662  
Total identifiable assets
  $ 1,266,583     $ 1,138,291  

 
(1)
Amounts based on the location of the selling entity.
 
(2)
Amounts primarily represent elimination of U.S. and Ireland’s intercompany business.
 
(3)
Amounts based on the physical location of the asset.

11.
CONTINGENCIES
On May 22, 2008, a jury returned verdicts totaling $7.5 million against the Company in the consolidated actions of Roth Cash Register v. MICROS Systems, Inc., et al. and Shenango Systems Solutions v. MICROS Systems, Inc., et al.  The cases initially were filed in 2000 in the Court of Common Pleas of Allegheny County, Pennsylvania.  The complaints both related to the non-renewal of dealership agreements in the year 2000 between the Company and the respective plaintiffs.  The agreements were non-renewed as part of a restructuring of the dealer channel.  There is no other outstanding litigation relating to the restructuring of the dealer channel in the year 2000.  The plaintiffs alleged that the Company and certain of its subsidiaries and employees entered into a plan to eliminate the plaintiffs as authorized dealers and improperly interfere with the plaintiffs' relationships with their respective existing and potential future clients and customers without compensation to the plaintiffs.  As a result, the plaintiffs claimed that the Company was liable for, among other things, breach of contract and tortious interference with existing and prospective contractual relationships.  The Company and the plaintiffs appealed the verdicts on various grounds.  On December 30, 2010, the Superior Court of Pennsylvania issued an opinion reversing and remanding $4.5 million of the award and affirming $3.0 million of the award.  In January 2011, both the Company and the plaintiffs filed motions seeking reconsideration of certain aspects of the appellate court decision and response briefs.  During the three months ended December 31, 2010, the Company reserved an additional $3.0 million for any potential liability relating to these matters in its consolidated statements of operations in selling, general and administrative expenses.  The Company has also recognized interest expense of approximately $0.4 million related to the judgment as the amount payable will be subject to interest accruing at the statutory rate of 6% per annum.

The Company is and has been involved in legal proceedings arising in the normal course of business, and, subject to the matters referenced above, the Company is of the opinion, based upon presently available information and the advice of counsel concerning pertinent legal matters, that any resulting liability should not have a material adverse effect on the Company’s results of operations, financial position, or cash flows.

 
13

 

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

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

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

We have been adversely affected by the current global recession.  We believe that weakened consumer spending and difficulties in obtaining credit have negatively affected our customers’ abilities to acquire or open new hospitality and retail venues, and also limit their willingness and ability to make significant capital expenditures on new systems and system upgrades.  However, we have experienced some increase in revenues in the six months ended December 31, 2010, which we believe reflects a modest improvement in economic conditions.  Moreover, we believe that our customers continued reliance on existing systems has had a favorable effect on our service revenues.  In light of current uncertain conditions, we continue to limit certain discretionary expenses, and scrutinize carefully any expansion of our workforce.

FORWARD-LOOKING STATEMENTS
       The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.  Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2010 and in Part II, Item 1A, “Risk Factors” in this report.

Examples of such forward-looking statements include:
 
·
our statements about the growth of and conditions in the hospitality and retail industries generally, and our analysis of the growth and direction of various sectors within those industries;
 
·
our expectations regarding the effects of continued uncertain economic conditions on our customers, our distributors, and our business generally.
 
·
our statements regarding the effects of foreign currency rate fluctuations (in particular, the Euro and British pound sterling) on our financial performance;
 
·
our belief that, subject to the specific matter described in note 11 to the consolidated financial statements included in this report, any existing legal claims or proceedings will not have a material adverse effect on our results of operations or financial position;
 
·
our expectations regarding effective tax rates in future periods;
 
·
our expectations regarding the impact or lack of impact on our financial position and results of operations of the application of recent accounting standards;
 
·
our expectations about the adequacy of our cash flows and our available lines of credit to meet our working capital needs, and our ability to raise additional funds if and when needed;
 
·
our expectations about our capital expenditures for future periods;
 
·
our expectations that our exposure to interest rate risk will not materially change in the future;
 
·
our expectation that we will evaluate our need to invest in instruments to protect against interest rate fluctuations and our exposure to such interest rate risk;
 
·
our expectations regarding valuation and liquidity of auction rate securities in which we have invested.
 
