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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO
COMMISSION FILE NUMBER: 000-19807
 
 
 
SYNOPSYSLOGOA20.JPG
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
56-1546236
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
690 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices, including zip code)
(650) 584-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
($0.01 par value)
SNPS
Nasdaq Global Select Market
 
 
 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated Filer
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
As of August 19, 2020, there were 151,761,689 shares of the registrant’s common stock outstanding.




SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2020
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.





PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
 
Financial Statements
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
 
July 31, 2020
 
 October 31,
2019*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,049,922

 
$
728,597

Accounts receivable, net
638,489

 
553,895

Inventories, net
159,813

 
141,518

Income taxes receivable and prepaid taxes
20,960

 
24,855

Prepaid and other current assets
316,831

 
290,052

Total current assets
2,186,015

 
1,738,917

Property and equipment, net
484,529

 
429,532

Operating lease right-of-use assets, net
472,244

 

Goodwill
3,356,407

 
3,171,179

Intangible assets, net
275,338

 
279,374

Long-term prepaid taxes
8,279

 
15,503

Deferred income taxes
463,894

 
390,129

Other long-term assets
416,544

 
380,526

Total assets
$
7,663,250

 
$
6,405,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
549,906

 
$
506,459

Operating lease liabilities, current
71,861

 

Accrued income taxes
20,653

 
15,904

Deferred revenue
1,389,609

 
1,212,476

Short-term debt
24,248

 
17,614

Total current liabilities
2,056,277

 
1,752,453

Operating lease liabilities, non-current
470,215

 

Long-term accrued income taxes
27,011

 
29,911

Long-term deferred revenue
111,915

 
90,102

Long-term debt
107,104

 
120,093

Other long-term liabilities
289,411

 
323,725

Total liabilities
3,061,933

 
2,316,284

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding

 

Common stock, $0.01 par value: 400,000 shares authorized; 151,758 and 150,331 shares outstanding, respectively
1,519

 
1,503

Capital in excess of par value
1,623,586

 
1,635,455

Retained earnings
3,597,944

 
3,164,144

Treasury stock, at cost: 5,503 and 6,930 shares, respectively
(554,304
)
 
(625,642
)
Accumulated other comprehensive income (loss)
(72,820
)
 
(92,447
)
Total Synopsys stockholders’ equity
4,595,925

 
4,083,013

Non-controlling interest
5,392

 
5,863

Total stockholders’ equity
4,601,317

 
4,088,876

Total liabilities and stockholders’ equity
$
7,663,250

 
$
6,405,160

*
Derived from audited financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.

1



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Time-based products
$
612,065

 
$
537,569

 
$
1,758,601

 
$
1,649,590

Upfront products
210,931

 
177,552

 
491,417

 
451,466

Maintenance and service
141,138

 
137,849

 
409,824

 
408,557

Total revenue
964,134

 
852,970

 
2,659,842

 
2,509,613

Cost of revenue:
 
 
 
 
 
 
 
Products
118,478

 
113,533

 
344,469

 
346,163

Maintenance and service
60,812

 
59,496

 
184,940

 
178,113

Amortization of intangible assets
13,718

 
13,603

 
40,732

 
45,927

Total cost of revenue
193,008

 
186,632

 
570,141

 
570,203

Gross margin
771,126

 
666,338

 
2,089,701

 
1,939,410

Operating expenses:
 
 
 
 
 
 
 
Research and development
322,602

 
284,804

 
939,456

 
846,429

Sales and marketing
156,456

 
157,109

 
455,511

 
471,720

General and administrative
73,516

 
67,382

 
204,734

 
165,794

Amortization of intangible assets
9,931

 
10,111

 
29,545

 
31,211

Restructuring charges
(1,977
)
 
19,338

 
36,446

 
33,746

Total operating expenses
560,528

 
538,744

 
1,665,692

 
1,548,900

Operating income
210,598

 
127,594

 
424,009

 
390,510

Other income (expense), net
26,256

 
5,317

 
22,584

 
23,373

Income before income taxes
236,854

 
132,911

 
446,593

 
413,883

Provision (benefit) for income taxes
(16,057
)
 
32,982

 
(20,299
)
 
42,230

Net income
$
252,911

 
$
99,929

 
$
466,892

 
$
371,653

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.67

 
$
0.67

 
$
3.10

 
$
2.48

Diluted
$
1.62

 
$
0.65

 
$
3.01

 
$
2.42

Shares used in computing per share amounts:
 
 
 
 
 
 
 
Basic
151,352

 
150,123

 
150,731

 
149,708

Diluted
155,973

 
154,600

 
155,074

 
153,859

See accompanying notes to unaudited condensed consolidated financial statements.


2



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
Net income
$
252,911

 
$
99,929

 
$
466,892

 
$
371,653

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
18,102

 
(2,123
)
 
14,099

 
(67
)
Cash flow hedges:
 
 
 
 
 
 
 
Deferred gains (losses), net of tax of $(4,169) and $(1,823), for the three and nine months ended July 31, 2020, respectively, and of $(464) and $(2,178) for each of the same periods in fiscal 2019, respectively.
12,399

 
(1,070
)
 
3,965

 
4,844

Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(134) and $(262), for the three and nine months ended July 31, 2020, respectively, and of $(702) and $(2,988) for each of the same periods in fiscal 2019, respectively.
709

 
3,260

 
1,563

 
11,747

Other comprehensive income (loss), net of tax effects
31,210

 
67

 
19,627

 
16,524

Comprehensive income
$
284,121

 
$
99,996

 
$
486,519

 
$
388,177

See accompanying notes to unaudited condensed consolidated financial statements.


