Item 2.02
|
Results of Operations and Financial Condition.
|
On May 22, 2019, Synopsys, Inc. (
Synopsys
) issued a press release announcing the financial results of its second
fiscal quarter ended April 30, 2019. A copy of this press release is furnished and attached hereto as Exhibit 99.1 and is incorporated herein by reference.
The information in this Current Report, including the exhibit hereto, shall not be deemed to be filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information contained herein and in the
accompanying exhibit shall not be incorporated by reference into any registration statement or other document filed with the Securities and Exchange Commission by Synopsys whether made before or after the date hereof, regardless of any general
incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.
The attached press
release includes measures that are not in accordance with, or an alternative for, U.S. generally accepted accounting principles (
GAAP
). The attached press release includes
non-GAAP
earnings per share,
non-GAAP
net income, targeted
non-GAAP
expenses, targeted
non-GAAP
earnings per share, and targeted
non-GAAP
operating margin.
These
non-GAAP
measures may be
different from
non-GAAP
measures used by other companies. In addition, these
non-GAAP
measures are not based on any comprehensive set of accounting rules or
principles, and management exercises judgment in determining which items should be excluded in the calculation of
non-GAAP
measures. While we believe that
non-GAAP
measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, we believe that
non-GAAP
measures are valuable in
analyzing our core operations. Management analyzes current and future results on a GAAP basis as well as a
non-GAAP
basis and also provides GAAP and
non-GAAP
measures in our earnings release. The presentation of
non-GAAP
financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared
in accordance with GAAP. The
non-GAAP
financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures. We believe that the presentation of
non-GAAP
measures, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to our financial condition
and results of operations.
Synopsys management evaluates and makes decisions about our business operations primarily based on the
income and costs that management believes are directly related to Synopsys core operations, both from a company-wide basis and on a business segment basis. For our internal budgeting and resource allocation process, and in reviewing our
financial results, we use
non-GAAP
financial measures that exclude: (i) the amortization of acquired intangible assets; (ii) the impact of stock compensation; (iii) acquisition-related costs;
(iv) restructuring charges; (v) the effects of certain settlements, final judgments and loss contingencies related to legal proceedings; (vi) the various income tax impacts, as further described below, prompted by the Tax Cut and Jobs
Act of 2017 enacted on December 22, 2017 (
U.S. Tax Reform
); and (vii) the income tax effect of
non-GAAP
pre-tax
adjustments. We also
utilize a normalized annual
non-GAAP
tax rate in the calculation of our
non-GAAP
measures, as further described below.
We use these
non-GAAP
financial measures in making our operating decisions because we believe the
measures provide meaningful supplemental information regarding our core operational performance and give us a better understanding of how we should invest in research and development, as well as fund infrastructure and product and market
strategies. We use these measures to help us make budgeting decisions, for example, among product development expenses and research and development, sales and marketing, and general and administrative expenses. In addition, these
non-GAAP
financial measures facilitate our internal comparisons to our historical operating results, forecasted targets and comparisons to competitors operating results.
Synopsys provides segment information, namely adjusted segment operating income and adjusted
segment operating margin, in accordance with FASB Accounting Standards Codification Topic 280, Segment Reporting. These measures reflect how management evaluates the operating performance of its segments. In evaluating our business segments,
management considers the income and costs that management believes are directly related to those segments. The items mentioned above that are excluded from
non-GAAP
measures are the same items that management
does not allocate to the segments to evaluate their performance. Similarly, Synopsys does not allocate changes in the fair value of its
non-qualified
deferred compensation plan because these changes typically
do not require cash settlement and they are not used by us to assess the core profitability of our business operations.
As described
above, we exclude the following items from one or more of our
non-GAAP
measures:
(i)
Amortization of acquired intangible assets.
We incur expenses from amortization of acquired intangible assets, which
include contract rights, core/developed technology, trademarks, trade names, customer relationships, covenants not to compete, and other intangibles related to acquisitions. We amortize the intangible assets over their economic lives. We exclude
this item because the expense is
non-cash
in nature and because we believe the
non-GAAP
financial measures excluding this item provide meaningful supplemental
information regarding (a) our core operational performance and liquidity, and (b) our ability to invest in research and development and fund acquisitions and capital expenditures.
(ii)
Stock compensation impact.
While stock compensation expense constitutes an ongoing and recurring expense, such expense
is excluded from
non-GAAP
results because it is not an expense that typically requires or will require cash settlement by us and because such expense is not used by us to assess the core profitability of our
business operations. In addition, excluding this item from various
non-GAAP
measures facilitates comparisons to our competitors operating results.
(iii)
Acquisition-related costs.
In connection with our business combinations, we incur significant expenses which we
would not have otherwise incurred as part of our business operations. These expenses include compensation expenses, professional fees and other direct expenses, and concurrent restructuring activities, including employee severance and other exit
costs, as well as changes to the fair value of contingent consideration related to the acquired company. We exclude such expenses, which we would not have otherwise incurred, as they are related to acquisitions and have no direct correlation to the
operation of our business.
(iv)
Restructuring charges.
We initiate restructuring activities in order to align our costs
in connection with both our operating plans and our business strategies based on then-current economic conditions. The amounts of the restructuring activities and frequency of occurrence may vary from time to time. Restructuring costs generally
include severance and other termination benefits related to voluntary retirement programs and involuntary headcount reductions as well as facilities closures. Such restructuring costs include elimination of operational redundancy and permanent
reductions in workforce and facilities closures and, therefore, are not considered by us to be a part of the core operation of our business and not used by us when assessing the core profitability and performance of our business
operations. Furthermore, excluding this item from various
non-GAAP
measures facilitates comparisons to our competitors and our past operating results.
(v)
Legal matters
. From time to time we are party to legal proceedings, including
tax-related
matters. Legal proceedings could result in an expense or benefit due to settlements, final judgments, or accruals for loss contingencies. We exclude these types of expenses or benefits because we do not believe they are reflective of the core
operation of our business.
(vi)
Income tax impacts of U.S. tax reform.
On December 22, 2017, the Tax Cut and Jobs Act of 2017
was enacted into law, and includes numerous provisions that affect our business and tax strategy, resulting in
tax-related
impacts to our financial statements, as follows:
(a)
Transition Tax Impact.
A mandated
one-time transition
tax on deemed repatriation
of foreign earnings, resulted in a $73 million tax expense in fiscal 2018; and
(b)
Tax Rate Change Impact.
A reduction of the U.S. federal statutory tax rate from 35% to
21%, effective January 1, 2018, resulted in a $46 million tax expense in fiscal 2018 for the write-down of certain deferred tax assets.
These items are excluded from various
non-GAAP
measures as they are unusual and infrequent events that
do not have a direct correlation to the operation of our business.
(vii)
Income tax effect of
non-GAAP
pre-tax
adjustments.
Excluding the income tax effect of
non-GAAP
pre-tax
adjustments from the provision for income taxes assists investors in understanding the tax provision associated with those adjustments and the effect on net income.
We utilize a normalized annual
non-GAAP
tax rate in calculating
non-GAAP
financial measures to provide better consistency across interim reporting periods by eliminating the effects of
non-recurring
and period-specific items such as
tax audit settlements, which can vary in size and frequency and not necessarily reflect our normal operations, and to more clearly align our tax rate with our expected geographic earnings mix. In projecting this rate, we evaluate our historical and
projected mix of U.S. and international profit before tax, excluding the impact of stock-based compensation, the amortization of purchased intangibles and other
non-GAAP
adjustments described above. We also
consider other factors including our current tax structure, our existing tax positions, and expected recurring tax incentives, such as the U.S. federal research and development tax credit.
On an annual basis we
re-evaluate
this rate for significant events that may materially affect our
projections. We expect our annual
non-GAAP
tax rate to be 16% in fiscal 2019 based upon our projected normalized annual
non-GAAP
tax rate through fiscal 2021. We will
re-evaluate
this rate on an annual basis, but further regulatory guidance regarding specific parts of U.S. Tax Reform could materially change our projections. Notwithstanding the foregoing, we excluded from the
normalized annual
non-GAAP
tax rate unusual and infrequent events, such as tax audit settlements and certain impacts of U.S Tax Reform in fiscal 2018.