·
our expectation that further reductions in liquidity of our auction rate securities will not materially affect our ability to meet our liquidity needs.

 
14

 
 
RESULTS OF OPERATIONS
 
Revenue:
 
Three Months Ended December 31, 2010:
The following table provides information regarding sales mix by reportable segments (amounts are net of intersegment eliminations, are based on location of the selling entity, and exclude export sales):

   
Three Months Ended December 31,
 
   
U.S.
   
International
   
Total
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Hardware
  $ 22,859     $ 21,879     $ 24,982     $ 23,914     $ 47,841     $ 45,793  
Software
    14,981       12,621       18,098       17,878       33,079       30,499  
Service
    79,540       69,034       86,657       80,321       166,197       149,355  
Total Revenue
  $ 117,380     $ 103,534     $ 129,737     $ 122,113     $ 247,117     $ 225,647  

The following table sets forth the sales mix of Company products and services as a percent of total revenue:

   
Three Months Ended
December 31,
 
(in thousands)
 
2010
   
2009
 
Hardware
    19.4 %     20.3 %
Software
    13.4 %     13.5 %
Service
    67.2 %     66.2 %
Total
    100.0 %     100.0 %

For the three months ended December 31, 2010, total revenue was approximately $247.1 million, an increase of approximately $21.5 million, or 9.5% compared to the same period last year reflecting the following:
 
·
Hardware, software and service revenue increased by 4.5%, 8.5% and 11.3%, respectively, compared to the same period last year.  We believe the increases were primarily due to an improvement in demand from our customers as a result of a modest improvement in global economic conditions.  The software revenue increase also reflects a major rollout of Simphony by a large customer.
 
·
The revenue changes shown in the table above also reflect unfavorable foreign currency exchange rate fluctuations primarily for the Euro and the British pound sterling against the U.S. dollar, which negatively impacted total revenue by approximately $2.9 million.
 
·
The total revenue increase also reflects additional service revenue generated from the continued expansion of our customer base and the additional revenue generated by Fortech and TIG Global, companies that we acquired in October 2010 and December 2009, respectively.

International segment revenue for the three months ended December 31, 2010 increased by approximately $7.6 million, or 6.2% compared to the same period last year due to the following:
 
·
Hardware, software and service revenue increased by 4.5%, 1.2% and 7.9%, respectively, compared to the same period last year.  We believe these changes were primarily due to an improvement in demand from our customers as a result of a modest improvement in global economic conditions.
 
·
The revenue changes shown in the table above also reflect unfavorable foreign currency exchange rate fluctuations primarily for the Euro and British pound sterling against the U.S. dollar, which negatively impacted total revenue by approximately $2.9 million.
 
·
The total revenue increase also reflects additional service revenue generated from the continued expansion of our customer base and the additional revenue generated by Fortech, a company we acquired in October 2010.

U.S. segment revenue for the three months ended December 31, 2010 increased approximately $13.8 million, or 13.4% compared to the same period last year due to the following:
 
·
Hardware, software and service revenue increased by 4.5%, 18.7% and 15.2%, respectively, compared to the same period last year.  We believe these changes were primarily due to an improvement in demand from our customers as a result of a modest improvement in global economic conditions.
 
·
The software revenue increase also reflects a major rollout of Simphony by a large customer.  In addition, the service revenue increase reflects additional service revenue generated from the continued expansion of our customer base and the additional service revenue generated by TIG Global, a company that we acquired in December 2009.

 
15

 
 
Six Months Ended December 31, 2010:
The following table provides information regarding sales mix by reportable segments (amounts are net of intersegment eliminations, are based on location of the selling entity, and exclude export sales):
 
   
Six Months Ended December 31,
 
   
U.S.
   