3



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
 
 
 
Capital in
Excess of
Par
Value
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total 
Synopsys
Stockholders’
Equity
 
Non-controlling
Interest
 
Stockholders’
Equity
 
Common Stock
 
 
Shares
 
Amount
 
Balance at April 30, 2020
150,908

 
$
1,509

 
$
1,655,787

 
$
3,356,489

 
$
(634,669
)
 
$
(104,030
)
 
$
4,275,086

 
$
5,863

 
$
4,280,949

Net income
 
 
 
 
 
 
252,911

 
 
 
 
 
252,911

 
(471
)
 
252,440

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
31,210

 
31,210

 
 
 
31,210

Purchases of treasury stock
(149
)
 


 


 
 
 
(20,000
)
 
 
 
(20,000
)
 
 
 
(20,000
)
Equity forward contract
 
 
 
 
20,000

 
 
 


 
 
 
20,000

 
 
 
20,000

Common stock issued, net of shares withheld for employee taxes
999

 
10

 
(114,038
)
 
(11,456
)
 
100,365

 
 
 
(25,119
)
 
 
 
(25,119
)
Stock-based compensation
 
 
 
 
61,837

 
 
 
 
 
 
 
61,837

 
 
 
61,837

Balance at July 31, 2020
151,758

 
$
1,519

 
$
1,623,586

 
$
3,597,944

 
$
(554,304
)
 
$
(72,820
)
 
$
4,595,925

 
$
5,392

 
$
4,601,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2019
150,331

 
$
1,503

 
$
1,635,455

 
$
3,164,144

 
$
(625,642
)
 
$
(92,447
)
 
$
4,083,013

 
$
5,863

 
$
4,088,876

Net income
 
 
 
 
 
 
466,892

 
 
 
 
 
466,892

 
(471
)
 
466,421

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
19,627

 
19,627

 
 
 
19,627

Purchases of treasury stock
(1,380
)
 
(12
)
 
12

 
 
 
(200,000
)
 
 
 
(200,000
)
 
 
 
(200,000
)
Common stock issued, net of shares withheld for employee taxes
2,807

 
28

 
(182,036
)
 
(33,092
)
 
271,338

 
 
 
56,238

 
 
 
56,238

Stock-based compensation
 
 
 
 
170,155

 
 
 
 
 
 
 
170,155

 
 
 
170,155

Balance at July 31, 2020
151,758

 
$
1,519

 
$
1,623,586

 
$
3,597,944

 
$
(554,304
)
 
$
(72,820
)
 
$
4,595,925

 
$
5,392

 
$
4,601,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital in
Excess of
Par
Value
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total 
Synopsys
Stockholders’
Equity
 
Non-controlling
Interest
 
Stockholders’
Equity
 
Common Stock
 
 
Shares
 
Amount
 
Balance at April 30, 2019
149,982

 
$
1,500

 
$
1,659,484

 
$
2,912,811

 
$
(567,503
)
 
$
(96,720
)
 
$
3,909,572

 
$
5,863

 
$
3,915,435

Net income
 
 
 
 
 
 
99,929

 
 
 
 
 
99,929

 
 
 
99,929

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
67

 
67

 
 
 
67

Purchases of treasury stock
(775
)
 
(8
)
 
8

 
 
 
(100,000
)
 
 
 
(100,000
)
 
 
 
(100,000
)
Common stock issued, net of shares withheld for employee taxes
1,166

 
12

 
(101,310
)
 
(9,310
)
 
95,399

 
 
 
(15,209
)
 
 
 
(15,209
)
Stock-based compensation
 
 
 
 
39,447

 
 
 
 
 
 
 
39,447

 
 
 
39,447

Balance at July 31, 2019
150,373

 
$
1,504

 
$
1,597,629

 
$
3,003,430

 
$
(572,104
)
 
$
(96,653
)
 
$
3,933,806

 
$
5,863

 
$
3,939,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2018
149,265

 
$
1,493

 
$
1,644,830

 
$
2,543,688

 
$
(597,682
)
 
$
(113,177
)
 
$
3,479,152

 
$
5,863

 
$
3,485,015

Net income
 
 
 
 
 
 
371,653

 
 
 
 
 
371,653

 
 
 
371,653

Retained earnings adjustment due to adoption of accounting standards related to revenue(1)
 
 
 
 
 
 
257,594

 
 
 
 
 
257,594

 
 
 
257,594

Retained earnings adjustment due to adoption of an accounting standard related to income taxes(2)
 
 
 
 
 
 
(130,544
)
 
 
 
 
 
(130,544
)
 
 
 
(130,544
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
16,524

 
16,524

 
 
 
16,524

Purchases of treasury stock
(1,901
)
 
(19
)
 
19

 
 
 
(209,185
)
 
 
 
(209,185
)
 
 
 
(209,185
)
Equity forward contract
 
 
 
 
(20,000
)
 
 
 
 
 
 
 
(20,000
)
 
 
 
(20,000
)
Common stock issued, net of shares withheld for employee taxes
3,009

 
30

 
(140,841
)
 
(38,961
)
 
234,763

 
 
 
54,991

 
 
 
54,991

Stock-based compensation
 
 
 
 
113,621

 
 
 
 
 
 
 
113,621

 
 
 
113,621

Balance at July 31, 2019
150,373

 
$
1,504

 
$
1,597,629

 
$
3,003,430

 
$
(572,104
)
 
$
(96,653
)
 
$
3,933,806

 
$
5,863

 
$
3,939,669

(1) 
See Note 2. Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019 for additional information on the retained earnings adjustment due to adoption of Accounting Standards Codification (ASC) 606 and ASC 340, “Other Assets and Deferred Costs”.
(2) 
See Note 11. Income Taxes in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019 for additional information on the retained earnings adjustment due to adoption of Accounting Standard Update (ASU) 2016-16.
See accompanying notes to unaudited condensed consolidated financial statements.


