NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) provides products and services used by designers 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, 2018
as filed with the SEC on December 17, 2018.
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.
Principles of Consolidation.
The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All 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 every five or six 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
2019
is a 52-week year and will end on November 2, 2019. Fiscal
2018
was a 53-week year and ended on November 3, 2018.
The results of operations for the first six months of fiscal
2019
and
2018
included 26 weeks and 27 weeks, respectively, and ended on May 4, 2019 and May 5, 2018, respectively. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Segment Reporting.
Effective in fiscal 2019, the Company realigned its business to evaluate the results of its Software Integrity business separately from Synopsys’ traditional electronic design automation (EDA) and semiconductor IP business. The Chief Operating Decision Makers (CODMs) now regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. Synopsys' CODMs are its two co-Chief Executive Officers. Historical segment disclosures have been recast to retrospectively reflect the change from one to two reportable segments.
Goodwill.
Effective in the first quarter of fiscal 2019, with the change in the Company’s reportable segments, the Company has determined there are now two reporting units, requiring goodwill to be allocated to the two reporting units using a relative fair value method. Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill at each reporting unit is tested for impairment annually as of October 31, or more frequently if facts and circumstances warrant a review. As a result of changes to the Company's segment reporting, the Company conducted a quantitative impairment test for each of its reporting units and concluded that there was no impairment. The Company performs either a qualitative or quantitative analysis when testing a reporting unit’s goodwill for impairment. A qualitative goodwill impairment test is performed when the fair value of a reporting unit historically has significantly exceeded the carrying value of its net assets and based on current operations is expected to continue to do so. Otherwise, the Company is required to conduct a quantitative impairment test for each reporting unit and estimates the fair value of each reporting unit using a combination of a discounted cash flow analysis and a market approach based on market multiples. The discount rate used in an income approach is based on the Company's weighted-average cost of capital and may be adjusted for the relevant risks pertaining to projecting future cash flows. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference. Refer to
Note 3. Goodwill and Intangible Assets
for a discussion of the change in reporting units as related to the realignment of the Company’s segments.
Revenue Recognition.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC 606), "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” The new guidance creates a single, principle-based model for revenue recognition that is intended to expand and improve companies' revenue disclosures. For revenue recognition policies under ASC 605, refer to Note 2 - Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2018.
ASC 606 requires a company to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. ASC 606 also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to ASC 606, including amendments that deferred the initially proposed adoption date and clarified accounting for licenses of intellectual property and identifying performance obligations.
The Company adopted ASC 606 at the beginning of fiscal 2019 using the modified retrospective transition method. Under this method, periods prior to the adoption date are not adjusted and continue to be reported under the revenue accounting literature in effect during those periods. The Company evaluated contracts that were in effect at the beginning of fiscal 2019 as if they had been accounted for under ASC 606 from the contract inception and summarized the most significant adoption impacts as follows:
|
|
•
|
Revenue for certain ongoing contracts that was previously deferred would have been recognized in the periods prior to adoption under ASC 606. Therefore, upon adoption, the Company recorded the following adjustments to the beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase to retained earnings of
$265.1 million
, a decrease to unbilled receivables of
$27.4 million
, an increase to contract assets of
$126.9 million
, and a decrease in deferred revenue of
$165.6 million
.
|
|
|
•
|
The Company capitalized
$73.8 million
of incremental costs for obtaining contracts with customers at the adoption date with a corresponding adjustment to retained earnings and is amortizing these costs over the contract term.
|
|
|
•
|
The Company recorded an increase in its opening deferred tax liability of
$81.4 million
, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.
|
The impacts of adopting ASC 606 on the Company's unaudited condensed consolidated financial statements for the six months are summarized in the tables below.
Balance Sheet Accounts
The following table summarizes the effects of adopting ASC 606 on certain account balances of the unaudited condensed consolidated balance sheet that were impacted as of
April 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported under ASC 606
|
|
Adjustments
|
|
Adjusted balance under ASC 605
|
|
(in thousands)
|
Receivables, net
|
$
|
526,691
|
|
|
$
|
61,849
|
|
|
$
|
588,540
|
|
Prepaid and other current assets
|
259,849
|
|
|
(168,487
|
)
|
|
91,362
|
|
Deferred income taxes
|
352,667
|
|
|
67,763
|
|
|
420,430
|
|
Other long-term assets
|
380,682
|
|
|
(96,441
|
)
|
|
284,241
|
|
Accounts payable and other accrued liabilities
|
365,848
|
|
|
(9,499
|
)
|
|
356,349
|
|
Deferred revenue
|
1,194,404
|
|
|
91,067
|
|
|
1,285,471
|
|
Long-term deferred revenue
|
60,825
|
|
|
73,454
|
|
|
134,279
|
|
Other long-term liabilities (1)
|
324,217
|
|
|
(16,671
|
)
|
|
307,546
|
|
Retained earnings
|
2,912,811
|
|
|
(273,667
|
)
|
|
2,639,144
|
|
(1) Includes long-term deferred tax liabilities.