International
   
Total
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Hardware
  $ 45,131     $ 42,842     $ 46,976     $ 46,257     $ 92,107     $ 89,099  
Software
    23,667       21,958       37,301       33,234       60,968       55,192  
Service
    164,423       139,067       163,033       153,690       327,456       292,757  
Total Revenue
  $ 233,221     $ 203,867     $ 247,310     $ 233,181     $ 480,531     $ 437,048  
 
The following table sets forth the sales mix of Company products and services as a percent of total revenue:
 
   
Six Months Ended
December 31,
 
(in thousands)
 
2010
   
2009
 
Hardware
    19.2 %     20.4 %
Software
    12.7 %     12.6 %
Service
    68.1 %     67.0 %
Total
    100.0 %     100.0 %

For the six months ended December 31, 2010, total revenue was approximately $480.5 million, an increase of approximately $43.5 million, or 9.9% compared to the same period last year reflecting the following:
 
·
Hardware, software and service revenue increased by 3.4%, 10.5% and 11.9%, respectively, compared to the same period last year.  We believe the increases were primarily due to an improvement in demand from our customers as a result of a modest improvement in global economic conditions.  The software revenue increase also reflects a major rollout of Simphony by a large customer.
 
·
The revenue changes shown in the table above also reflect unfavorable foreign currency exchange rate fluctuations primarily for the Euro and British pound sterling against the U.S. dollar, which negatively impacted total revenue by approximately $5.6 million.
 
·
The total revenue increase also reflects additional service revenue generated from the continued expansion of our customer base and the additional revenue generated by Fortech and TIG Global, companies that we acquired in October 2010 and December 2009, respectively.

International segment revenue for the six months ended December 31, 2010 increased by approximately $14.1 million, or 6.1% compared to the same period last year due to the following:
 
·
Hardware, software and service revenue increased by 1.6%, 12.2% and 6.1%, respectively, compared to the same period last year.  We believe these changes were primarily due to an improvement in demand from our customers as a result of a modest improvement in global economic conditions.
 
·
The revenue changes shown in the table above also reflect unfavorable foreign currency exchange rate fluctuations primarily for the Euro and the British pound sterling against the U.S. dollar, which negatively impacted total revenue by approximately $5.6 million.
 
·
The total revenue increase also reflects additional service revenue generated from the continued expansion of our customer base and the additional revenue generated by Fortech.

U.S. segment revenue for the six months ended December 31, 2010 increased approximately $29.4 million, or 14.4% compared to the same period last year due to the following:
 
·
Hardware, software and service revenue increased by 5.3%, 7.8% and 18.2%, respectively, compared to the same period last year.  We believe these changes were primarily due to an improvement in demand from our customers as a result of a modest improvement in global economic conditions.
 
·
The software revenue increase also reflects a major rollout of Simphony by a large customer.  In addition, the service revenue increase reflects additional service revenue generated by TIG Global, a company that we acquired in December 2009, and the additional service revenue generated from the continued expansion of our customer base.

 
16

 
 
Cost of Sales:
 
Three Months Ended December 31, 2010:
The following table provides information regarding the cost of sales:

   
Three Months Ended December 31,
 
   
2010
   
2009
 
(in thousands)
 
Cost 
of Sales
   
% of Related
Revenue
   
Cost 
of Sales
   
% of Related
Revenue
 
Hardware
  $ 31,353       65.5 %   $ 30,364       66.3 %
Software
    4,921       14.9 %     7,045       23.1 %
Service
    73,473       44.2 %     63,259       42.4 %
Total Cost of Sales
  $ 109,747       44.4 %   $ 100,668       44.6 %

For the three months ended December 31, 2010 and 2009, cost of sales as a percent of revenue were 44.4% and 44.6%, respectively.  Hardware cost of sales as a percent of related revenue for the three months ended December 31, 2010 decreased 0.8% compared to the same period last year primarily as a result of product mix and an overall improvement in margins on substantially all hardware product sales.

Software cost of sales as a percent of related revenue decreased approximately 8.2% compared to the same period last year due to an increase in the sale of internally developed software which has much higher margin than third party software.  The decrease also reflects a decrease in capitalized software amortization expense (included in software cost of sales) as a percent of software revenue as compared to the three months ended December 31, 2009.

Service costs as a percent of related revenue increased approximately 1.8% compared to the same period last year because the cost structure for services provided through TIG Global, a subsidiary we acquired in December 2009, generally is higher as a percent of its revenue than our overall service costs as a percent of our overall revenue.