4



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended 
 July 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
466,892

 
$
371,653

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
159,156

 
152,133

Reduction of operating lease right-of-use assets
62,585

 

Amortization of capitalized costs to obtain revenue contracts
44,851

 
46,230

Stock-based compensation
170,155

 
114,826

Allowance for doubtful accounts
14,875

 
8,950

(Gain) loss on sale of property and investments
(1,994
)
 
(4,052
)
Deferred income taxes
(74,374
)
 
(9,664
)
Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(89,667
)
 
89,370

Inventories
(17,040
)
 
(39,431
)
Prepaid and other current assets
(21,350
)
 
(38,224
)
Other long-term assets
(77,895
)
 
(114,344
)
Accounts payable and accrued liabilities
43,842

 
(45,200
)
Operating lease liabilities
(57,968
)
 

Income taxes
6,128

 
(6,963
)
Deferred revenue
160,966

 
53,980

Net cash provided by operating activities
789,162

 
579,264

Cash flows from investing activities:
 
 
 
Proceeds from sales of long-term investments
2,151

 
6,361

Purchases of long-term investments
(2,762
)
 

Purchases of property and equipment
(120,234
)
 
(122,358
)
Cash paid for acquisitions and intangible assets, net of cash acquired
(201,045
)
 

Capitalization of software development costs
(3,035
)
 
(2,245
)
Net cash used in investing activities
(324,925
)
 
(118,242
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
276,490

 
192,897

Repayment of debt
(284,218
)
 
(520,312
)
Issuances of common stock
123,237

 
107,354

Payments for taxes related to net share settlement of equity awards
(66,985
)
 
(52,309
)
Purchase of equity forward contract

 
(20,000
)
Purchases of treasury stock
(200,000
)
 
(209,185
)
Other

 
(762
)
Net cash used in financing activities
(151,476
)
 
(502,317
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
8,700

 
4,975

Net change in cash, cash equivalents and restricted cash
321,461

 
(36,320
)
Cash, cash equivalents and restricted cash, beginning of year
730,527

 
725,001

Cash, cash equivalents and restricted cash, end of period
$
1,051,988

 
$
688,681

See accompanying notes to unaudited condensed consolidated financial statements.

5



SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) provides products and services used across the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the security and quality of their code. The Company is a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. The Company also offers semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The Company provides software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, the Company provides technical services and support to help its customers develop advanced chips and electronic systems. These products and services are part of the Company’s Semiconductor & System Design segment.
The Company is also a leading provider of software tools and services that improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials. These tools and services are part of the Company’s Software Integrity segment.
Note 2. Summary of Significant Accounting Policies
The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its unaudited condensed consolidated balance sheets, results of operations, comprehensive income, stockholders’ equity and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in Synopsys’ Annual Report on Form 10-K for the fiscal year ended October 31, 2019 as filed with the SEC on December 20, 2019.
Use of Estimates. To prepare financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position. In addition, the Company has considered the potential impact of the COVID-19 pandemic on the business operations. Although no material impairment or other effects have been identified to date related to the COVID-19 pandemic, there is substantial uncertainty in the nature and degree of its continued effects over time. This uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information are known.
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Year End. The Company’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2020 and 2019 are both 52-week years. Fiscal 2020 will end on October 31, 2020. Fiscal 2019 ended on November 2, 2019. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which supersedes the previous lease requirements in Topic 840. Topic 842 was subsequently amended by several ASUs. The new guidance requires a lessee to recognize a right-of-use (ROU) asset and a lease liability for most operating leases in the consolidated balance sheets. These ASUs also made minor changes to lessor accounting and aligns key aspects of the lessor accounting model with the new

6



revenue recognition guidance. The new standard did not have a material impact on the unaudited condensed consolidated financial statements for arrangements in which the Company is the lessor.
The Company adopted Topic 842 at the beginning of fiscal 2020 using the modified retrospective method without restatement of comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allows the carryforward of historical assessments about (1) lease classification, (2) whether a contract is or contains a lease, and (3) which costs qualify as initial direct costs for leases that existed prior to the adoption. The Company did not elect either the use of hindsight or land easements practical expedients available in transition.
The adoption of the standard did not have an impact on the Company’s beginning retained earnings, results of operations, or cash flows. The operating lease liabilities equaled the present value of the remaining Topic 840 minimum rental payments for those leases, discounted at the Company’s incremental borrowing rate as of the date of adoption. The ROU assets were measured at the amount of the related lease liabilities plus any prepaid rental payments and less any unamortized lease incentives such as tenant improvement allowances. The Company recognized ROU assets of $475 million and operating lease liabilities of $540 million on the unaudited condensed consolidated balance sheets.
The Company determines if a contract is or contains a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments arising from the lease. Lease liabilities for operating and finance leases are recognized at the lease commencement date based on the present value of future lease payments over the remaining lease terms. ROU assets are derived from the carrying amount of the related lease liability plus any prepaid lease payments, less any lease incentives such as tenant improvement allowances. The Company primarily uses its incremental borrowing rate, determined as of the lease commencement date, to measure the present value of its future lease payments, as the rate implicit in the lease is generally not readily determinable. The Company uses a benchmark senior unsecured yield curve for debt instruments and considers specific credit quality, market conditions, tenor of lease arrangements, and quality of collateral to determine the incremental borrowing rate.
Operating lease expense is recognized on a straight-line basis over the lease term of each lease. Variable payments, such as for maintenance, property taxes or insurance, are recognized on our unaudited condensed consolidated statements of operations as incurred.
The Company has adopted both (1) the practical expedient to not separate lease from non-lease components and (2) the short-term lease exemption. The Company has elected the practical expedient to not separate lease from non-lease components for all classes of underlying assets and the short-term lease exemption for all classes of underlying assets except real estate leases, with terms 12 months or less.
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC 606), “Revenue from Contracts with Customers,” which the Company adopted in fiscal 2019. See Note 2. Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019 for revenue recognition policies under the new revenue guidance ASC 606.
Note 3. Revenue
Disaggregated Revenue
The following table shows the percentage of revenue by product groups:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
EDA
55
%
 