Statements of Operations
The following table summarizes the effects of adopting ASC 606 on the unaudited condensed consolidated statements of operations for the three and six months ended
April 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30, 2019
|
|
Six Months Ended
April 30, 2019
|
|
As reported under ASC 606
|
|
Adjustments
|
|
Adjusted under ASC 605
|
|
As reported under ASC 606
|
|
Adjustments
|
|
Adjusted under ASC 605
|
|
(in thousands, except per share amounts)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Time-based products
|
$
|
558,305
|
|
|
$
|
86,762
|
|
|
$
|
645,067
|
|
|
$
|
1,112,021
|
|
|
$
|
102,618
|
|
|
$
|
1,214,639
|
|
Upfront products
|
143,401
|
|
|
(61,057
|
)
|
|
82,344
|
|
|
273,914
|
|
|
(77,843
|
)
|
|
196,071
|
|
Maintenance and service
|
134,536
|
|
|
(9,379
|
)
|
|
125,157
|
|
|
270,708
|
|
|
(30,793
|
)
|
|
239,915
|
|
Total revenue
|
836,242
|
|
|
16,326
|
|
|
852,568
|
|
|
1,656,643
|
|
|
(6,018
|
)
|
|
1,650,625
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
116,010
|
|
|
—
|
|
|
116,010
|
|
|
232,630
|
|
|
—
|
|
|
232,630
|
|
Maintenance and service
|
59,788
|
|
|
—
|
|
|
59,788
|
|
|
118,617
|
|
|
—
|
|
|
118,617
|
|
Amortization of intangible assets
|
14,881
|
|
|
—
|
|
|
14,881
|
|
|
32,324
|
|
|
—
|
|
|
32,324
|
|
Total cost of revenue
|
190,679
|
|
|
—
|
|
|
190,679
|
|
|
383,571
|
|
|
—
|
|
|
383,571
|
|
Gross margin
|
645,563
|
|
|
16,326
|
|
|
661,889
|
|
|
1,273,072
|
|
|
(6,018
|
)
|
|
1,267,054
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
290,299
|
|
|
—
|
|
|
290,299
|
|
|
561,625
|
|
|
—
|
|
|
561,625
|
|
Sales and marketing
|
158,652
|
|
|
1,942
|
|
|
160,594
|
|
|
314,611
|
|
|
13,126
|
|
|
327,737
|
|
General and administrative
|
56,351
|
|
|
—
|
|
|
56,351
|
|
|
98,412
|
|
|
—
|
|
|
98,412
|
|
Amortization of intangible assets
|
10,316
|
|
|
—
|
|
|
10,316
|
|
|
21,100
|
|
|
—
|
|
|
21,100
|
|
Restructuring
|
14,443
|
|
|
—
|
|
|
14,443
|
|
|
14,408
|
|
|
—
|
|
|
14,408
|
|
Total operating expenses
|
530,061
|
|
|
1,942
|
|
|
532,003
|
|
|
1,010,156
|
|
|
13,126
|
|
|
1,023,282
|
|
Operating income
|
115,502
|
|
|
14,384
|
|
|
129,886
|
|
|
262,916
|
|
|
(19,144
|
)
|
|
243,772
|
|
Other income (expense), net
|
18,415
|
|
|
—
|
|
|
18,415
|
|
|
18,056
|
|
|
—
|
|
|
18,056
|
|
Income before provision for income taxes
|
133,917
|
|
|
14,384
|
|
|
148,301
|
|
|
280,972
|
|
|
(19,144
|
)
|
|
261,828
|
|
Provision (benefit) for income taxes
|
15,707
|
|
|
2,599
|
|
|
18,306
|
|
|
9,248
|
|
|
(3,071
|
)
|
|
6,177
|
|
Net income
|
$
|
118,210
|
|
|
$
|
11,785
|
|
|
$
|
129,995
|
|
|
$
|
271,724
|
|
|
$
|
(16,073
|
)
|
|
$
|
255,651
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.79
|
|
|
$
|
0.08
|
|
|
$
|
0.87
|
|
|
$
|
1.82
|
|
|
$
|
(0.11
|
)
|
|
$
|
1.71
|
|
Diluted
|
$
|
0.77
|
|
|
$
|
0.07
|
|
|
$
|
0.84
|
|
|
$
|
1.77
|
|
|
$
|
(0.10
|
)
|
|
$
|
1.67
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
149,712
|
|
|
|
|
149,712
|
|
|
149,500
|
|
|
|
|
149,500
|
|
Diluted
|
153,904
|
|
|
|
|
153,904
|
|
|
153,383
|
|
|
|
|
153,383
|
|
Statements of Cash Flows
Adoption of ASC 606 had no impact to cash from or used in operating, financing, or investing activities on the unaudited condensed consolidated cash flows statements.
Revenue Policy
The core principle of ASC 606 is to recognize revenue for the transfer of services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or products. The principle is achieved through the following five-step approach:
|
|
•
|
Identification of the contract, or contracts, with the customer
|
|
|
•
|
Identification of the performance obligation in the contract
|
|
|
•
|
Determination of the transaction price
|
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
|
|
|
•
|
Recognition of revenue when, or as, the Company satisfies a performance obligation
|
Nature of Products and Services
The Company generates revenue from the sale of products that include software licenses and, to a lesser extent, hardware products, maintenance and services. The various types are set forth below.
Electronic Design Automation
Software license revenue consists of fees associated with the licensing of the Company's software primarily through Technology Subscription License (TSL) contracts. TSLs are time-based licenses for a finite term and generally provide the customer with limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. The majority of the Company's arrangements are TSLs due to the nature of its business and customer requirements. In addition to the licenses, the arrangements also include: post-contract customer support, which includes providing frequent updates and upgrades to maintain the utility of the software due to rapid changes in technology; other intertwined services such as multiple copies of the tools; assisting the Company's customers in applying the Company's technology in the customers' development environment; and rights to remix licenses for other licenses. Payments are generally received in equal or near equal installments over the term of the arrangement. Under ASC 605, these arrangements were qualified to be recognized ratably over the contract terms. Under ASC 606, the Company has concluded that its software licenses in TSL contracts are not distinct from its obligation to provide unspecified software updates to the licensed software throughout the license term. Such updates represent inputs to a single, combined performance obligation, commencing upon the later of the arrangement effective date or transfer of the software license. Remix rights are not an additional promised good or service in the contract, and where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same pattern of transfer to the customer over the duration of the subscription term.
IP & System Integration
The Company generally licenses IP under nonexclusive license agreements that provide usage rights for specific applications. Additionally, for certain IP license agreements, royalties are collected as customers sell their own products that incorporate the Company’s IP. Under ASC 605, the Company recognized revenue either upfront if certain criteria in ASC 605 were met, or over the contractual period for IP licensing and support arrangements if such arrangements were combined with other TSL arrangements. Under ASC 606, these arrangements generally have two distinct performance obligations that consist of transferring the licensed IP and the support service. Support services consist of a stand-ready obligation to provide technical support and software updates over the support term. Revenue allocated to the IP license is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term. Royalties are recognized as revenue is earned, generally when the customer sells its products that incorporate the Company’s IP.
Software Integrity Products
Software Integrity product arrangements provide customers the right to software licenses, software updates and technical support. Under the term of these arrangements, the customer expects to receive integral updates to the software licenses that protect the customer’s software from potential security vulnerabilities. The licenses and software updates together serve to fulfill the Company’s commitment to the customer, as they represent inputs to a single, combined performance obligation that commences upon the later of the arrangement effective date or transfer of the software license. Software updates are part of the contract with the customer, and such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer
.
Hardware
The Company generally has two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product, which includes embedded software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, including rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at a point in time when the hardware is delivered to the customer. The Company has concluded that control generally transfers upon delivery because the customer has title to the hardware, physical possession of the hardware, and a present
obligation to pay for the hardware. The portion of the transaction price allocated to maintenance is recognized as revenue that is ratable over the maintenance term. The adoption of ASC 606 did not change the timing of revenue recognition for hardware products and related services.