Six Months Ended December 31, 2010:
The following table provides information regarding the cost of sales:

   
Six Months Ended December 31,
 
   
2010
   
2009
 
(in thousands)
 
Cost 
of Sales
   
% of Related
Revenue
   
Cost 
of Sales
   
% of Related
Revenue
 
Hardware
  $ 61,308       66.6 %   $ 58,416       65.6 %
Software
    10,747       17.6 %     12,432       22.5 %
Service
    144,686       44.2 %     125,396       42.8 %
Total Cost of Sales
  $ 216,741       45.1 %   $ 196,244       44.9 %

For the six months ended December 31, 2010 and 2009, cost of sales as a percent of revenue were 45.1% and 44.9%, respectively.  Hardware cost of sales as a percent of related revenue for the six months ended December 31, 2010 increased 1.0% compared to the same period last year primarily as a result of an overall decrease in margins on substantially all hardware product sales.

Software cost of sales as a percent of related revenue decreased approximately 4.9% compared to the same period last year due to an increase in the sale of internally developed software which has much higher margin than third party software. The decrease also reflects a decrease in capitalized software amortization expense (included in software cost of sales) as a percent of software revenue as compared to the six months ended December 31, 2009.

Service costs as a percent of related revenue increased approximately 1.4% compared to the same period last year because the cost structure for services provided through TIG Global generally is higher as a percent of its revenue than our overall service costs as a percent of our overall revenue.

Selling, General and Administrative (“SG&A”) Expenses:
SG&A expenses, as a percentage of revenue, for the three months ended December 31, 2010, were 30.6%, a decrease of 1.0% compared to the same period last year.  This decrease was due to increased revenue, and our ability to manage our overall costs.  This decrease was partially offset by a $3.0 million litigation charge recognized during the three months ended December 31, 2010.

 
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SG&A expenses, as a percentage of revenue, for the six months ended December 31, 2010, were 29.2%, a decrease of 2.0% compared to the same period last year.  This decrease was due to increased revenue, and our ability to manage our overall costs. This decrease was partially offset by a $3.0 million litigation charge recognized during the six months ended December 31, 2010.
  
Research and Development (“R&D”) Expenses:
R&D expenses consisted primarily of labor costs less capitalized software development costs.  An analysis of the R&D expenses is as follows:

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
R&D labor and other costs
  $ 12,292     $ 10,436     $ 24,475     $ 21,653  
Capitalized software development costs
    (1,361 )     (733 )     (2,757 )     (933 )
Total R&D expenses
  $ 10,931     $ 9,703     $ 21,718     $ 20,720  
% of Revenue
    4.4 %     4.3 %     4.5 %     4.7 %

The increase in capitalized software development costs primarily relates to development of the next generation property management and retail related software.

Depreciation and Amortization Expenses:
Depreciation and amortization expenses for the three months ended December 31, 2010 and 2009 were approximately $4.2 million and $4.3 million, respectively.

Depreciation and amortization expenses for the six months ended December 31, 2010 and 2009 were approximately $8.4 million and $8.2 million, respectively.

Share-Based Compensation Expenses:
The following table shows the non-cash share-based compensation expenses we recognized in SG&A, cost of sales and R&D expenses discussed above:

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
SG&A
  $ 4,164     $ 4,204     $ 6,648     $ 7,069  
 R&D
    125       143       251       290  
Cost of sales
    27       31       62       70  
Total non-cash share-based compensation expense
    4,316       4,378       6,961       7,429  
Income tax benefit
    (1,866 )     (1,464 )     (2,655 )     (2,406 )
Total non-cash share-based compensation expense, net of tax benefit
  $ 2,450     $ 2,914     $ 4,306     $ 5,023  
Impact on diluted net income per share attributable to MICROS Systems, Inc. common shareholders
  $ 0.03     $ 0.03     $ 0.05     $ 0.05  

As of December 31, 2010, there was approximately $19.0 million in non-cash share-based compensation cost related to non-vested awards not yet recognized in our consolidated statements of operations.  This cost is expected to be recognized over a weighted-average period of 2.0 years.