57
%
 
58
%
 
59
%
IP & System Integration
35
%
 
33
%
 
32
%
 
31
%
Software Integrity Products & Services
10
%
 
10
%
 
10
%
 
10
%
Other
0
%
 
0
%
 
0
%
 
0
%
Total
100
%
 
100
%
 
100
%
 
100
%

Contract Balances
The contract assets indicated below are presented as prepaid and other current assets in the unaudited condensed consolidated balance sheets. The contract assets are transferred to receivables when the rights to invoice and

7



receive payment become unconditional. Unbilled receivables are presented as accounts receivable, net, in the unaudited condensed consolidated balance sheets.
Contract balances are as follows:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Contract assets
$
216,516

 
$
210,557

Unbilled receivables
$
53,028

 
$
38,175

Deferred revenue
$
1,501,524

 
$
1,302,578


During the nine months ended July 31, 2020, the Company recognized $926.2 million of revenue that was included in the deferred revenue balance as of October 31, 2019. During the nine months ended July 31, 2019, the Company recognized $785.1 million of revenue that was included in the deferred revenue balance as of October 31, 2018.
Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $4.6 billion as of July 31, 2020, which includes $604.6 million in non-cancellable Flexible Spending Account (FSA) commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date. The Company has elected to exclude future sales-based royalty payments from the remaining performance obligations. The contracted but unsatisfied or partially unsatisfied performance obligations expected to be recognized over the next 12 months are approximately 58%, with the remainder recognized thereafter.
During the three and nine months ended July 31, 2020, the Company recognized $25.9 million and $78.0 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods. During the three and nine months ended July 31, 2019, the Company recognized $17.5 million and $64.8 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods.
Costs of Obtaining a Contract with Customer
The incremental costs of obtaining a contract with a customer, which consist primarily of direct sales commissions earned upon execution of the contract, are required to be capitalized under ASC 340-40 and amortized over the estimated period of which the benefit is expected to be received. As direct sales commissions paid for renewals are commensurate with the amounts paid for initial contracts, the deferred incremental costs will be recognized over the contract term. Total capitalized direct commission costs as of July 31, 2020 were $92.1 million and included in other assets in the Company’s unaudited condensed consolidated balance sheets. Amortization of these assets was $16.6 million and $44.9 million during the three and nine months ended July 31, 2020, respectively, and included in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations. Amortization of these assets was $17.8 million and $46.2 million during the three and nine months ended July 31, 2019, respectively, and included in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations.
Note 4. Business Combinations
During the nine months ended July 31, 2020, the Company completed several acquisitions for an aggregate consideration of $238.3 million, net of cash acquired as described below:
During the second quarter of fiscal 2020, the Company completed an acquisition for an aggregate consideration of $105.7 million; including cash consideration of $75.7 million and $30.0 million equal to the fair value of the Company’s products exchanged in connection with the acquisition.

8



The consideration of $105.7 million was allocated to $20.6 million of identifiable intangible assets, $4.2 million of net tangible assets, and $80.9 million in goodwill, on a preliminary basis. The fair value of these intangible assets was estimated using the income method. These transactions are not considered to be material to the Company’s unaudited condensed consolidated statements of operations. The acquisition was attributable to the Semiconductor & System Design reporting segment.
Concurrent to this transaction, the Company also executed a design service arrangement and recognized an asset of $10.7 million for the off-market component. The $10.7 million contract asset is expected to be amortized over the contractual period of the agreement of five years.
In addition to the above, the Company also completed several other acquisitions for an aggregate cash consideration of $132.6 million, net of cash acquired. The preliminary purchase allocations are $44.7 million of identifiable intangible assets and $92.4 million in goodwill, of which $12.9 million is attributable to the Software Integrity reporting segment. The fair value of these intangible assets and goodwill are estimated using the income method.    
The preliminary fair value estimates for the assets acquired and liabilities assumed for all acquisitions completed within 12 months from the applicable acquisition date are not yet finalized and may change as additional information becomes available during the respective measurement periods. The primary areas of those preliminary estimates relate to certain tangible assets and liabilities, identifiable intangible assets, and income taxes.
The Company does not consider these acquisitions to be material, individually or in the aggregate, to the Company’s unaudited condensed consolidated statements of operations.
Note 5. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the nine months ended July 31, 2020 were as follows:
 
(in thousands)
Balance at October 31, 2019
$
3,171,179

Additions
173,341

Effect of foreign currency translation
11,887

Balance at July 31, 2020
$
3,356,407


Intangible Assets
In-process research and development (IPR&D) as of July 31, 2020 consisted of acquired projects that, if completed, will be reclassified to core/developed technology upon completion, or if abandoned, will be written off. Intangible assets as of July 31, 2020 consisted of the following:
 