Professional Services
Our arrangements often include service elements (other than maintenance and support services). These services include training, design assistance, and consulting. Services performed on a time and materials basis are recognized over time, as the customer simultaneously receives and consumes the benefit provided. Certain arrangements also include the customization or modification of licensed IP. Revenue from these contracts is recognized over time as the services are performed, when the development is specific to the customer’s needs and Synopsys has enforceable rights to payment for performance completed. Performance is generally measured using costs incurred or hours expended to measure progress. The Company has a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances, specification and testing requirement changes, and changes in customer delivery priorities. Payments for services are generally due upon milestones in the contract or upon consumption of the hourly resources.
Flexible Spending Accounts
Some customers enter into a non-cancelable Flexible Spending Account arrangement (FSA) whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of Synopsys products or services. These arrangements do not meet the definition of a revenue contract until the customer executes a separate order to identify the required products and services that they are purchasing. The combination of the FSA arrangement and the subsequent order creates enforceable rights and obligations, thus meeting the definition of a revenue contract. Each separate order under the agreement is treated as an individual contract under the new standard and accounted for based on the respective performance obligations included within the FSA arrangements.
Disaggregated Revenue
The following table shows the percentage of revenue by product groups:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30, 2019
|
|
Six Months Ended
April 30, 2019
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
EDA
|
58
|
%
|
|
62
|
%
|
|
59
|
%
|
|
63
|
%
|
IP & System Integration
|
31
|
%
|
|
29
|
%
|
|
30
|
%
|
|
29
|
%
|
Software Integrity Products & Services
|
10
|
%
|
|
9
|
%
|
|
10
|
%
|
|
8
|
%
|
Other
|
1
|
%
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment
.
The Company has concluded that (1) its EDA software licenses in TSL contracts are not distinct from its obligation to provide unspecified software updates to the licensed software throughout the license term, because those promises represent inputs to a single, combined performance obligation, and (2) where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support, because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer. In reaching this conclusion, the Company considered the nature of the obligation to customers which is to provide an ongoing right to use the most up to date and relevant software. As EDA customers operate in a rapidly changing and competitive environment, satisfying the obligation requires providing critical updates to the existing software products, including ongoing iterative interaction with customers to make the software relevant to customers’ ability to meet the time to go to market with advanced products.
Similarly, the Company also concluded that in its Software Integrity business, the licenses and maintenance updates serve together to fulfill the Company’s commitment to the customer as both work together to provide the
functionality to the customer and represent a combined performance obligation because the updates are essential to the software’s central utility, which is to identify security vulnerabilities and other threats.
Judgment is also required to determine the standalone selling price (SSP) for each distinct performance obligation. For non-software performance obligations (IP, Hardware, and services), SSP is established based on observable prices of products and services sold separately. SSP for license (and related updates and support) in a contract with multiple performance obligations is determined by applying a residual approach whereby all other non-software performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSP, using observable prices, with any residual amount of the transaction price allocated to the license because the Company does not sell the license separately, and the pricing is highly variable.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables (billed or unbilled), contract assets, or contract liabilities (deferred revenue) on the Company’s unaudited condensed consolidated balance sheet. The Company records a contract asset when revenue is recognized prior to the right to invoice, or deferred revenue when revenue is recognized subsequent to invoicing. For time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers prefer to be invoiced in single or annual amounts. The Company records an unbilled receivable when revenue is recognized and it has an unconditional right to invoice and receive payment.
The contract assets indicated below are presented as prepaid and other current assets in the unaudited condensed consolidated balance sheet. The contract assets are transferred to receivables when the rights to invoice and receive payment become unconditional.
Contract balances are as follows:
|
|
|
|
|
|
|
|
|
|
As of April 30, 2019
|
|
As of October 31, 2018
|
|
|
|
as adjusted
|
|
(in thousands)
|
Contract assets
|
$
|
168,487
|
|
|
$
|
126,897
|
|
Unbilled receivables
|
38,133
|
|
|
36,699
|
|
Deferred revenue
|
1,255,229
|
|
|
1,104,110
|
|
During the three and six months ended
April 30, 2019
, the Company recognized
$474.4 million
and
$961.5 million
, respectively, of revenue that were included in the deferred revenue balance at the beginning of the period, as adjusted for the adoption of ASC 606.
Contracted but unsatisfied or partially unsatisfied performance obligations were approximately
$4.3 billion
as of
April 30, 2019
, which includes
$512.3 million
in non-cancellable 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 unsatisfied performance obligations, excluding non-cancellable FSA, expected to be recognized over the next 12 months is approximately
52%
, with the remainder recognized thereafter.
During the three and six month periods ended April 30, 2019, the Company recognized
$28.5 million
and
$47.3 million
, respectively, from performance obligations satisfied in previous periods. These amounts represent 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
April 30, 2019
were
$96.4 million
and are included in other assets in the Company’s unaudited condensed consolidated balance sheet. Amortization of these assets was
$15.6 million
and
$28.4 million
during the three and six months ended
April 30, 2019
, respectively, and are included
in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations.
Note 3. Goodwill and Intangible Assets
Following the realignment of the Company’s operating segments during the first quarter of fiscal 2019, as described in
Note 12. Segment Disclosure,
the Company has
two
reporting units and has assigned assets and liabilities to each of the reporting units based on each unit's operating activities. Previously, the Company operated as a single reporting segment and reporting unit. Goodwill was reallocated to the reporting units using a relative fair value method and assessed for impairment. No impairment of goodwill was identified for any periods presented.
Intangible assets as of
April 30, 2019
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Assets
|
|
Accumulated
Amortization
|
|
Net Assets
|
|
(in thousands)
|
Core/developed technology
|
$
|
773,147
|
|
|
$
|
629,360
|
|
|
$
|
143,787
|
|
Customer relationships
|
358,522
|
|
|
223,374
|
|
|
135,148
|
|
Contract rights intangible
|
183,947
|
|
|
179,167
|
|
|
4,780
|
|
Trademarks and trade names
|
42,929
|
|
|
24,025
|
|
|
18,904
|
|
In-process research and development (IPR&D)(1)
|
1,200
|
|
|
—
|
|
|
1,200
|
|
Capitalized software development costs
|
37,309
|
|
|
34,201
|
|
|
3,108
|
|
Total
|
$
|
1,397,054
|
|
|
$
|
1,090,127
|
|
|
$
|
306,927
|
|
|
|
(1)
|
IPR&D is reclassified to core/developed technology upon completion or is written off upon abandonment.