Non-operating Income:
Net non-operating income for the three months ended December 31, 2010, was approximately $1.5 million compared to approximately $0.4 million for the same period last year.  The increase of approximately $1.1 million is primarily due to an increase in interest income of approximately $0.6 million, foreign currency exchange gains of approximately $0.2 million for the three months ended December 31, 2010 compared to foreign currency exchange losses of less than $0.3 million for the same period last year.

Net non-operating income for the six months ended December 31, 2010, was approximately $1.7 million compared to approximately $1.1 million for the same period last year.  The increase of approximately $0.6 million is primarily due to an increase in interest income of approximately $0.7 million.

 
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Income Tax Provisions:
The effective tax rate for the three months ended December 31, 2010 and 2009 was 32.5% and 33.3%, respectively.  The effective tax rate for the six months ended December 31, 2010 and 2009 was 32.6% and 33.3%, respectively.  The decreases in tax rates for the three and six month periods ended December 31, 2010 compared to the same periods last year were primarily attributable to the changes in the aggregate valuation allowances and non-deductible compensation, partially offset by the earnings mix among jurisdictions.

Based on currently available information, we estimate that the fiscal year 2011 effective tax rate will be approximately 32%.  We believe that due to changes in the mix of earnings among jurisdictions, the fluctuation of earnings, and the impact of certain discrete items recognized during the interim reporting periods, there may be some degree of adjustment to the effective tax rate on a quarterly basis.

RECENT ACCOUNTING STANDARDS

On July 1, 2010, we adopted the accounting guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance.  Under the guidance, when vendor-specific objective evidence or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”).  The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price.  The adoption of this guidance did not have a material impact on our consolidated financial statements.

On July 1, 2010, we adopted the accounting guidance on revenue recognition for arrangements that include software elements.  Under the guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of software revenue recognition guidance and will be subject to other relevant revenue recognition guidance.  The adoption of this guidance did not have a material impact on our consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

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

·      Revenue recognition;
·      Allowance for doubtful accounts;
·      Inventory;
·      Financial instruments and fair value measurements;
·      Capitalized software development costs;
·      Valuation of long-lived assets and intangible assets
·      Goodwill and indefinite-lived intangible assets;
·      Share-based compensation;
·      Income taxes.

We have reviewed our critical accounting estimates and the related disclosures with our Audit Committee.  Critical accounting estimates are described in greater detail in our Annual Report on Form 10-K for the year ended June 30, 2010 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates.”

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash
Our condensed consolidated statement of cash flows summary is as follows:

   
Six Months Ended
December 31,
 
(in thousands)
 
2010
   
2009
 
Net cash provided by (used in):
           
Operating activities
  $ 81,795     $ 85,921  
Investing activities
    16,767       (15,159 )
Financing activities
    11,947       (24,971 )

 
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Operating activities:
Net cash provided by operating activities for the six months ended December 31, 2010 decreased approximately $4.1 million compared to the six months ended December 31, 2009.  This decrease was primarily due to performance based compensation payments made during the six months ended December 31, 2010 and inventory build-up since June 30, 2010 in anticipation of customer roll outs, partially offset by an increase in net income as compared to the same period last year.

Investing activities:
Net cash flows provided by investing activities for the six months ended December 31, 2010 were approximately $16.8 million reflecting approximately $29.1 million we used to purchase investments, net of cash received from the sale of investments (including approximately $6.4 million received from the redemption of two of our auction rate securities.)  We also used approximately $4.3 million related to acquisitions and an additional $8.1 million to purchase property, plant and equipment, and internally developed software to be licensed to others.

Net cash flows used in investing activities for the six months ended December 31, 2009 were approximately $15.2 million reflecting approximately $29.0 million used in connection with the acquisition of TIG Global on December 31, 2009.  Additionally, approximately $5.0 million was used to purchase property, plant and equipment, and internally developed software to be licensed to others.  These amounts were partially offset by approximately $18.8 million received from the sale of investments, net of cash used to purchase investments.

Financing activities:
Net cash provided by financing activities for the six months ended December 31, 2010 was approximately $11.9 million, principally reflecting proceeds from stock option exercises of approximately $16.5 million and realized tax benefits from stock option exercises of approximately $4.9 million, partially offset by approximately $6.4 million used to purchase our stock, debt repayment of approximately $2.7 million and our purchase of stock of approximately $1.0 million following exercise of a put option held by former owners of a business we acquired.