Gross Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
827,232

 
$
692,545

 
$
134,687

Customer relationships
380,817

 
268,574

 
112,243

Contract rights intangible
192,757

 
185,357

 
7,400

Trademarks and trade names
43,096

 
28,070

 
15,026

In-process research and development (IPR&D)
1,214

 

 
1,214

Capitalized software development costs
43,112

 
38,344

 
4,768

Total
$
1,488,228

 
$
1,212,890

 
$
275,338



9



Intangible assets as of October 31, 2019 consisted of the following:
 
Gross Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
791,647

 
$
655,119

 
$
136,528

Customer relationships
358,661

 
242,058

 
116,603

Contract rights intangible
184,304

 
181,124

 
3,180

Trademarks and trade names
42,929

 
25,581

 
17,348

In-process research and development (IPR&D)
1,200

 

 
1,200

Capitalized software development costs
40,077

 
35,562

 
4,515

Total
$
1,418,818

 
$
1,139,444

 
$
279,374


Amortization expense related to intangible assets consisted of the following:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Core/developed technology
$
12,472

 
$
12,825

 
$
37,515

 
$
43,229

Customer relationships
8,971

 
9,303

 
26,444

 
28,261

Contract rights intangible
1,272

 
808

 
3,829

 
2,790

Trademarks and trade names
934

 
778

 
2,489

 
2,858

Capitalized software development costs(1)
947

 
700

 
2,782

 
2,207

Total
$
24,596

 
$
24,414

 
$
73,059

 
$
79,345


(1) Amortization of capitalized software development costs is included in cost of products revenue in the unaudited condensed consolidated statements of operations.
The following table presents the estimated future amortization of intangible assets as of July 31, 2020:
Fiscal year
(in thousands)
Remainder of fiscal 2020
$
22,033

2021
75,568

2022
60,735

2023
44,733

2024
34,398

2025 and thereafter
36,657

IPR&D
1,214

Total
$
275,338


Note 6. Financial Assets and Liabilities
Cash equivalents. The Company classifies time deposits and other investments with original maturities less than three months as cash equivalents.

10



As of July 31, 2020, the balances of the Company’s cash equivalents were:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value
(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
280,417

 
$

 
$

 
$

 
$
280,417

Total:
$
280,417

 
$

 
$

 
$

 
$
280,417

(1) 
See Note 7. Fair Value Measures for further discussion on fair values of cash equivalents.
As of October 31, 2019, the balances of the Company’s cash equivalents were:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value
(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
166,024

 
$

 
$

 
$

 
$
166,024

Total:
$
166,024

 
$

 
$

 
$

 
$
166,024

(1) 
See Note 7. Fair Value Measures for further discussion on fair values of cash equivalents.
Restricted cash. The Company includes amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. All restricted cash is primarily associated with office leases and has no material impact on the Company’s unaudited condensed consolidated statements of cash flows.
The following table provides a reconciliation of cash, cash equivalents and restricted cash included in the unaudited condensed consolidated balance sheets:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Cash and cash equivalents
$
1,049,922

 
$
728,597

Restricted cash included in Prepaid expenses and other current assets
1,287

 
1,174

Restricted cash included in Other long-term assets
779

 
756

Total cash, cash equivalents and restricted cash
$
1,051,988

 
$
730,527


Non-marketable equity securities. The Company’s strategic investment portfolio consists of non-marketable equity securities in privately held companies. The investments that the Company have less than 20% equity interests and/or do not have the ability to exercise significant influence are accounted using the measurement alternative when the fair value of the investment is not readily determinable. Securities accounted for as equity method investments are recorded at cost plus the proportional share of the issuers’ income or loss, which is recorded in the Company’s other income (expense), net. The cost basis of securities sold is based on the specific identification method. See Note 7. Fair Value Measures.
Derivatives

In the first quarter of 2020, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities, which amends the hedge accounting recognition and presentation requirements of ASC 815. Pursuant to the provisions of ASU 2017-12, the Company is not required to separately measure and report hedge ineffectiveness, which was previously recorded in Other income (expense), net in our unaudited condensed consolidated statements of operations. Also, prior to the adoption of ASU 2017-12, the forward point components of the Cash Flow hedges were excluded from assessing effectiveness of the hedging

11



relationship and were recorded on the unaudited condensed consolidated statements of operations in other income (expense), net. Upon adoption of ASU 2017-12, the Company presents the related earning impact of the Cash Flow hedges in the same income statement section as the hedged items. Also, adoption of the guidance did not impact opening retained earnings or have a material impact on our financial statements.
The Company recognizes derivative instruments as either assets or liabilities in the unaudited condensed consolidated balance sheets at fair value and provides qualitative and quantitative disclosures about such derivatives. The Company operates internationally and is exposed to potentially adverse movements in foreign currency exchange rates. The Company enters into hedges in the form of foreign currency forward contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately one month, (3) future billings and revenue on previously shipped orders, and (4) certain future intercompany invoices denominated in foreign currencies.
The duration of forward contracts ranges from approximately one month to 22 months, the majority of which are short-term. The Company does not use foreign currency forward contracts for speculative or trading purposes. The Company enters into foreign exchange forward contracts with high credit quality financial institutions that are rated ‘A’ or above and to date has not experienced nonperformance by counterparties. In addition, the Company mitigates credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty and anticipates continued performance by all counterparties to such agreements.
The assets or liabilities associated with the forward contracts are recorded at fair value in other current assets or accrued liabilities in the unaudited condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the foreign currency forward contract and whether it is designated and qualifies for hedge accounting. The cash flow impact upon settlement of the derivative contracts will be included in “Net cash provided by operating activities” in the unaudited condensed consolidated statements of cash flows.
Cash Flow Hedging Activities
Certain foreign exchange forward contracts are designated and qualify as cash flow hedges. These contracts have durations of approximately 22 months or less. Certain forward contracts are rolled over periodically to capture the full length of exposure to the Company’s foreign currency risk, which can be up to three years. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on the hedged transactions. The related gains or losses resulting from changes in fair value of these hedges is initially reported, net of tax, as a component of other comprehensive income (loss) (OCI) in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the hedged transactions affect earnings. The Company expects a majority of the hedge balance in OCI to be reclassified to the statements of operations within the next 12 months.