|
Intangible assets as of
October 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Assets
|
|
Accumulated
Amortization
|
|
Net Assets
|
|
(in thousands)
|
Core/developed technology
|
$
|
773,147
|
|
|
$
|
598,956
|
|
|
$
|
174,191
|
|
Customer relationships
|
358,524
|
|
|
204,382
|
|
|
154,142
|
|
Contract rights intangible
|
183,953
|
|
|
177,191
|
|
|
6,762
|
|
Trademarks and trade names
|
42,929
|
|
|
21,944
|
|
|
20,985
|
|
In-process research and development (IPR&D)(1)
|
1,200
|
|
|
—
|
|
|
1,200
|
|
Capitalized software development costs
|
35,818
|
|
|
32,694
|
|
|
3,124
|
|
Total
|
$
|
1,395,571
|
|
|
$
|
1,035,167
|
|
|
$
|
360,404
|
|
Amortization expense related to intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Core/developed technology
|
$
|
14,045
|
|
|
$
|
18,985
|
|
|
$
|
30,404
|
|
|
$
|
37,053
|
|
Customer relationships
|
9,377
|
|
|
9,656
|
|
|
18,957
|
|
|
18,219
|
|
Contract rights intangible
|
866
|
|
|
1,372
|
|
|
1,982
|
|
|
2,262
|
|
Trademarks and trade names
|
909
|
|
|
1,172
|
|
|
2,081
|
|
|
2,198
|
|
Capitalized software development costs(2)
|
735
|
|
|
897
|
|
|
1,507
|
|
|
1,817
|
|
Total
|
$
|
25,932
|
|
|
$
|
32,082
|
|
|
$
|
54,931
|
|
|
$
|
61,549
|
|
|
|
(2)
|
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 the existing intangible assets as of
April 30, 2019
:
|
|
|
|
|
Fiscal Year
|
(in thousands)
|
Remainder of fiscal 2019
|
$
|
48,131
|
|
2020
|
78,806
|
|
2021
|
56,118
|
|
2022
|
44,006
|
|
2023
|
29,219
|
|
2024 and thereafter
|
49,447
|
|
IPR&D(3)
|
1,200
|
|
Total
|
$
|
306,927
|
|
|
|
(3)
|
IPR&D assets are amortized over their useful lives upon completion or are written off upon abandonment.
|
Note 4. Financial Assets and Liabilities
Cash equivalents.
The Company classifies time deposits and other investments with original maturities less than three months as cash equivalents.
As of April 30, 2019
, the balances of the Company's cash equivalents are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
206,438
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
206,438
|
|
Total:
|
$
|
206,438
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
206,438
|
|
|
|
(1)
|
See
Note 5. Fair Value Measures
for further discussion on fair values of cash equivalents.
|
As of
October 31, 2018
, the balances of the Company's cash equivalents are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
165,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165,296
|
|
Total:
|
$
|
165,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165,296
|
|
|
|
(1)
|
See
Note 5. Fair Value Measures
for further discussion on fair values of cash equivalents.
|
Restricted Cash.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The Company adopted the standard in the first quarter of fiscal 2019 and applied it retrospectively for the periods presented. As required by ASU 2016-18, the Company included 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 statement of cash flows. All restricted cash is primarily associated with office leases and has no material impact on the Company’s unaudited condensed consolidated statement 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 April 30, 2019
|
|
As of October 31, 2018
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
631,161
|
|
|
$
|
723,115
|
|
Restricted cash included in Prepaid expenses and other current assets
|
1,166
|
|
|
1,164
|
|
Restricted cash included in Other long-term assets
|
721
|
|
|
722
|
|
Total cash, cash equivalents and restricted cash
|
$
|
633,048
|
|
|
$
|
725,001
|
|
Non-marketable equity securities.
The Company’s strategic investment portfolio consists of non-marketable equity securities in privately-held companies. The securities accounted for under cost method investments are reported at cost net of impairment losses. Securities accounted for under 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. Refer to
Note 5. Fair Value Measures.
Derivatives.
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. Further, the Company 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.
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 effective portion of 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 (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
.
Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in other income (expense), net. The premium/discount component of the forward contracts is recorded to other income (expense), net, and is not included in evaluating hedging effectiveness.
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 effect of the changes in the fair values of non-designated forward contracts is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Gain (loss) recorded in other income (expense), net
|
$
|
5,035
|
|
|
$
|
1,248
|
|
|
$
|
3,135
|
|
|
$
|
(323
|
)
|
The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:
|
|
|
|
|
|
|
|
|
|
As of April 30, 2019
|
|
As of October 31, 2018
|
|
(in thousands)
|
Total gross notional amount
|
$
|
962,157
|
|
|
$
|
1,135,549
|
|
Net fair value
|
$
|
(1,359
|
)
|
|
$
|
(18,120
|
)
|
The notional amounts for derivative instruments do not represent the amount of the Company’s exposure to market gain or loss. 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 sheet 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)
|
As of April 30, 2019
|
|
|
|
Other current assets
|
$
|
8,258
|
|
|
$
|
428
|
|
Accrued liabilities
|
$
|
9,879
|
|
|
$
|
166
|
|
As of October 31, 2018
|
|
|
|
Other current assets
|
$
|
4,771
|
|
|
$
|
131
|
|
Accrued liabilities
|
$
|
22,890
|
|
|
$
|
132
|
|
The following table represents the unaudited condensed consolidated statement of operations location 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
April 30, 2019
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Revenue
|
|
$
|
1,949
|
|
|
Revenue
|
|
$
|
199
|
|
Foreign exchange contracts
|
Operating expenses
|
|
(1,502
|
)
|
|
Operating expenses
|
|
(4,211
|
)
|
Total
|
|
|
$
|
447
|
|
|
|
|
$
|
(4,012
|
)
|
Three months ended
April 30, 2018
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Revenue
|
|
$
|
662
|
|
|
Revenue
|
|
$
|
(169
|
)
|
Foreign exchange contracts
|
Operating expenses
|
|
(9,195
|
)
|
|
Operating expenses
|
|
5,711
|
|
Total
|
|
|
$
|
(8,533
|
)
|
|
|
|
$
|
5,542
|
|
Six months ended
April 30, 2019
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Revenue
|
|
$
|
741
|
|
|
Revenue
|
|
$
|
363
|
|
Foreign exchange contracts
|
Operating expenses
|
|
5,173
|
|
|
Operating expenses
|
|
(8,850
|
)
|
Total
|
|
|
$
|
5,914
|
|
|
|
|
$
|
(8,487
|
)
|
Six months ended
April 30, 2018
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Revenue
|
|
$
|
(1,964
|
)
|
|
Revenue
|
|
$
|
1,498
|
|
Foreign exchange contracts
|
Operating expenses
|
|
6,444
|
|
|
Operating expenses
|
|
9,350
|
|
Total
|
|
|
$
|
4,480
|
|
|
|
|
$
|
10,848
|
|
The following table represents the ineffective portions and portions excluded from effectiveness testing of the hedge gains (losses) for derivative instruments designated as hedging instruments, which are recorded in other income (expense), net:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Amount of
gain (loss) recognized
in statement of operations
on derivatives
(ineffective
portion)(1)
|
|
Amount of gain (loss)
recognized in
statement of operations on
derivatives
(excluded from
effectiveness testing)(2)
|
|
(in thousands)
|
For the three months ended April 30, 2019
|
$
|
20
|
|
|
$
|
(706
|
)
|
For the three months ended April 30, 2018
|
$
|
308
|
|
|
$
|
607
|
|
For the six months ended April 30, 2019
|
$
|
(84
|
)
|
|
$
|
(719
|
)
|
For the six months ended April 30, 2018
|
$
|
522
|
|
|
$
|
1,707
|
|
|
|
(1)
|
The ineffective portion includes forecast inaccuracies.
|
|
|
(2)
|
The portion excluded from effectiveness testing includes the discount earned or premium paid for the contracts.
|
Note 5. Fair Value Measures
Accounting standards require an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Accounting standards also establish 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.
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. Refer to
Note 7. Credit Facility
for more information on these borrowings.
Assets and 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
April 30, 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
|
$
|
206,438
|
|
|
$
|
206,438
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid and other current assets:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
|
8,686
|
|
|
—
|
|
|
8,686
|
|
|
—
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
244,830
|
|
|
244,830
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
459,954
|
|
|
$
|
451,268
|
|
|
$
|
8,686
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
|
$
|
10,045
|
|
|
$
|
—
|
|
|
$
|
10,045
|
|
|
$
|
—
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities
|
244,830
|
|
|
244,830
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
254,875
|
|
|
$
|
244,830
|
|
|
$
|
10,045
|
|
|
$
|
—
|
|
Assets and liabilities measured at fair value on a recurring basis are summarized below as of
October 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
165,296
|
|
|
$
|
165,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid and other current assets:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
|
4,902
|
|
|
—
|
|
|
4,902
|
|
|
—
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
212,165
|
|
|
212,165
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
382,363
|
|
|
$
|
377,461
|
|
|
$
|
4,902
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
|
$
|
23,022
|
|
|
$
|
—
|
|
|
$
|
23,022
|
|
|
$
|
—
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities
|
212,165
|
|
|
212,165
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
235,187
|
|
|
$
|
212,165
|
|
|
$
|
23,022
|
|
|
$
|
—
|
|
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 cost 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.
The Company did not recognize any impairment during the three and
six
months ended
April 30, 2019
and
April 30, 2018
.
Note 6. Liabilities and Restructuring Charges
In the second quarter of fiscal 2019, the Company initiated restructuring plans for involuntary and voluntary employee terminations and facility closures 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 plans are expected to be
$35 million
to
$65 million
and consist primarily of severance, termination, and retirement benefits under the 2019 Voluntary Retirement Program (VRP). The actual total charges will depend, in part, on the number of eligible employees to accept offers of the VRP. The 2019 restructuring plans are anticipated to be completed by the second quarter of fiscal 2020.
During the three and six months ended
April 30, 2019
, the Company incurred restructuring charges of approximately
$14.7 million
for involuntary employee termination actions. These charges consist primarily of severance and termination benefits. As of
April 30, 2019
,
$6.8 million
remained outstanding and was recorded in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.
During the three and six months ended April 30, 2018, the Company incurred restructuring charges of approximately
$1.8 million
as part of a business realignment. Total charges under this realignment were expected to be
$8 million
to
$10 million
consisting of severance and benefits. The outstanding balance as of April 30, 2019 was immaterial. As of October 31, 2018,
$8.1 million
remained outstanding and was recorded in accounts payable and accrued liabilities in the consolidated balance sheets.
Accounts payable and accrued liabilities consist of:
|
|
|
|
|
|
|
|
|
|
As of April 30, 2019
|
|
As of October 31, 2018
|
|
(in thousands)
|
Payroll and related benefits
|
$
|
272,998
|
|
|
$
|
413,307
|
|
Other accrued liabilities
|
61,631
|
|
|
79,973
|
|
Accounts payable
|
31,219
|
|
|
85,046
|
|
Total
|
$
|
365,848
|
|
|
$
|
578,326
|
|
Other long-term liabilities consist of:
|
|
|
|
|
|
|
|
|
|
As of April 30, 2019
|
|
As of October 31, 2018
|
|
(in thousands)
|
Deferred compensation liability
|
$
|
244,830
|
|
|
$
|
212,165
|
|
Other long-term liabilities
|
79,387
|
|
|
53,395
|
|
Total
|
$
|
324,217
|
|
|
$
|
265,560
|
|
Note 7. Credit Facility
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
April 30, 2019
, the Company had
$14.6 million
outstanding under the agreement.
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 (the 2015 agreement), in order to increase the size of the revolving credit facility from
$500.0 million
to
$650.0 million
, to provide a new
$150.0 million
senior unsecured term loan facility, and to 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 a minimum interest coverage ratio, as well as other non-financial covenants. As of
April 30, 2019
, the Company was in compliance with all financial covenants.
As of
April 30, 2019
, the Company had
$127.3 million
outstanding balance, net of debt issuance costs, under the Term Loan, of which
$111.6 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 2019
|
$
|
7,500
|
|
2020
|
17,813
|
|
2021
|
27,187
|
|
2022
|
75,000
|
|
Total
|
$
|
127,500
|
|
As of
October 31, 2018
, the Company had
$133.8 million
outstanding balance, net of debt issuance costs, under the Term Loan, of which
$120.0 million
was classified as long-term liabilities, and
$330.0 million
outstanding balance under the Revolver.
The total outstanding balance of the Revolver as of
April 30, 2019
was
$150.0 million
, which was included in short-term liabilities. 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
April 30, 2019
, 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 8. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
|
|
|
|
|
|
|
|
|
|
As of April 30, 2019
|
|
As of October 31, 2018
|
|
(in thousands)
|
Cumulative currency translation adjustments
|
$
|
(87,233
|
)
|
|
$
|
(89,289
|
)
|
Unrealized gain (loss) on derivative instruments, net of taxes
|
(9,487
|
)
|
|
(23,888
|
)
|
Total accumulated other comprehensive income (loss)
|
$
|
(96,720
|
)
|
|
$
|
(113,177
|
)
|
The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) (AOCI) into net income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Reclassifications from AOCI to unaudited condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedges, net of taxes
|
|
|
|
|
|
|
|
Revenues
|
$
|
199
|
|
|
$
|
(169
|
)
|
|
$
|
363
|
|
|
$
|
1,498
|
|
Operating expenses
|
(4,211
|
)
|
|
5,711
|
|
|
(8,850
|
)
|
|
9,350
|
|
Total reclassifications into net income
|
$
|
(4,012
|
)
|
|
$
|
5,542
|
|
|
$
|
(8,487
|
)
|
|
$
|
10,848
|
|
Note 9. 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 April 5, 2018. 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 structured transactions. As of
April 30, 2019
,
$195.8 million
remained available for further repurchases under the program.
In February 2019, the Company entered into an accelerated share repurchase agreement (the February 2019 ASR) to repurchase an aggregate of
$100.0 million
of the Company’s common stock. Pursuant to the February 2019 ASR, the Company made a prepayment of
$100.0 million
and received initial share deliveries valued at
$80.0 million
. The remaining balance of
$20.0 million
was settled in May 2019. Total shares repurchased under the February 2019 ASR were approximately
0.9 million
shares, at an average purchase price of
$114.01
per share.
Stock repurchase activities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019 (1)
|
|
2018
|
|
2019 (1)
|
|
2018
|
|
(in thousands)
|
Total shares repurchased(2)(3)
|
780
|
|
|
916
|
|
|
1,126
|
|
|
2,902
|
|
Total cost of the repurchased shares (3)
|
$
|
80,000
|
|
|
$
|
75,000
|
|
|
$
|
109,185
|
|
|
$
|
255,000
|
|
Reissuance of treasury stock
|
1,486
|
|
|
924
|
|
|
1,843
|
|
|
1,419
|
|
|
|
(1)
|
Does not include the
97,601
shares and
$20.0 million
equity forward contract, respectively, from the February 2019 ASR settled in May 2019.
|
|
|
(2)
|
The first quarter of fiscal 2018 includes the settlement of the
$20.0 million
equity forward contract related to the Company's accelerated share repurchase agreement entered into in September 2017.
|
|
|
(3)
|
The Company also repurchased
0.4 million
shares at an average price of
$82.61
per share, for an aggregate purchase price of
$35.0 million
during the second quarter of fiscal 2018.
|
Note 10. Stock Compensation
The compensation cost recognized in the unaudited condensed consolidated statements of operations for the Company’s stock compensation arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Cost of products
|
$
|
4,065
|
|
|
$
|
3,460
|
|
|
$
|
8,191
|
|
|
$
|
6,843
|
|
Cost of maintenance and service
|
1,522
|
|
|
1,290
|
|
|
2,981
|
|
|
2,537
|
|
Research and development expense
|
18,115
|
|
|
15,150
|
|
|
36,419
|
|
|
30,546
|
|
Sales and marketing expense
|
7,158
|
|
|
6,875
|
|
|
14,430
|
|
|
13,496
|
|
General and administrative expense
|
6,054
|
|
|
6,190
|
|
|
13,353
|
|
|
11,866
|
|
Stock compensation expense before taxes
|
36,914
|
|
|
32,965
|
|
|
75,374
|
|
|
65,288
|
|
Income tax benefit
|
(6,214
|
)
|
|
(6,336
|
)
|
|
(12,688
|
)
|
|
(12,548
|
)
|
Stock compensation expense after taxes
|
$
|
30,700
|
|
|
$
|
26,629
|
|
|
$
|
62,686
|
|
|
$
|
52,740
|
|
As of
April 30, 2019
, there was
$224.1 million
of unamortized share-based compensation expense relating to options and restricted stock units and awards, which is expected to be amortized over a weighted-average period of approximately
2.3 years
.
The intrinsic values of equity awards exercised during the periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Intrinsic value of awards exercised
|
$
|
50,426
|
|
|
$
|
12,017
|
|
|
$
|
58,578
|
|
|
$
|
30,792
|
|
Note 11. Net Income per Share
The Company computes basic net income per share by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the dilution from potential common shares outstanding, such as stock options and unvested restricted stock units and awards, during the period using the treasury stock method.
The table below reconciles the weighted-average common shares used to calculate basic net income per share with the weighted-average common shares used to calculate diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands, except per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
118,210
|
|
|
$
|
102,472
|
|
|
$
|
271,724
|
|
|
$
|
98,781
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average common shares for basic net income per share
|
149,712
|
|
|
149,034
|
|
|
149,500
|
|
|
149,245
|
|
Dilutive effect of potential common shares from equity-based compensation
|
4,192
|
|
|
4,133
|
|
|
3,883
|
|
|
4,419
|
|
Weighted-average common shares for diluted net income per share
|
153,904
|
|
|
153,167
|
|
|
153,383
|
|
|
153,664
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
$
|
1.82
|
|
|
$
|
0.66
|
|
Diluted
|
$
|
0.77
|
|
|
$
|
0.67
|
|
|
$
|
1.77
|
|
|
$
|
0.64
|
|
Anti-dilutive employee stock-based awards excluded(1)
|
49
|
|
|
761
|
|
|
1,538
|
|
|
618
|
|
|
|
(1)
|
These employee stock-based awards were anti-dilutive for the respective periods and are excluded in calculating diluted net income per share. While such awards were anti-dilutive for the respective periods, they could be dilutive in the future.
|
Note 12. Segment Disclosure
Certain disclosures are required for operating segments, products and services, geographic areas of operation and major customers. Segment reporting is based upon the “management approach,” i.e., how management organizes the Company’s operating segments for which separate financial information is (1) available and (2) evaluated regularly by the Chief Operating Decision Makers (CODMs) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are its two co-Chief Executive Officers.
In prior periods, the Company operated in a single segment. Effective in fiscal 2019, the Company realigned its business to evaluate the results of its Software Integrity business separately from the Company’s traditional EDA and semiconductor IP business. The CODMs now regularly review disaggregated information for the following
two
reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. The Company’s historical results have been recast to retrospectively reflect the change from
one
to
two
reportable segments.
As a result of the change in reporting structure, financial information provided to and used by the CODMs to assist in making operational decisions, allocating resources, and assessing performance reflects consolidated financial information as well as revenue, adjusted operating income, and adjusted operating margin information for the Semiconductor & System Design and Software Integrity segments, accompanied by disaggregated information relating to revenues by geographic region.
Information by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Total Segments:
|
|
|
|
|
|
|
|
Revenues
|
$
|
836,242
|
|
|
$
|
776,836
|
|
|
$
|
1,656,643
|
|
|
$
|
1,546,262
|
|
Adjusted operating income
|
209,836
|
|
|
190,116
|
|
|
410,788
|
|
|
386,062
|
|
Adjusted operating margin
|
25
|
%
|
|
24
|
%
|
|
25
|
%
|
|
25
|
%
|
Semiconductor & System Design:
|
|
|
|
|
|
|
|
Revenues
|
$
|
753,055
|
|
|
$
|
709,034
|
|
|
$
|
1,490,961
|
|
|
$
|
1,414,367
|
|
Adjusted operating income
|
201,406
|
|
|
195,741
|
|
|
396,724
|
|
|
394,857
|
|
Adjusted operating margin
|
27
|
%
|
|
28
|
%
|
|
27
|
%
|
|
28
|
%
|
Software Integrity:
|
|
|
|
|
|
|
|
Revenues
|
$
|
83,187
|
|
|
$
|
67,802
|
|
|
$
|
165,682
|
|
|
$
|
131,895
|
|
Adjusted operating income
|
8,430
|
|
|
(5,625
|
)
|
|
14,064
|
|
|
(8,795
|
)
|
Adjusted operating margin
|
10
|
%
|
|
(8
|
)%
|
|
8
|
%
|
|
(7
|
)%
|
Certain operating expenses are not allocated to the segments and are managed at a consolidated level. The unallocated expenses managed at a consolidated level, including amortization of intangible assets, stock compensation and other operating expenses, are presented in the table below to provide a reconciliation of the total adjusted operating income from segments to the Company's consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Total segment adjusted operating income
|
$
|
209,836
|
|
|
$
|
190,116
|
|
|
$
|
410,788
|
|
|
$
|
386,062
|
|
Reconciling items:
|
|
|
|
|
|
|
|
Amortization of intangible expense
|
(25,197
|
)
|
|
(31,186
|
)
|
|
(53,424
|
)
|
|
(59,733
|
)
|
Stock-based compensation expense
|
(36,914
|
)
|
|
(32,965
|
)
|
|
(75,374
|
)
|
|
(65,288
|
)
|
Other
|
(32,223
|
)
|
|
1,049
|
|
|
(19,074
|
)
|
|
(26,309
|
)
|
Total operating income
|
$
|
115,502
|
|
|
$
|
127,014
|
|
|
$
|
262,916
|
|
|
$
|
234,732
|
|
The CODMs do not use total assets by segment to evaluate segment performance or allocate resources. As a result, total assets by segment are not required to be disclosed.
Revenue by Geography
The CODMs consider where individual “seats” or licenses to the Company’s products are located in allocating revenue to particular geographic areas. Revenue is defined as revenues from external customers. Revenues related to operations in the United States and other geographic areas were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
United States
|
$
|
416,744
|
|
|
$
|
376,636
|
|
|
$
|
824,543
|
|
|
$
|
761,210
|
|
Europe
|
83,542
|
|
|
97,014
|
|
|
167,428
|
|
|
182,479
|
|
Japan
|
72,703
|
|
|
70,435
|
|
|
137,776
|
|
|
138,824
|
|
Asia-Pacific and Other
|
263,253
|
|
|
232,751
|
|
|
526,896
|
|
|
463,749
|
|
Consolidated
|
$
|
836,242
|
|
|
$
|
776,836
|
|
|
$
|
1,656,643
|
|
|
$
|
1,546,262
|
|
Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and the Company’s methodology.
For the three and
six
months ended
April 30, 2019
and
2018
,
one
customer, including its subsidiaries, through multiple agreements accounted for greater than 10% of the Company's total revenues.
Note 13. Other Income (Expense), net
The following table presents the components of other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Interest income
|
$
|
1,927
|
|
|
$
|
927
|
|
|
$
|
3,491
|
|
|
$
|
2,563
|
|
Interest expense
|
(3,841
|
)
|
|
(3,880
|
)
|
|
(8,394
|
)
|
|
(6,723
|
)
|
Gain (loss) on assets related to executive deferred compensation plan assets
|
16,226
|
|
|
(7,245
|
)
|
|
20,515
|
|
|
6,195
|
|
Foreign currency exchange gain (loss)
|
2,718
|
|
|
1,117
|
|
|
2,302
|
|
|
98
|
|
Other, net
|
1,385
|
|
|
1,366
|
|
|
142
|
|
|
2,537
|
|
Total
|
$
|
18,415
|
|
|
$
|
(7,715
|
)
|
|
$
|
18,056
|
|
|
$
|
4,670
|
|
Note 14. Taxes
Effective Tax Rate
The Company estimates its annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account the Company's estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and possible outcomes of audits.
The following table presents the provision (benefit) for income taxes and the effective tax rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Income before income taxes
|
$
|
133,917
|
|
|
$
|
119,299
|
|
|
$
|
280,972
|
|
|
$
|
239,402
|
|
Provision (benefit) for income taxes
|
$
|
15,707
|
|
|
$
|
16,827
|
|
|
$
|
9,248
|
|
|
$
|
140,621
|
|
Effective tax rate
|
11.7
|
%
|
|
14.1
|
%
|
|
3.3
|
%
|
|
58.7
|
%
|
The Tax Cuts and Jobs Act (Tax Act), enacted on December 22, 2017, lowered the statutory federal corporate income tax rate from
35%
to
21%
effective on January 1, 2018. Beginning in the Company's fiscal 2019, the annual statutory federal corporate tax rate is
21%
.
The Tax Act includes certain new tax provisions listed below which apply to the Company beginning in fiscal 2019.
|
|
•
|
A tax on global intangible low-tax income (GILTI), which is determined annually based on the Company’s aggregate foreign subsidiaries’ income in excess of certain qualified business asset investment return. In
|
the first quarter of fiscal 2019, the Company adopted an accounting policy to account for the tax effects of GILTI in the period that it is subject to such tax.
|
|
•
|
A base erosion and anti-abuse tax (BEAT), which functions as a minimum tax that partially disallows deductions for certain related party transactions and certain tax credits.
|
|
|
•
|
A special tax deduction for foreign-derived intangible income (FDII), which, in general, allows a deduction of certain intangible income earned in the U.S. and derived from foreign sources.
|
|
|
•
|
Certain new limitations on the use of foreign tax credits.
|
In the first and second quarters of 2019, the U.S. Treasury Department issued proposed regulations that could impact the calculation of taxes related to these provisions. While the Company continues to evaluate the potential impact on its estimated annual tax rate, such regulations have not been finalized and are subject to change.
The Company’s effective tax rate for the
six
months ended
April 30, 2019
is lower than the statutory federal corporate tax rate of
21.0%
primarily due to U.S. federal and California research credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, and a decrease in unrecognized foreign tax benefits, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings.
The Company's effective tax rate decreased in the three months ended April 30, 2019 as compared to the same period in fiscal 2018, primarily due to increase in excess tax benefits from stock-based compensation offset by an increase in unrecognized foreign tax benefits. The Company's effective tax rate decreased in the six months ended April 30, 2019, as compared to the same periods in fiscal 2018, primarily due to accounting for the effects of the Tax Act in fiscal 2018.
On July 27, 2015, the United States Tax Court (Tax Court) issued an opinion (
Altera Corp. et al. v. Commissioner
) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. In view of the Tax Court opinion, the Company amended its cost-sharing arrangement effective February 1, 2016 to exclude stock-based compensation expense on a prospective basis and has reflected the corresponding benefits in its income tax expense for fiscal year 2016, 2017 and 2018. On July 24, 2018, the United States Court of Appeals for the Ninth Circuit reversed the decision of the Tax Court, however, subsequently withdrew the decision on August 7, 2018. A rehearing of the case was held on October 16, 2018, but a decision has not yet been issued. As the final resolution with respect to historical cost-sharing of stock-based compensation, and the potential impact on the Company, is unclear, the Company is recording no impact at this time and will continue to monitor developments related to this opinion and the potential impact of those developments on the Company's prior fiscal years. The Company's intercompany cost-sharing arrangement was terminated at the end of fiscal 2018 as part of a tax restructuring.
The timing of the resolution of income tax examinations is highly uncertain, as are the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between
$0
and
$7 million
. In addition, a settlement or changes in guidance could result in changes to the Company's valuation allowance.
Intra-Entity Transfers of Assets
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory. This ASU was adopted on the first day of fiscal 2019. As a result of the adoption, the Company recorded a decrease of approximately
$130.5 million
in retained earnings as of the beginning of the period of adoption, with a corresponding decrease in prepaid taxes related to the unamortized tax expense attributed to intra-entity transfers of assets other than inventory previously deferred. The Company will recognize the income tax consequences of new intra-entity transfers of assets other than inventory in the consolidated statement of income in the period when the transaction takes place.
Non-U.S. Examinations
In July 2017, the Hungarian Tax Authority (HTA) issued a final assessment against the Company’s Hungarian subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has applied withholding taxes on certain payments made to affiliates, resulting in an aggregate tax assessment of approximately
$25.0 million
and interest and penalties of
$11.0 million
(at current exchange rates). On August 2, 2017, Synopsys Hungary filed a claim contesting the final assessment with the Hungarian Administrative Court. In the first quarter of fiscal 2018, Synopsys Hungary paid the assessments, penalties and interest as required by law and recorded these amounts as prepaid taxes on its balance sheet, while continuing its challenge to the assessment through the Hungarian Administrative Court. On April 30, 2019, the Hungarian Administrative Court (Court) ruled against Synopsys Hungary. The Court's opinion was received on May 16, 2019. The Court ruling may be appealed to the Hungarian Supreme Court within 60 days of receipt of the Court's opinion. Synopsys Hungary is evaluating whether to appeal. In the second quarter of 2019, as a result of the Court's decision, the Company recorded a tax expense due to an unrecognized tax benefit of
$17.4 million
, which is net of estimated U.S. foreign tax credits for the tax assessments.
In the fourth quarter of 2018, the Company made significant changes to its international tax structure by transferring intangible assets between certain foreign subsidiaries, including its Hungarian subsidiary. In the first quarter of fiscal 2019, the Company received a ruling from the Hungarian authorities, which provided guidance on determining the tax associated with the gain recognized on the transfer, resulting in a benefit of
$22.8 million
recognized in the first quarter of fiscal 2019. The Company recorded an additional benefit of
$10.3 million
in the second quarter of fiscal 2019 upon the filing of its fiscal 2018 Hungarian return.
The Company was notified of audit by the HTA for fiscal years 2014 through 2018.
In the first quarter of fiscal 2019, the Company reached final settlement with Taiwanese tax authorities for fiscal year 2017 and recognized
$5.5 million
in previously unrecognized tax benefits.
The Company is also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.
Note 15. Contingencies
Legal Proceedings
The Company is subject to routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of its business. The ultimate outcome of any litigation is often uncertain and unfavorable outcomes could have a negative impact on the Company’s results of operations and financial condition. The Company regularly reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount is estimable, the Company accrues a liability for the estimated loss. Legal proceedings are inherently uncertain and as circumstances change, it is possible that the amount of any accrued liability may increase, decrease, or be eliminated.
The Company has determined that, except as set forth below, no disclosure of estimated loss is required for a claim against the Company because: (1) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (2) a reasonably possible loss or range of loss cannot be estimated; or (3) such estimate is immaterial.
In March 2017, Siemens PLM Software (Siemens) acquired Mentor. On June 29, 2018, the Company, Siemens and Mentor settled all outstanding patent litigation between the Company and Mentor for a
$65.0 million
payment made from the Company to Mentor. The settlement included mutual
seven
-year patent cross-licenses between the Company and Siemens, and between the Company and Mentor. The Company and Mentor also amended an existing interoperability agreement to collaborate on a wide range of EDA products for the benefit of their mutual customers. The amendment includes a one-time termination charge between
$0.0
and
$25.0 million
, payable to Mentor under certain conditions. As of April 30, 2019, there has been no change to the status of the contingent charges.
Tax Matters
The Company undergoes examination from time to time by U.S. and foreign authorities for non-income based taxes, such as sales, use and value-added taxes, and is currently under examination by tax authorities in certain jurisdictions. If the potential loss from such examinations is considered probable and the amount or the range of loss could be estimated, the Company would accrue a liability for the estimated expense.
In addition to the foregoing, the Company is, from time to time, party to various other claims and legal proceedings in the ordinary course of its business, including with tax and other governmental authorities. For a description of certain of these other matters, refer to
Note 14. Taxes.
Note 16. Effect of New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)," which supersedes the lease requirements in "Leases (Topic 840)." This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the consolidated balance sheets. This ASU also makes minor changes to lessor accounting and aligns with the new revenue recognition guidance. This ASU will be effective for fiscal 2020, including interim periods within that reporting period, and earlier adoption is permitted. The Company is currently evaluating its lease portfolio and the impact of adoption is expected to be material to the consolidated balance sheets.