Net cash used in financing activities for the six months ended December 31, 2009 was approximately $25.0 million, principally reflecting stock repurchases of approximately $35.0 million.  This amount was partially offset by proceeds from stock option exercises of approximately $7.0 million and realized tax benefits from stock option exercises of approximately $2.7 million.

Capital Resources

At December 31, 2010, the favorable foreign exchange rate fluctuations primarily for the Euro against the U.S. dollar positively affected our cash and cash equivalents’ balance by approximately $26.1 million.  Our cash and cash equivalents’ balance of approximately $513.9 million at December 31, 2010 is an increase of approximately $136.7 million from the June 30, 2010 balance and an increase of approximately $76.7 million from the September 30, 2010 balance.  All cash and cash equivalents are being retained for the operation and expansion of the business, as well as for the repurchase of our common stock.

We have two credit agreements (the “Credit Agreements”) that, through July 31, 2010, provided an aggregate $65.0 million multi-currency committed line of credit.  On July 31, 2010, the Credit Agreements were amended to extend the maturity date until July 31, 2013, with some further modifications to the terms and conditions, including the addition and deletion of certain subsidiaries as co-borrowers, a reduction in the overall limit on the line to $50.0 million (a change made at our request), and reduction in certain fees payable to the lenders under certain circumstances.  As of December 31, 2010, we had no balance outstanding under the Credit Agreements and had applied approximately $0.4 million to guarantees.  We also have a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.3 million at the December 31, 2010 exchange rate).  As of December 31, 2010, there were no balances outstanding on this credit facility, but approximately EUR 0.6 million (approximately $0.8 million at the December 31, 2010 exchange rate) of the credit facility has been used for guarantees.  As of December 31, 2010, we had a borrowing capacity of approximately $50.1 million under all of the credit facilities described above.  See Note 6 “Line of Credit,” in the Notes to the Condensed Consolidated Financial Statements included in this report for further information about our credit facilities.

We do not currently invest in financial instruments designed to protect against interest rate fluctuations, although we will continue to evaluate the need to do so in the future.

We believe that our cash and cash equivalents, short-term investments, cash generated from operations and our available lines of credit are sufficient to provide our working capital needs for the foreseeable future.  Based on our expected operating cash flows and sources of cash, we do not believe that any limitations on liquidity of our auction rate securities will have a material impact on our overall ability to meet our liquidity needs.  In light of current economic conditions generally and in light of the overall performance of the stock market in recent periods, we cannot assume that funds would be available from other sources if we were required to fund significant acquisitions or any unanticipated and substantial cash needs.  We currently anticipate that our property, plant and equipment expenditures for fiscal year 2011 will be approximately $12 million.

 
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Financial indicators of our liquidity and capital resources as of December 31, 2010 and June 30, 2010, were as follows:

(in thousands, except ratios)
 
December 31,
2010
   
June 30,
2010
 
Cash and cash equivalents and short-term investments (1)
  $ 662,457     $ 545,298  
Available credit facilities
  $ 51,337     $ 66,223  
Outstanding credit facilities
          (1,442 )
Outstanding guarantees
    (1,257 )     (1,187 )
Unused credit facilities
  $ 50,080     $ 63,594  
Working capital (2)
  $ 586,236     $ 468,047  
MICROS Systems, Inc.’s shareholders’ equity
  $ 907,599     $ 783,380  
Current ratio (3)
    2.88       2.50  

 
(1)
Does not include approximately $57.9 million and $60.0 million classified as long-term investments in our Consolidated Balance Sheet as of December 31, 2010 and June 30, 2010, respectively, of which approximately $48.0 million and $53.3 million are invested in auction rate securities, respectively.
 
(2)
Current assets less current liabilities.
 