The Company did not have any gains or losses related to discontinuation of cash flow hedges during the three and nine months ended July 31, 2020 and 2019.

Prior to adoption of ASU 2017-12, hedge effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in other income (expense), net. During the three and nine months ended July 31, 2020 and 2019, the amounts recognized in other income (expense) for ineffectiveness and excluded component were immaterial.

Upon adoption of ASU 2017-12, the Company elected to use the forward method to measure hedge effectiveness for its Japanese yen revenue and foreign currency expense cash flow hedges. The Company did not change the process for its backlog cash flow hedges and continues to measure hedging effectiveness on a monthly basis.

12



Non-designated Hedging Activities
The Company’s foreign exchange forward contracts that are used to hedge non-functional currency denominated balance sheet assets and liabilities are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying assets and liabilities, which are also recorded in other income (expense), net. The duration of the forward contracts for hedging the Company’s balance sheet exposure is approximately one month.
The Company also has certain foreign exchange forward contracts for hedging certain international revenues and expenses that are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the foreign currency in operating income. The duration of these forward contracts is usually less than one year. The overall goal of the Company’s hedging program is to minimize the impact of currency fluctuations on its net income over its fiscal year.
The effects of the non-designated derivative instruments on the Company’s unaudited condensed consolidated statements of operations is summarized as follows:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Gain (loss) recorded in other income (expense), net
$
2,995

 
$
1,179

 
$
1,891

 
$
4,314


The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Total gross notional amount
$
838,981

 
$
817,441

Net fair value
$
4,796

 
$
3,494


The Company’s exposure to market gain or loss will vary over time as a function of currency exchange rates. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The following table represents the unaudited condensed consolidated balance sheets location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments:
 
Fair values of
derivative instruments
designated as hedging
instruments
 
Fair values of
derivative instruments
not designated as
hedging instruments
 
(in thousands)
Balance at July 31, 2020
 
 
 
Other current assets
$
7,103

 
$
60

Accrued liabilities
$
2,268

 
$
100

Balance at October 31, 2019
 
 
 
Other current assets
$
7,327

 
$
53

Accrued liabilities
$
3,715

 
$
171



13



The following table represents the unaudited condensed consolidated statements of operations location in Revenue/Deferred Revenue and Operating Expenses and amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax:
 
Location of gain (loss)
recognized in OCI on
derivatives
 
Amount of gain (loss)
recognized in OCI on
derivatives
(effective portion)
 
Location of
gain (loss)
reclassified from OCI
 
Amount of
gain (loss)
reclassified from
OCI
(effective portion)
 
(in thousands)
Three months ended 
 July 31, 2020
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
626

 
Revenue
 
$
466

Foreign exchange contracts
Operating expenses
 
11,773

 
Operating expenses
 
(1,175
)
Total
 
 
$
12,399

 
 
 
$
(709
)
Three months ended 
 July 31, 2019
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
(994
)
 
Revenue
 
$
685

Foreign exchange contracts
Operating expenses
 
(76
)
 
Operating expenses
 
(3,945
)
Total
 
 
$
(1,070
)
 
 
 
$
(3,260
)
Nine months ended 
 July 31, 2020
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
2,836

 
Revenue
 
$
648

Foreign exchange contracts
Operating expenses
 
1,129

 
Operating expenses
 
(2,211
)
Total
 
 
$
3,965

 
 
 
$
(1,563
)
Nine months ended 
 July 31, 2019
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
(253
)
 
Revenue
 
$
1,048

Foreign exchange contracts
Operating expenses
 
5,097

 
Operating expenses
 
(12,795
)
Total
 
 
$
4,844

 
 
 
$
(11,747
)


Note 7. Fair Value Measures
Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes guidelines and enhances disclosure requirements for fair value measurements. The accounting guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance also establishes a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical instruments in active markets;
Level 2—Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
On a recurring basis, the Company measures the fair value of certain of its assets and liabilities, which include cash equivalents, non-qualified deferred compensation plan assets, and foreign currency derivative contracts.
The Company’s cash equivalents are classified within Level 1 or Level 2 because they are valued using quoted market prices in an active market or alternative independent pricing sources and models utilizing market observable inputs.
The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets and are therefore classified within Level 1.

14



The Company’s foreign currency derivative contracts are classified within Level 2 because these contracts are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments.
The Company’s borrowings under its credit and term loan facilities are classified within Level 2 because these borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. See Note 9. Credit and Term Loan Facilities for more information on these borrowings.
Assets/Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below as of July 31, 2020:
 
 
 
Fair Value Measurement Using
Description
Total
 
Quoted Prices in 
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
280,417

 
$
280,417

 
$

 
$

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
7,163

 

 
7,163

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
269,484

 
269,484

 

 

Total assets
$
557,064

 
$
549,901

 
$
7,163

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
2,368

 
$

 
$
2,368

 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
269,484

 
269,484

 

 

Total liabilities
$
271,852

 
$
269,484

 
$
2,368

 
$

Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2019:
 
 
 
Fair Value Measurement Using
Description
Total
 
Quoted Prices in 
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
166,024

 
$
166,024

 
$

 
$

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
7,380

 

 
7,380

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
249,822

 
249,822

 

 

Total assets
$
423,226

 
$
415,846

 
$
7,380

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
3,886

 
$

 
$
3,886

 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
249,822

 
249,822

 

 

Total liabilities
$
253,708

 
$
249,822

 
$
3,886

 
$



15



Assets/Liabilities Measured at Fair Value on a Non-Recurring Basis
Non-Marketable Equity Securities
Equity investments in privately-held companies, also called non-marketable equity securities, are accounted for using either the alternative method or equity method of accounting.
The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred. In such events, these equity investments would be classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity. The Company monitors these investments and generally uses the income approach to assess impairments based primarily on the financial conditions of these companies.
Note 8. Liabilities and Restructuring Charges
In the second quarter of fiscal 2019, the Company initiated a restructuring plan for involuntary and voluntary employee termination and facility closure actions as part of a business reorganization to better position the Company for future growth by reallocating resources to priority areas, and to a lesser extent, eliminating operational redundancy. The total charges under the 2019 restructuring plan were $84 million and consisted primarily of severance, termination, and retirement benefits under the 2019 Voluntary Retirement Program (VRP).
During the three and nine months ended July 31, 2020, the Company adjusted restructuring charges by approximately $(2.0) million and incurred restructuring charges of $36.4 million, respectively, under the 2019 restructuring plan. These charges consisted primarily of severance, termination, and retirement benefits. During the three and nine months ended July 31, 2020, the Company made payments of $25.0 million and $55.7 million, respectively, related to the 2019 employee termination actions. As of July 31, 2020, $3.3 million remained outstanding and was recorded in accounts payable and accrued liabilities as payroll and related benefits in the unaudited condensed consolidated balance sheets. The remaining balance will be paid in fiscal 2020.
During the three and nine months ended July 31, 2019, the Company incurred restructuring charges of approximately $19.3 million and $33.7 million, respectively, for involuntary employee termination actions and the VRP. These charges consisted primarily of severance, termination and retirement benefits. As of July 31, 2019, $20.8 million remained outstanding and was recorded in accounts payable and accrued liabilities as payroll and related benefits in the unaudited condensed consolidated balance sheets. As of October 31, 2019, $22.6 million related to the 2019 employee termination actions remained outstanding and was recorded in accounts payable and accrued liabilities as payroll and related benefits in the consolidated balance sheets.
Accounts payable and accrued liabilities consist of:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Payroll and related benefits
$
417,403

 
$
417,157

Other accrued liabilities
95,377

 
69,487

Accounts payable
37,126

 
19,815

Total
$
549,906

 
$
506,459



Other long-term liabilities consist of:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Deferred compensation liability
$
269,484

 
$
249,822

Other long-term liabilities
19,927

 
73,903

Total
$
289,411

 
$
323,725


Note 9. Credit and Term Loan Facilities

16



On November 28, 2016, the Company entered into an amended and restated credit agreement with several lenders (the Credit Agreement) providing for (i) a $650.0 million senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0 million senior unsecured term loan facility (the Term Loan). The Credit Agreement amended and restated the Company’s previous credit agreement dated May 19, 2015, in order to increase the size of the revolving credit facility from $500.0 million to $650.0 million, provide a new $150.0 million senior unsecured term loan facility, and extend the termination date of the revolving credit facility from May 19, 2020 to November 28, 2021. Subject to obtaining additional commitments from lenders, the principal amount of the loans provided under the Credit Agreement may be increased by the Company by up to an additional $150.0 million. The Credit Agreement contains financial covenants requiring the Company to operate within a maximum leverage ratio and maintain a minimum interest coverage ratio, as well as other non-financial covenants. As of July 31, 2020, the Company was in compliance with all financial covenants.
As of July 31, 2020, the Company had $106.7 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $82.5 million was classified as long-term liabilities. Outstanding principal payments under the Term Loan are due as follows:

Fiscal year
(in thousands)
Remainder of fiscal 2020
$
4,688

2021
27,187

2022
75,000

Total
$
106,875


In July 2018, the Company entered into a 220.0 million RMB (approximately $33.0 million) credit agreement with a lender in China to support its facilities expansion. Borrowings bear interest at a floating rate based on the Chinese Central Bank rate plus 10% of such rate. As of July 31, 2020, the Company had $24.6 million outstanding under the agreement.
As of October 31, 2019, the Company had $119.8 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $102.2 million was classified as long-term liabilities. There was no outstanding balance under the Revolver as of October 31, 2019.
There was no outstanding balance under the Revolver as of July 31, 2020. The Company expects its borrowings under the Revolver will fluctuate from quarter to quarter. Borrowings bear interest at a floating rate based on a margin over the Company’s choice of market observable base rates as defined in the Credit Agreement. As of July 31, 2020, borrowings under the Term Loan bore interest at LIBOR +1.125% and the applicable interest rate for the Revolver was LIBOR +1.000%. In addition, commitment fees are payable on the Revolver at rates between 0.125% and 0.200% per year based on the Company’s leverage ratio on the daily amount of the revolving commitment.
The carrying amount of the short-term and long-term debt approximates the estimated fair value. These borrowings under the Credit Agreement have a variable interest rate structure and are classified within Level 2 of the fair value hierarchy.
Note 10. Leases
The Company has operating lease arrangements for office space, data center, equipment and other corporate assets. These leases have various expiration dates through March 31, 2032, some of which include options to extend the leases for up to 10 years. Because the Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments.