(3)
Current assets divided by current liabilities.  The Company does not have any long-term debt.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency exchange rate risk
We recorded foreign sales, including exports from the United States, of approximately $247.3 million and $233.2 million during the six months ended December 31, 2010 and 2009, respectively, to customers located primarily in Europe, Asia and Latin America.  See Note 10 “Segment Information” in the Notes to Condensed Consolidated Financial Statements as well as Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) above for additional geographic data.  Our international business and presence expose us to certain risks, such as currency, interest rate and political risks.  With respect to currency risk, we transact business in different currencies primarily through our foreign subsidiaries.  The fluctuation of currencies impacts sales and profitability.  Frequently, sales and the costs associated with those sales are not denominated in the same currency.

We transacted business in approximately 40 and 39 currencies in the six months ended December 31, 2010 and 2009, respectively.  The relative currency mix for the three and six months ended December 31, 2010 and 2009 was as follows:
 
   
% of Reported Revenue (1)
   
Exchange Rates to U.S.
 
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
   
Dollar as of
December 31,
 
Revenues by currency (1)
 
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
United States Dollar
    53 %     51 %     54 %     52 %     1.0000       1.0000  
European Euro
    20 %     21 %     20 %     22 %     1.3370       1.4316  
British Pound Sterling
    7 %     7 %     7 %     7 %     1.5599       1.6163  
Swiss Franc
    2 %     2 %     2 %     2 %     1.0703       0.9658  
Australian Dollar
    2 %     2 %     2 %     1 %     1.0219       0.8983  
Canadian Dollar
    1 %     2 %     1 %     1 %     1.0024       0.9512  
Singapore Dollar
    1 %     1 %     1 %     1 %     0.7793       0.7116  
Mexican Peso
    1 %     1 %     1 %     1 %     0.0810       0.0765  
Sweden Krona
    1 %     1 %     1 %     1 %     0.1488       0.1397  
Thailand Baht
    1 %     1 %     1 %     1 %     0.0333       0.0300  
Japanese Yen
    1 %     1 %     1 %     1 %     0.0123       0.0107  
All Other Currencies (2)
    10 %     10 %     9 %     10 %     0.1850       0.1891  
Total
    100 %     100 %     100 %     100 %                

(1)
Calculated using weighted average exchange rates for the fiscal period.
(2)
The “% of Reported Revenue” for “All Other Currencies” is calculated based on the weighted average three month and six month exchange rates (as applicable) for all other currencies. The “Exchange Rates to U.S. Dollar” for “All Other Currencies” represents the weighted average December 31, 2010 and 2009 exchange rates for the currencies.  Weighting is based on the six month revenue for each country or region whose currency is included in “All Other Currencies.”  Revenues from each currency included in “All Other Currencies” were less than 1% of our total revenues for the relevant period.

A 10% increase or decrease in the value of the Euro and British pound sterling in relation to the U.S. dollar in the six months ended December 31, 2010 would have affected our total revenues by approximately $12.8 million, or 2.7%.  The sensitivity analysis assumes a weighted average 10% change in the exchange rate during the period with all other variables being held constant.  This sensitivity analysis does not consider the effect of exchange rate changes on cost of sales, operating expenses, or income taxes, and accordingly, is not necessarily an indicator of the effect of potential exchange rate changes on our net income.

 
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Interest rate risk
Our committed lines of credit bear interest at a floating rate, which exposes us to interest rate risks.  We manage our exposure to this risk by minimizing, to the extent feasible, overall borrowing and by monitoring available financing alternatives.  At December 31, 2010, we had no borrowings and had not entered into any instruments to hedge the resulting exposure to interest-rate risk.   Our exposure to fluctuations in interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our lines of credit.  As we had no borrowing as of December 31, 2010, a 1% change in interest rate would have resulted in no impact on our condensed consolidated financial position, results of operations and cash flows. Our cash equivalents and our portfolio of marketable securities, including auction rate securities, are subject to market risk due to changes in interest rates.  Fixed interest rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.  Should interest rates fluctuate by 1%, the change in value of our marketable securities would not have been material as of December 31, 2010, and the change in our interest income would be an increase of approximately $3.3 million based on the cash, cash equivalents and short term investment balances as of December 31, 2010 for the six month period then ended.

To minimize our exposure to credit risk associated with financial instruments, we place our temporary cash investments with high-credit-quality institutions, generally with bond rating of “A” and above.  However, see Note 4 “Financial Instruments and Fair Value Measurements” in the Notes to Condensed Consolidated Financial Statements for a discussion regarding auction rate securities.

Finally, we are subject to, among others, those environmental and geopolitical risks, and economic, pricing, financial, and other risks described in Item 1A, “Risk Factors” in an Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and in Part II, Item 1A, “Risk Factors” in this report.

ITEM 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Refer to Note 11 to the condensed consolidated financial statements included in this report for information regarding certain pending legal proceedings.

ITEM 1A.   RISK FACTORS.

In addition to other information presented in this report, including the risk factors set forth below, you should consider carefully the factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2010.

Global economic conditions have had and may continue to have adverse effects on our business.

We have experienced reduced growth rates as compared to historic periods in total revenues that we believe are attributable in part to uncertain global economic conditions.  Economic conditions that are beyond our control, including the global recession, tight credit markets, reductions in consumer spending, and fluctuations in exchange rates, have resulted in demand for our products and services below historic trends.

 
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In addition, our primary customers – the hospitality, restaurant, and retail industries – are highly sensitive to economic, political, and environmental disturbances and uncertainty, all of which are not only outside of our and our customers’ control, but also are difficult to predict with any accuracy.

Further, weakened consumer spending, coupled with difficulties many businesses continue to encounter in obtaining credit, have negatively affected our customers’ operating results, which we believe has had an adverse impact on their ability to acquire or open new hospitality and retail venues, as well as their ability to make significant capital expenditures on the systems that we sell.  We believe these constraints may cause and in some cases may have already caused our customers to maintain their existing systems rather than purchase newer systems.

In addition, continued weakness in domestic and foreign economies may cause some of our distributors and customers to become illiquid and delay payments, or may otherwise adversely affect our ability to collect on their accounts, which would result in higher levels of bad debt expense.  Although adverse changes in the financial condition of our customers and distributors have not had a material effect on our financial condition or operating results, continued uncertain economic conditions may require that we institute protective measures such as financial reviews, modified customer credit limits and identification of alternative vendors, and ultimately could materially adversely affect our business.

While we believe that our cash and cash equivalents, additional cash generated from operations, and available lines of credit will be sufficient to provide working capital needs for the foreseeable future, current economic conditions, including the overall performance of the stock market, may limit the availability of funds from other sources if we encounter an extraordinary need for external capital.  These factors also affect us indirectly, to the extent that they serve to limit our customers’ ability to purchase our systems and services.

ITEM 6.        EXHIBITS

3(i)
Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3 to the Annual Report on Form 10-K of the Company for the Fiscal Year ended June 30, 1990.
3(i)(a)
Amendment to Articles of Incorporation is incorporated herein by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 1997.
3(i)(b)
Amendment to Articles of Incorporation is incorporated herein by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 1998.
3(i)(c)
Amendment to Articles of Incorporation is incorporated herein by reference to Exhibit 3(i) to the Current Report on Form 8-K filed on November 16, 2007.
3(ii)
By-laws of the Company, as amended, are incorporated herein by reference to Exhibit 3(ii) to the Quarterly Report on Form 10-Q of the Company for the period ended December 31, 2008.
23
Consent of Houlihan Capital Advisors, LLC (filed herewith).
31(a)
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)under the Securities Exchange Act of 1934 (filed herewith).
31(b)
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 (filed herewith).
32(a)
Certification of Principal Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350 (filed herewith).
32(b)
Certification of Principal Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350 (filed herewith).
101
The following materials from MICROS Systems’ Inc.’s quarterly report on Form 10-Q for the quarter ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at December 31, 2010 and June 30, 2010, (ii) Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2010 and 2009, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009, (iv) Condensed Consolidated Statements of Shareholders’ Equity for the six months ended December 31, 2010 and 2009, (v) Condensed Consolidated Statements of Comprehensive Income for the six months ended December 31, 2010 and 2009, (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
UMICROS SYSTEMS, INC.
 
(Registrant)
   
Date:  February 3, 2011
U/s/ Cynthia A. Russo
 
Cynthia A. Russo
 
Executive Vice President and
 
Chief Financial Officer
   
Date:  February 3, 2011
U/s/ Michael P. Russo
 
Michael P. Russo
 
Vice President and Corporate Controller

 
24