17



The components of the Company’s lease expense during the period presented are as follows:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2020
 
2020
 
(in thousands)
Operating lease expense
$
23,450

 
$
69,932

Variable lease expense (1)
1,447

 
3,439

Total lease expense
$
24,897

 
$
73,371

(1) Variable lease expense includes payments to lessors that are not fixed or determinable at lease commencement date. These payments primarily consist of maintenance, property taxes, insurance and variable indexed based payments.
Supplemental cash flow information during the period presented is as follows:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2020
 
2020
 
(in thousands)
Cash paid for amounts included in the measurement of operating lease liabilities
$
18,637

 
$
52,766

ROU assets obtained in exchange for operating lease liabilities
$
27,063

 
$
56,846


Lease term and discount rate information related to the Company’s operating leases as of the end of the period presented are as follows:
 
July 31, 2020
Weighted-average remaining lease term (in years)
8.84

Weighted-average discount rate
2.56
%

The following represents the maturities of the Company’s future lease payments due under operating leases as of July 31, 2020:
 
Lease Payments
Fiscal year
(in thousands)
Remainder of fiscal 2020
$
18,137

2021
86,552

2022
76,714

2023
61,045

2024
56,901

Thereafter
311,341

Total future minimum lease payments
610,690

Less: Imputed interest
68,614

Total lease liabilities
$
542,076


As of July 31, 2020, the Company has additional operating leases for facilities that have not yet commenced with future undiscounted lease payments of $57.0 million. These operating leases will commence before March 1, 2021, with lease terms between 3.0 years and 9.0 years.

18



As of October 31, 2019, the future minimum lease payments due under non-cancellable operating leases were as follows:
 
Minimum Lease Payments(1)
 
(in thousands)
Fiscal year
 
2020
$
79,286

2021
79,703

2022
69,477

2023
53,909

2024
48,730

Thereafter
291,494

Total
$
622,599

(1) Amounts based on Topic 840, Leases.
Note 11. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Cumulative currency translation adjustments
$
(73,828
)
 
$
(87,929
)
Unrealized gain (loss) on derivative instruments, net of taxes
1,008

 
(4,518
)
Total accumulated other comprehensive income (loss)
$
(72,820
)
 
$
(92,447
)

The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income was as follows:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Reclassifications from accumulated other comprehensive income (loss) into unaudited condensed consolidated statements of operations:
 
 
 
 
 
 
 
Gain (loss) on cash flow hedges, net of taxes
 
 
 
 
 
 
 
Revenues
$
466

 
$
685

 
$
648

 
$
1,048

Operating expenses
(1,175
)
 
(3,945
)
 
(2,211
)
 
(12,795
)
Total reclassifications into net income
$
(709
)
 
$
(3,260
)
 
$
(1,563
)
 
$
(11,747
)

Note 12. Stock Repurchase Program
The Company’s Board of Directors (the Board) previously approved a stock repurchase program pursuant to which the Company was authorized to purchase up to $500.0 million of its common stock, and has periodically replenished the stock repurchase program to such amount. The Board replenished the stock repurchase program up to $500.0 million on June 19, 2020. The program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated at any time by the Company’s Chief Financial Officer or the Board. The Company repurchases shares to offset dilution caused by ongoing stock issuances from existing equity plans for equity compensation awards and issuances related to acquisitions, and when management believes it is a good use of cash. Repurchases are transacted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the Exchange Act) and may be made through any means, including, but not limited to, open market purchases, plans executed under Rule 10b5-1(c) of the Exchange Act and

19



structured transactions. As of July 31, 2020, $500.0 million remained available for future repurchases under the program.
In December 2019, the Company entered into an accelerated share repurchase agreement (the December 2019 ASR) to repurchase an aggregate of $100.0 million of the Company's common stock. Pursuant to the December 2019 ASR, the Company made a prepayment of $100.0 million to receive initial share deliveries of shares valued at $80.0 million. The remaining balance of $20.0 million was settled in February 2020. Total shares purchased under the December 2019 ASR were approximately 0.7 million shares, at an average purchase price of $149.75 per share.
In February 2020, the Company entered into an accelerated share repurchase agreement (the February 2020 ASR) to repurchase an aggregate of $100.0 million of the Company’s common stock. Pursuant to the February 2020 ASR, the Company made a prepayment of $100.0 million to receive initial share deliveries of shares valued at $80.0 million. The remaining balance of $20.0 million was settled in May 2020. Total shares purchased under the February 2020 ASR were approximately 0.7 million shares, at an average purchase price of $140.41 per share.
Stock repurchase activities as well as the reissuance of treasury stock for employee stock-based compensation purposes are as follows:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020(3)
 
2019(1)
 
2020(3)
 
2019(1)(2)
 
(in thousands)
Total shares repurchased
149

 
775

 
1,380

 
1,901

Total cost of the repurchased shares
$
20,000

 
$
100,000

 
$
200,000

 
$
209,185

Reissuance of treasury stock
999

 
1,166

 
2,807

 
3,009


(1) Does not include the 90,202 shares or $20.0 million equity forward contract from the June 2019 ASR settled in August 2019.
(2) The third quarter of fiscal 2019 includes the settlement of the 97,601 shares or $20.0 million equity forward contract from the February 2019 ASR settled in May 2019.
(3) The third quarter of fiscal 2020 includes the settlement of the 148,953 shares or $20.0 million equity forward contract from the February 2020 ASR settled in May 2020.
Note 13. Stock-Based Compensation
The compensation cost recognized in the unaudited condensed consolidated statements of operations for the Company’s stock compensation arrangements was as follows: