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Synopsys 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(MARK ONE)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2009

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM          TO          

 

COMMISSION FILE NUMBER: 0-19807

 

SYNOPSYS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

56-1546236

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

700 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043

(Address of principal executive offices, including zip code)

 

(650) 584-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

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

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of September 4, 2009, there were 145,742,213 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

SYNOPSYS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 31, 2009

 

TABLE OF CONTENTS

 

 

 

Page

PART I.

Financial Information

3

ITEM 1.

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets

3

 

Unaudited Condensed Consolidated Statements of Operations

4

 

Unaudited Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

29

ITEM 4.

Controls and Procedures

29

PART II

Other Information

30

ITEM 1

Legal Proceedings

30

ITEM 1A.

Risk Factors

30

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

ITEM 3.

Defaults Upon Senior Securities

39

ITEM 4.

Submission of Matters to a Vote of Security Holders

39

ITEM 5.

Other Information

39

ITEM 6.

Exhibits

39

Signatures

 

40

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)

 

 

 

July 31,
2009

 

October 31,
2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

622,281

 

$

577,632

 

Short-term investments

 

460,258

 

373,669

 

Total cash, cash equivalents and short-term investments

 

1,082,539

 

951,301

 

Accounts receivable, net of allowances of $6,346 and $2,338, respectively

 

136,760

 

147,365

 

Deferred income taxes

 

136,073

 

133,609

 

Income taxes receivable

 

44,091

 

49,859

 

Other current assets

 

49,494

 

40,156

 

Total current assets

 

1,448,957

 

1,322,290

 

Property and equipment, net

 

144,928

 

145,087

 

Goodwill

 

933,560

 

899,640

 

Intangible assets, net

 

102,676

 

114,760

 

Long-term deferred income taxes

 

160,090

 

177,386

 

Other long-term assets

 

87,533

 

83,315

 

Total assets

 

$

2,877,744

 

$

2,742,478

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

221,249

 

$

289,769

 

Accrued income taxes

 

13,051

 

14,496

 

Deferred revenue

 

581,792

 

604,718

 

Total current liabilities

 

816,092

 

908,983

 

Long-term accrued income taxes

 

168,008

 

152,745

 

Deferred compensation and other liabilities

 

93,939

 

76,970

 

Long-term deferred revenue

 

36,787

 

75,409

 

Total liabilities

 

1,114,826

 

1,214,107

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value: 400,000 shares authorized; 144,295 and 141,786 shares outstanding, respectively

 

1,443

 

1,418

 

Capital in excess of par value

 

1,488,012

 

1,471,031

 

Retained earnings

 

568,639

 

434,057

 

Treasury stock, at cost: 12,976 and 15,485 shares, respectively

 

(287,305

)

(342,856

)

Accumulated other comprehensive loss

 

(7,871

)

(35,279

)

Total stockholders’ equity

 

1,762,918

 

1,528,371

 

Total liabilities and stockholders’ equity

 

$

2,877,744

 

$

2,742,478

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenue:

 

 

 

 

 

 

 

 

 

Time-based license

 

$

284,401

 

$

289,250

 

$

853,449

 

$

835,330

 

Upfront license

 

18,972

 

20,558

 

53,293

 

45,293

 

Maintenance and service

 

41,804

 

34,320

 

115,025

 

103,523

 

Total revenue

 

345,177

 

344,128

 

1,021,767

 

984,146

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

License

 

44,173

 

44,654

 

128,288

 

126,761

 

Maintenance and service

 

17,410

 

16,110

 

48,037

 

48,156

 

Amortization of intangible assets

 

8,452

 

6,262

 

24,153

 

17,111

 

Total cost of revenue

 

70,035

 

67,026

 

200,478

 

192,028

 

Gross margin

 

275,142

 

277,102

 

821,289

 

792,118

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

104,989

 

104,394

 

305,792

 

292,183

 

Sales and marketing

 

77,973

 

86,816

 

237,877

 

247,073

 

General and administrative

 

27,735

 

26,512

 

83,608

 

76,524

 

In-process research and development

 

400

 

4,800

 

1,000

 

4,800

 

Amortization of intangible assets

 

2,956

 

4,548

 

9,683

 

17,730

 

Total operating expenses

 

214,053

 

227,070

 

637,960

 

638,310

 

Operating income

 

61,089

 

50,032

 

183,329

 

153,808

 

Other income, net

 

5,384

 

2,947

 

17,928

 

9,428

 

Income before income taxes

 

66,473

 

52,979

 

201,257

 

163,236

 

Provision (benefit) for income taxes

 

19,037

 

(4,770

)

53,104

 

19,655

 

Net income

 

$

47,436

 

$

57,749

 

$

148,153

 

$

143,581

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.41

 

$

1.04

 

$

1.00

 

Diluted

 

$

0.32

 

$

0.39

 

$

1.02

 

$

0.97

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing per share amounts:

 

 

 

 

 

 

 

 

 

Basic

 

144,138

 

142,536

 

143,093

 

143,450

 

Diluted

 

146,063

 

147,486

 

144,699

 

147,760

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

Cash flow from operating activities:

 

 

 

 

 

Net income

 

$

148,153

 

$

143,581

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization and depreciation

 

74,581

 

73,535

 

Share-based compensation

 

42,799

 

50,807

 

Allowance for doubtful accounts

 

2,735

 

429

 

Write-down of long-term investments

 

6,333

 

394

 

(Gain) on sale of investments

 

(610

)

(1,347

)

Deferred income taxes

 

15,801

 

18,852

 

In-process research and development

 

1,000

 

4,800

 

Net change in deferred gains and losses on cash flow hedges

 

17,949

 

5,169

 

Net changes in operating assets and liabilities, net of acquired assets and assumed liabilities:

 

 

 

 

 

Accounts receivable

 

10,690

 

(8,761

)

Other current assets

 

10,315

 

(11,277

)

Other long-term assets

 

981

 

64

 

Accounts payable and accrued liabilities

 

(87,473

)

(26,767

)

Accrued income taxes

 

(4,778

)

(33,974

)

Deferred revenue

 

(62,723

)

2,626

 

Deferred compensation and other liabilities

 

(504

)

(2,928

)

Net cash provided by operating activities

 

175,249

 

215,203

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales and maturities of short-term investments

 

223,994

 

512,797

 

Purchases of short-term investments

 

(310,323

)

(436,144

)

Purchases of long-term investments

 

(671

)

(7,694

)

Proceeds from sale of long-term investments

 

 

77

 

Purchases of property and equipment

 

(24,634

)

(26,500

)

Cash paid for acquisitions, net of cash acquired

 

(48,248

)

(181,018

)

Capitalization of software development costs

 

(2,228

)

(2,114

)

Net cash used in investing activities

 

(162,110

)

(140,596

)

Cash flows from financing activities:

 

 

 

 

 

Principal payments on capital leases

 

(1,675

)

(1,453

)

Proceeds from credit facilities

 

1,279

 

 

Payment on credit facility

 

(260

)

 

Issuances of common stock

 

28,237

 

56,600

 

Purchases of treasury stock

 

 

(170,052

)

Net cash provided by (used in) financing activities

 

27,581

 

(114,905

)

Effect of exchange rate changes on cash and cash equivalents

 

3,929

 

6,460

 

Net change in cash and cash equivalents

 

44,649

 

(33,838

)

Cash and cash equivalents, beginning of year

 

577,632

 

579,327

 

Cash and cash equivalents, end of period

 

$

622,281

 

$

545,489

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

SYNOPSYS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.     Description of Business

 

Synopsys, Inc. (Synopsys or the Company) is a world leader in electronic design automation (EDA), supplying the global electronics market with software, intellectual property (IP) and services used in semiconductor design and manufacturing. The Company delivers technology-leading semiconductor design and verification platforms and integrated circuit (IC) manufacturing related products to the global electronics market, enabling the development and production of complex systems-on-chips (SoCs). In addition, the Company provides IP, system-level solutions and design services to simplify the design process and accelerate time-to-market for its customers, and software and services that help customers prepare and optimize their designs for manufacturing.

 

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 (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 financial position, results of operations 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, 2008 filed with the SEC on December 22, 2008.

 

To prepare financial statements in conformity with 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 significant intercompany accounts and transactions have been eliminated.

 

Fiscal Year End.  The Company has adopted a fiscal year ending on the Saturday nearest to October 31. The Company’s third quarter of fiscal 2009 ended on August 1, 2009.  Fiscal 2009 and 2008 are both 52-week fiscal years.  For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the applicable calendar month end.

 

Subsequent Events.  The Company has evaluated subsequent events through the date and time of filing of this Quarterly Report on Form 10-Q.

 

Note 3.     Fair Value Measurements of Financial Assets and Liabilities

 

Effective November 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes guidelines and enhances disclosures for fair value measurements.  In February 2008, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the Company’s fiscal year 2010. SFAS 157 clarifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In addition to defining fair value, SFAS 157 establishes a three-tier fair value hierarchy that encourages the use of observable inputs but allows for unobservable inputs when observable inputs do not exist:

 

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.

 

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Table of Contents

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with SFAS 157, the Company’s cash equivalents, short-term investments, and marketable equity security are classified within Level 1 or Level 2. These classifications are based on the fact that cash equivalents and marketable securities are valued using quoted market prices in an active market or alternative pricing sources and models utilizing market observable inputs.

 

The Company’s foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

 

The Company’s deferred compensation plan assets and liabilities are classified within Level 2 as the inputs to measure the fair value are only indirectly observable.  The deferred compensation plan assets and liabilities consist of mutual funds invested in domestic and international marketable securities.

 

The Company’s strategic investments in privately held companies are classified within Level 3 as most of the inputs used to value the investments are unobservable.

 

Assets/Liabilities Measured at Fair Value on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis are summarized below as of July 31, 2009:

 

 

 

 

 

Fair Value Measurement at Reporting Date Using

 

Description

 

Total as of
July 31, 2009

 

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

 

$

407,893

 

$

407,893

 

$

 

$

 

Municipal securities

 

601

 

 

601

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Municipal securities

 

460,258

 

 

460,258

 

 

Other current assets:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

11,422

 

 

11,422

 

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

Marketable equity security(1)

 

1,182

 

1,182

 

 

 

Deferred compensation plan assets

 

68,736

 

 

68,736

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

950,092

 

$

409,075

 

$

541,017

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Account payable and accrued liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

$

2,670

 

$

 

$

2,670

 

$

 

Deferred compensation and other liabilities:

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities

 

68,791

 

 

68,791

 

 

Total liabilities

 

$

71,461

 

$

 

$

71,461

 

$

 

 


(1) During the nine months ended July 31, 2009, the Company recorded $0.9 million of other-than-temporary impairment charges in other income, net, due to the decline of the stock price of a public company in its long-term investment portfolio.

 

Assets/Liabilities Measured at Fair Value on a Non-recurring Basis

 

Equity investments in privately-held companies are accounted for under the cost method of accounting. These equity investments (also called non-marketable equity investments) are classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgments due to the absence of market price and inherent lack of liquidity.  The non-marketable equity investments are measured and recorded at fair value when an event or circumstance which impacts the fair value of these investments indicates other-than-temporary decline in value has occurred. During the three and nine months ended July 31, 2009, a portion of the non-marketable equity investments were measured and recorded at fair value determined by a financial model using the income approach.  The financial model included estimates of investees’ revenue growth and operating costs made by investees’ management.  The valuation of these non-marketable equity investments also takes into consideration the investees’ recent financing activities, the investees’ capital structure, and liquidation preferences for the

 

7



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investees’ capital.  As a result of the fair value measurement, the Company recorded $3.4 million and $5.5 million, respectively, in the three and nine months ended July 31, 2009, of other-than-temporary impairment charges in other income, net, on the unaudited condensed consolidated statement of operations.

 

The following table presents the non-marketable equity investments that were measured and recorded at fair value within other long-term assets on a non-recurring basis as of July 31, 2009, and the loss recorded during the three and nine months ended July 31, 2009:

 

 

 

 

 

 

 

Total gains

 

Total gains

 

 

 

 

 

Significant

 

(losses) for the

 

(losses) for the

 

 

 

 

 

Unobservable

 

three months

 

nine months

 

 

 

Balance as of

 

Inputs

 

ended

 

ended

 

 

 

July 31, 2009

 

(Level 3)

 

July 31, 2009

 

July 31, 2009

 

 

 

(in thousands)

 

Non-marketable equity investments

 

$

3,206

 

$

3,206

 

$

(3,374

)

$

(5,464

)

 

Effective January 1, 2009, the Company also adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of FASB Statement No. 115. Under this statement, entities may choose to measure certain financial instruments and liabilities at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings. The Company did not elect such option for its financial instruments and liabilities.

 

Derivatives

 

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), requires companies to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161), requires qualitative disclosures about the objectives and strategies for using derivatives and quantitative disclosures about the volume and gross fair value amounts of derivatives. The Company adopted SFAS 161 in the second quarter of fiscal 2009. Since SFAS 161 only required additional disclosure, the adoption did not impact the Company’s consolidated financial position, results of operations or cash flows.

 

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 one month to 19 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 other current liabilities in the unaudited condensed consolidated balance sheet in accordance with SFAS 133. 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 under SFAS 133. To receive hedge accounting treatment, all hedging relationships are formally documented at inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on 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 accumulated other comprehensive income (loss) or OCI in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the forecasted transactions affect earnings. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately three years. The duration of the forward contracts is generally one year or less, except for forward contracts denominated in British pound, Canadian dollar, Chinese yuan, Euro, Indian rupee Japanese yen and Taiwan dollar, which can have durations as long as 19 months.

 

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Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in earnings as other income, net. The premium/discount component of the forward contracts is recorded to other income, 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 under SFAS 133. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income, 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, 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 revenue and expenses that are not designated as hedging instruments under SFAS 133. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income, 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 comprehensive hedging program is to minimize the impact of currency fluctuations on its net income over its fiscal year.

 

During the three and nine months ended July 31, 2009, $1.7 million and $7.8 million of gains were recorded in other income, net, from changes in fair values of non-designated forward contracts.

 

As of July 31, 2009, the Company had a total net notional amount of $129.7 million of short-term foreign currency forward contracts outstanding with net fair market value of $8.8 million.

 

The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding as of July 31, 2009, and 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 represents the balance sheet location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments under SFAS 133 as of July 31, 2009:

 

 

 

Fair Values of
derivative instruments
designated as hedging
instruments under
SFAS 133

 

Fair Values of
derivative instruments
not designated as
hedging instruments
under SFAS 133

 

 

 

(in thousands)

 

Other current assets

 

$

10,265

 

$

1,157

 

Other current liabilities

 

$

2,631

 

$

39

 

 

The following table represents the income statement location and amount of gains and losses on derivative instrument fair values for designated hedge instruments under SFAS 133 for the three and nine months ended July 31, 2009:

 

 

 

Location of gain(loss)
recognized in OCI on
derivatives

 

Amount of gain(loss)
recognized in OCI on
derivatives (effective
portion)(1)

 

Location of
gain(loss)
reclassified from
OCI

 

Amount of
gain(loss)
reclassified from
OCI (effective
portion)

 

 

 

(in thousands)

 

Three months ended

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Revenue

 

$

2,373

 

Revenue

 

$

1,896

 

Foreign exchange contracts

 

Operating expenses

 

9,899

 

Operating expenses

 

(2,849

)

Total

 

 

 

$

12,272

 

 

 

$

(953

)

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Revenue

 

$

4,486

 

Revenue

 

$

4,216

 

Foreign exchange contracts

 

Operating expenses

 

10,384

 

Operating expenses

 

(13,553

)

Total

 

 

 

$

14,870

 

 

 

$

(9,337

)

 


(1) Refer to Note 8.

 

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Table of Contents

 

The following table represents the ineffective portions of the hedge gains (losses) for derivative instruments designated as hedging instruments under SFAS 133 during the three and nine months ended July 31, 2009:

 

 

 

Location of gain(loss)
recognized in income on
derivatives (ineffective
portion and excluded
from effectiveness
testing)

 

Amount of gain(loss)
recognized in income
statement on
derivatives
(ineffective
portion)(1)

 

Amount of gain(loss)
recognized in income
statement on derivatives
(excluded from
effectiveness testing)(2)

 

 

 

(in thousands)

 

Three months ended

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

41

 

$

(36

)

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

3

 

$

3,008

 

 


(1) The ineffective portion includes forecast inaccuracies.

(2) The portion excluded from effectiveness includes the discount earned or premium paid for the contracts.

 

Cash, Cash Equivalents and Investments

 

In the third quarter of fiscal 2009, the Company adopted FASB Staff Position (FSP) SFAS 107-1—Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1), FSP FAS 115-1 and FAS 124-1—The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1) and FSP FAS 115-2 and FAS 124-2 —Recognition and Presentation of Other-Than-Temporary Impairment (FSP 115-2). The adoption of FSP 107-1, FSP 115-1 and FSP 115-2 did not have a material impact on the unaudited condensed consolidated financial statements.

 

The Company’s short-term investments and an investment in a marketable equity security have been classified as available-for-sale securities. Cash, cash equivalents and investments are detailed as follows:

 

 

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses
Less Than
12 Months

 

Gross
Unrealized
Losses
12 Months
or Longer

 

Estimated
Fair
Value

 

 

 

(in thousands)

 

Balance at July 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing cash (U.S. and International)

 

$

59,815

 

$

 

$

 

$

 

$

59,815

 

Money market funds (U.S.)

 

111,143

 

 

 

 

111,143

 

Cash deposits and money market funds (International)

 

450,722

 

 

 

 

450,722

 

Municipal obligations

 

457,496

 

3,481

 

(118

)

 

460,859

 

Marketable equity security

 

344

 

838

 

 

 

1,182

 

Total

 

$

1,079,520

 

$

4,319

 

$

(118

)

$

 

$

1,083,721

 

 

 

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses
Less Than
12 Months

 

Gross
Unrealized
Losses
12 Months
or Longer

 

Estimated
Fair
Value

 

 

 

(in thousands)

 

Balance at October 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing cash (U.S. and International)

 

$

9,399

 

$

 

$

 

$

 

$

9,399

 

Money market funds (U.S.)

 

127,304

 

 

 

 

127,304

 

Cash deposits and money market funds (International)

 

440,929

 

 

 

 

440,929

 

Municipal obligations

 

372,373

 

1,721

 

(425

)

 

373,669

 

Marketable equity security

 

1,213

 

 

(735

)

 

478

 

Total

 

$

951,218

 

$

1,721

 

$

(1,160

)

$

 

$

951,779

 

 

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Table of Contents

 

As of July 31, 2009, the stated maturities of the Company’s short-term investments are $80.4 million within one year, $168.0 million within one to five years, $62.3 million within five to ten years and $150.2 million after ten years. Actual maturities may differ from the stated maturities because borrowers may have the right to call or prepay certain obligations. These investments are classified as available-for-sale and are recorded on the balance sheet at fair market value with unrealized gains or losses, net of tax, reported as a component of accumulated other comprehensive income (loss), net of tax. Realized gains and losses on sales of short-term investments have not been material in any period presented.

 

Note 4.     Business Combinations

 

During fiscal year 2009, the Company completed certain purchase acquisitions for cash. These acquisitions are not considered material, individually or in the aggregate to the Company’s unaudited condensed consolidated balance sheet and results of operations. The Company preliminarily allocated the total purchase considerations (which included acquisition related costs of $5.8 million) to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the acquisition dates, resulting in aggregate goodwill of $35.1 million. Acquired identifiable intangible assets of $21.6 million are being amortized over one to six years.  In-process research and development expense related to these acquisitions was $1.0 million.

 

As a result of one of the acquisitions, the Company assumed two credit facilities with a Portuguese bank.  The facilities provide maximum borrowing limits of (Euro) €0.7 million and (U.S. dollar) $0.4 million, respectively. As of July 31, 2009, the borrowings outstanding under the combined facilities totaled $1.3 million. Subsequent to July 31, 2009, the Company completely paid down these credit facilities and intends to cancel them in the near future.

 

Note 5.     Goodwill and Intangible Assets

 

Goodwill as of July 31, 2009 consisted of the following:

 

 

 

(in thousands)

 

Balance at October 31, 2008

 

$

899,640

 

Additions(1)

 

35,050

 

Other adjustments(2)

 

(1,130

)

Balance at July 31, 2009

 

$

933,560

 

 


(1)          Additions relate to acquisitions as described in Note 4 above.

(2)          Adjustments relate to reduction of merger costs and income tax adjustments for prior year acquisitions.

 

Intangible assets as of July 31, 2009 consisted of the following:

 

 

 

Gross Assets

 

Accumulated
Amortization

 

Net Assets

 

 

 

(in thousands)

 

Core/developed technology

 

$

144,531

 

$

81,466

 

$

63,065

 

Customer relationships

 

175,620

 

145,620

 

30,000

 

Contract rights intangible

 

14,200

 

10,840

 

3,360

 

Covenants not to compete

 

3,400

 

2,527

 

873

 

Trademarks and trade names

 

2,700

 

764

 

1,936

 

Capitalized software development costs

 

11,132

 

7,690

 

3,442

 

Total

 

$

351,583

 

$

248,907

 

$

102,676

 

 

Intangible assets as of October 31, 2008 consisted of the following:

 

 

 

Gross Assets

 

Accumulated
Amortization

 

Net Assets

 

 

 

(in thousands)

 

Core/developed technology

 

$

128,231

 

$

59,577

 

$

68,654

 

Customer relationships

 

172,420

 

137,106

 

35,314

 

Contract rights intangible

 

12,500

 

8,362

 

4,138

 

Covenants not to compete

 

3,100

 

2,006

 

1,094

 

Trademarks and trade names

 

2,600

 

330

 

2,270

 

Capitalized software development costs

 

8,784

 

5,494

 

3,290

 

Total

 

$

327,635

 

$

212,875

 

$

114,760

 

 

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Table of Contents

 

Amortization expense related to intangible assets consisted of the following:

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Core/developed technology

 

$

7,502

 

$

5,616

 

$

21,889

 

$

15,532

 

Customer relationships

 

2,597

 

4,047

 

8,514

 

16,442

 

Contract rights intangible

 

950

 

863

 

2,478

 

2,229

 

Covenant not to compete

 

212

 

154

 

521

 

487

 

Trademark and trade names

 

147

 

130

 

434

 

150

 

Capitalized software development costs(1)

 

742

 

724

 

2,196

 

2,178

 

Total

 

$

12,150

 

$

11,534

 

$

36,032

 

$

37,018

 

 


(1)          Amortization of capitalized software development costs is included in cost of license revenue in the unaudited condensed consolidated statements of operations.

 

The following table presents the estimated future amortization of intangible assets:

 

Fiscal Year

 

(in thousands)

 

Remainder of fiscal 2009

 

$

12,129

 

2010

 

36,670

 

2011

 

24,540

 

2012

 

15,596

 

2013

 

8,316

 

2014 and thereafter

 

5,425

 

Total

 

$

102,676

 

 

Note 6.     Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of the following:

 

 

 

July 31,

 

October 31,

 

 

 

2009

 

2008

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

158,435

 

$

188,344

 

Other accrued liabilities

 

48,873

 

74,297

 

Accounts payable

 

8,353

 

23,168

 

Acquisition related costs

 

5,588

 

3,960

 

Total

 

$

221,249

 

$

289,769

 

 

Note 7.     Credit Facility

 

On October 20, 2006, the Company entered into a five-year, $300.0 million senior unsecured revolving credit facility providing for loans to the Company and certain of its foreign subsidiaries. The amount of the facility may be increased by up to an additional $150.0 million through the fourth year of the facility. The facility contains financial covenants requiring the Company to maintain a minimum leverage ratio and specified levels of cash, as well as other non-financial covenants. The facility terminates on October 20, 2011. Borrowings under the facility bear interest at the greater of the administrative agent’s prime rate or the federal funds rate plus 0.50%; however, the Company has the option to pay interest based on the outstanding amount at Eurodollar rates plus a spread between 0.50% and 0.70% based on a pricing grid tied to a financial covenant. In addition, commitment fees are payable on the facility at rates between 0.125% and 0.175% per year based on a pricing grid tied to a financial covenant. As of July 31, 2009, the Company had no outstanding borrowings under this credit facility and was in compliance with all the covenants.

 

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Table of Contents

 

Note 8.   Comprehensive Income

 

The following table presents the components of comprehensive income:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Net income

 

$

47,436

 

$

57,749

 

$

148,153

 

$

143,581

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses) on investments, net of tax of ($111) and ($1,447), for the three and nine months ended July 31, 2009, respectively, and of $606 and $1,204 for each of the same periods in fiscal 2008, respectively

 

169

 

(918

)

2,193

 

(1,823

)

 

 

 

 

 

 

 

 

 

 

Deferred gains (losses) on cash flow hedges, net of tax of ($3,013) and ($3,079), for the three and nine months ended July 31, 2009, respectively, and of $886 and ($651) for each of the same periods in fiscal 2008, respectively

 

12,272

 

(1,229

)

14,870

 

4,729

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment on deferred losses (gains) on cash flow hedges, net of tax of ($138) and ($1,846), for the three and nine months ended July 31, 2009, respectively, and of $279 and $1,388 for each of the same periods in fiscal 2008, respectively

 

912

 

(1,768

)

9,333

 

(5,878

)

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

4,367

 

699

 

1,012

 

(732

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

65,156

 

$

54,533

 

$

175,561

 

$

139,877

 

 

Note 9.     Stock Repurchase Program

 

In December 2002, the Company’s Board of Directors (Board) approved a stock repurchase program pursuant to which the Company was authorized to purchase up to $500.0 million of its common stock.  Since 2002, the Board has periodically replenished the stock repurchase program up to $500.0 million.  The Company repurchases shares to offset dilution caused by ongoing stock issuances from existing plans for equity compensation awards, 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 (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.

 

There were no stock repurchases during the three and nine months ended July 31, 2009. There were no stock repurchases during the three months ended July 31, 2008. During the nine months ended July 31, 2008, the Company repurchased 7.2 million shares at an average price of $23.64 per share, for an aggregate purchase price of $170.1 million. During the three and nine months ended July 31, 2009, approximately 0.2 million and 2.5 million shares were reissued from treasury stock, respectively, for employee share-based compensation requirements. During the three and nine months ended July 31, 2008, approximately 1.1 million and 3.6 million shares were reissued, respectively, for employee share-based compensation requirements. As of July 31, 2009, $209.7 million remained available for future repurchases under the program. On September 3, 2009, the Board replenished the stock repurchase program to $500.0 million.

 

Note 10.   Share-based Compensation

 

The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options and employee stock purchase plan awards under SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS 123(R)). The Black-Scholes option-pricing model incorporates various subjective assumptions including expected volatility, expected term and interest rates. The expected volatility for both stock options and employee stock purchase plan (ESPP) is estimated by a combination of implied volatility for publicly traded options of the Company’s stock with a term of six months or longer and the historical stock price volatility over the estimated expected term of the Company’s share-based awards. The expected term of the Company’s share-based awards is based on historical experience.

 

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Table of Contents

 

As of July 31, 2009, there was $110.3 million of unamortized share-based compensation expense which is expected to be amortized over a weighted-average period of approximately 2.5 years. The intrinsic values of options exercised during the three and nine months ended July 31, 2009 were $0.5 million and $2.2 million, respectively. The intrinsic values of options exercised during the three and nine months ended July 31, 2008 were $7.9 million and $16.7 million, respectively.

 

The compensation cost recognized in the unaudited condensed consolidated statements of operations for these share-based compensation arrangements was as follows:

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Cost of license

 

$

1,640

 

$

2,104

 

$

5,013

 

$

5,728

 

Cost of maintenance and service

 

536

 

788

 

1,626

 

2,940

 

Research and development expense

 

5,994

 

7,368

 

18,166

 

21,231

 

Sales and marketing expense

 

2,964

 

4,175

 

9,224

 

12,226

 

General and administrative expense

 

2,861

 

2,886

 

8,770

 

8,682

 

Share-based compensation expense before taxes

 

13,995

 

17,321

 

42,799

 

50,807

 

Income tax benefit

 

(3,163

)

(4,046

)

(9,673

)

(11,868

)

Share-based compensation expense after taxes

 

$

10,832

 

$

13,275

 

$

33,126

 

$

38,939

 

 

Note 11.   Net Income per Share

 

The Company computes basic income per share by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the dilution of potential common shares outstanding such as stock options and unvested restricted stock units and awards during the period using the treasury stock method.

 

The tables below illustrate 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
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

47,436

 

$

57,749

 

$

148,153

 

$

143,581

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares for basic net income per share

 

144,138

 

142,536

 

143,093

 

143,450

 

Dilutive effect of common share equivalents from equity-based compensation

 

1,925

 

4,950

 

1,606

 

4,310

 

Weighted-average common shares for diluted net income per share

 

146,063

 

147,486

 

144,699

 

147,760

 

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.41

 

$

1.04

 

$

1.00

 

Diluted

 

$

0.32

 

$

0.39

 

$

1.02

 

$

0.97

 

 

Diluted net income per share excludes 20.0 million and 9.4 million of anti-dilutive stock options and unvested restricted stock units and awards for the three months ended July 31, 2009 and 2008, respectively; and 19.2 million and 9.6 million of anti-dilutive options and unvested restricted stock units and awards for the nine months ended July 31, 2009 and 2008, respectively.  While these stock options and unvested restricted stock units and awards were anti-dilutive for the respective periods, they could be dilutive in the future.

 

14



Table of Contents

 

Note 12.   Segment Disclosure

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS 131) requires disclosures of certain information regarding operating segments, products and services, geographic areas of operation and major customers. SFAS 131 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 Maker (CODM) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are the Company’s Chief Executive Officer and Chief Operating Officer.

 

The Company provides software and hardware products and consulting services in the electronic design automation software industry. The Company operates in a single segment. In making operating decisions, the CODMs primarily consider consolidated financial information, accompanied by disaggregated information about revenues by geographic region. Specifically, the CODMs consider where individual “seats” or licenses to the Company’s products are used in allocating revenue to particular geographic areas. Revenue is defined as revenues from external customers. Goodwill is not allocated since the Company operates in one reportable operating segment.

 

The following table presents the revenues related to operations by geographic areas:

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

169,553

 

$

166,224

 

$

495,611

 

$

487,264

 

Europe

 

47,587

 

47,858

 

148,022

 

145,904

 

Japan

 

65,791

 

74,043

 

202,969

 

186,568

 

Asia-Pacific and other

 

62,246

 

56,003

 

175,165

 

164,410

 

Consolidated

 

$

345,177

 

$

344,128

 

$

1,021,767

 

$

984,146

 

 

Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and is therefore subject to certain assumptions and to the Company’s methodology.

 

One customer accounted for more than ten percent of the Company’s consolidated revenue in the three and nine months ended July 31, 2009 and 2008.

 

Note 13.   Other Income, net

 

The following table presents the components of other income, net:

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Interest income

 

$

2,364

 

$

4,021

 

$

8,788

 

$

16,305

 

Gain (loss) on assets related to executive deferred compensation plan assets

 

6,134

 

(861

)

5,615

 

(6,363

)

Foreign currency exchange gain (loss)

 

(18

)

118

 

5,694

 

831

 

Other, net

 

(3,096

)

(331

)

(2,169

)

(1,345

)

Total

 

$

5,384

 

$

2,947

 

$

17,928

 

$

9,428

 

 

Note 14.   Taxes

 

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The Company’s estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and the Company’s interpretations of tax laws and possible outcomes of audits.

 

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Table of Contents

 

The following table presents the provision for income taxes and the effective tax rates for the three and nine months ended July 31, 2009 and 2008:

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(dollars in thousands)

 

Income before income taxes

 

$

66,473

 

$

52,979

 

$

201,257

 

$

163,236

 

Provision (benefit) for income tax

 

$

19,037

 

$

(4,770

)

$

53,104

 

$

19,655

 

Effective tax rate

 

28.6

%

(9.0

)%

26.4

%

12.0

%

 

The Company’s effective tax rate for the three and nine months ended July 31, 2009 is lower than the statutory federal income tax rate of 35% primarily due to the tax impact of non-U.S. operations, which are taxed at lower rates, and research and development credits, partially offset by state taxes and non-deductible share-based compensation recorded under SFAS 123(R). The effective tax rate increased in the three and nine months ended July 31, 2009, as compared to the same periods in fiscal 2008, primarily due to changes in mix of geographical earnings, as well as the discrete impact of the federal tax audit settlement for fiscal 2000 and 2001 in the third quarter of fiscal 2008.

 

The Company files income tax returns in the U.S., including various state and local jurisdictions. Its subsidiaries file tax returns in various foreign jurisdictions, including Ireland, Hungary, Taiwan and Japan. The Company remains subject to income tax examinations in the U.S. for fiscal years from 1999 through 2004 and after fiscal year 2005, in Hungary and Taiwan for fiscal years after 2005, in Ireland for fiscal years after 2003 and in Japan for fiscal years after 2004.

 

The timing of the resolution of income tax examinations is highly uncertain as well as 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 next twelve months it is reasonably possible that the statute of limitations will expire on income and withholding tax filings in various jurisdictions, and that certain federal and foreign transfer pricing issues could be effectively settled. 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 $99 million.  Approximately $60 million would decrease goodwill as a result of the settlement of the Internal Revenue Service (IRS) examination for fiscal 2002 through 2004 if it is settled prior to the end of fiscal 2009, and would decrease income tax expense if settled thereafter as a result of the Company’s adoption of SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R) in fiscal 2010.  Under SFAS 141R, adjustments to acquired income tax liabilities (including adjustments for acquisitions completed prior to the effective date) that are recorded subsequent to the acquisition date will be recognized in income from continuing operations, with certain exceptions, rather than through a change to goodwill, as existing rules allow, if such changes occur after the measurement period. See IRS Examinations below for the status of current federal income tax audits.

 

On February 17, 2009, the President of the United States signed into law the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), which has significant tax implications for certain businesses and individuals.  The Company does not anticipate the Recovery Act having a material impact on its effective tax rate for fiscal 2009 or future periods.

 

On May 27, 2009, the 9th Circuit Court of Appeals issued its decision in the case of Xilinx, Inc. v. Commissioner, holding that stock based compensation was required to be included in certain transfer pricing arrangements between a U.S. company and its offshore subsidiary.  Although the decision in the Xilinx case is subject to a rehearing, the Company increased its liability for unrecognized tax benefits and decreased shareholders’ equity by approximately $11 million and increased income tax expense by approximately $1 million in the third quarter of fiscal 2009.

 

IRS Examinations

 

The Company is regularly audited by the IRS.

 

On June 30, 2008, the Appeals Office of the IRS and the Company executed a final Closing Agreement with respect to a Revenue Agent’s Report (RAR) received for the audit of fiscal years 2000 and 2001, in connection with a transfer pricing dispute.  As a result of the Closing Agreement and the Company’s concurrent evaluation of its ability to use certain foreign tax credits, the Company’s provision for income taxes in its third quarter of fiscal 2008 included a net income tax benefit (net of decreases in related deferred tax assets) of $17.3 million.

 

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In July 2008, the IRS completed its field examination of fiscal years 2002-2004 and issued an RAR in which the IRS proposed an adjustment that would result in an aggregate tax deficiency for the three year period of approximately $236.2 million, $130.5 million of which would be a reduction of certain tax losses and credits that would otherwise be available either as refund claims or to offset taxes due in future periods. The IRS contested the Company’s tax deduction for payments made in connection with litigation between Avant! Corporation and Cadence Design Systems, Inc.  In addition, the IRS asserted that the Company is required to make an additional transfer pricing adjustment with a wholly owned non-U.S. subsidiary as a result of the Company’s acquisition of Avant! in 2002. The IRS also proposed adjustments to the Company’s transfer pricing arrangements with its foreign subsidiaries, deductions for foreign trade income and certain temporary differences.

 

In the second quarter of fiscal 2009, the Company reached a tentative settlement with the Examination Division of the IRS that would resolve this matter. The settlement is subject to further review and approval within the federal government, including the Joint Committee on Taxation of the U.S. Congress (“Joint Committee”), which could take at least several more months, but the Company believes that settlement is likely. If the settlement becomes final on the tentative terms agreed upon, the Company has already adequately provided for this matter. As a result of the settlement, the Company would owe additional taxes of approximately $53 million (including interest) which would likely be payable within the next 12 months and would be fully offset by future tax benefits over the next 8 years. Upon Joint Committee approval, certain refund claims of approximately $35 million (including interest) would be disbursed to the Company as a result of the settlement. Final resolution of this matter could take considerable time or may not be finally approved by the federal government, in which case, while the Company believes it is still adequately provided for regarding this matter, there is still a possibility that an adverse outcome of the matter could have a material effect on the Company’s results of operations and financial condition.

 

Note 15.   Contingencies

 

See Note 14 above regarding the IRS Examinations.

 

Other Proceedings

 

The Company is also subject to other 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 uncertain and unfavorable outcomes could have a negative impact on the Company’s financial position and results of operations.

 

Note 16.   Effect of New Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of Statement No. 140 (SFAS 166).  SFAS 166 removes the scope exception from applying FASB interpretation No. 46(R). SFAS changes the requirements for recognizing financial assets and requires enhanced disclosures.  SFAS 166 is effective for the Company in the beginning of fiscal 2011.  The Company has not yet determined the impact that SFAS 166 may have on its consolidated financial position, results of operations or cash flows.

 

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167).  SFAS 167 requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. SFAS 167 is effective for financial statements issued for fiscal years beginning after November 15, 2009 and will be effective for the Company in the first quarter of fiscal 2011.  The Company has not yet determined the impact that SFAS 167 may have on its consolidated financial position, results of operations or cash flows.

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No 162 (SFAS 168).  SFAS 168 establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will be effective for the Company in the fourth quarter of fiscal 2009.  The Company believes that the adoption of SFAS 168 will not have significant impact on its consolidated financial position, results of operations or cash flows.

 

With the exception of the discussion above, the effect of recent accounting pronouncements has not changed from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2008.

 

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

 

This Quarterly Report on Form 10-Q, and in particular the following discussion, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). These statements include but are not limited to statements concerning: our business, product and platform strategies, expectations regarding previous and future acquisitions; completion of development of our unfinished products, or further development or integration of our existing products; continuation of current industry trends towards vendor consolidation; expectations regarding our license mix; expectations regarding customer interest in more highly integrated tools and design flows; expectations of the success of our intellectual property and design for manufacturing initiatives; expectations concerning recent completed acquisitions; expectations regarding the likely outcome of the Internal Revenue Service’s proposed net tax deficiencies for fiscal years 2000 through 2004 and other outstanding litigation; expectations that our cash, cash equivalents and short-term investments and cash generated from operations will satisfy our business requirements for the next 12 months; and our expectations of our future liquidity requirements. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including, without limitation, those identified below in Part II, Item 1A of this Form 10-Q. The words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “continue,” or the negatives of these terms, or other comparable terminology and similar expressions identify these forward-looking statements. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  The information included herein is given as of the filing date of this Form 10-Q with the Securities and Exchange Commission (SEC) and future events or circumstances could differ significantly from these forward-looking statements. Accordingly, we caution readers not to place undue reliance on these statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements.  All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

 

The following summary of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report and with our audited consolidated financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the SEC on December 22, 2008.

 

Fiscal Year End.  Our fiscal year ends on the Saturday nearest to October 31. Our third quarter of fiscal 2009 ended on August 1, 2009.  Fiscal 2009 and 2008 are both 52-week fiscal years. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the applicable calendar month end.

 

Overview

 

Business Summary

 

We are a world leader in electronic design automation (EDA) software and related services for semiconductor design companies. We offer a broad portfolio of solutions that are highly integrated to solve our customers’ needs at each stage of the semiconductor chip design process. We deliver technology-leading semiconductor design and verification software platforms and integrated circuit (IC) manufacturing software products to the global electronics market, enabling the development and production of complex systems-on-chips (SoCs). In addition, we provide intellectual property (IP), system-level design hardware and software products, and design services to simplify the design process and accelerate time-to-market for our customers. Finally, we provide software and services that help customers prepare and optimize their designs for manufacturing.

 

We generate a substantial majority of our revenue from large customers in the semiconductor and electronics industries. Our customers typically fund purchases of our software and services largely out of their research and development (R&D) budgets and, to a lesser extent, their manufacturing and capital budgets. Our customers continually face the competing challenges of developing increasingly advanced electronics products while reducing their design and manufacturing costs in order to meet ongoing consumer demand for lower prices. Our customers’ business outlook and willingness to invest in new and increasingly complex chip designs affect their spending decisions and vendor selections. The crisis in the financial markets and the ongoing weakness of the global economy have exacerbated these challenges.

 

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Table of Contents

 

Our customers bargain on various aspects of the contractual arrangements they make with us. Our customers often demand a broader portfolio of solutions, support and services and seek more favorable terms such as expanded license usage, future purchase rights and other unique rights at an overall lower total cost of design. Our customer arrangements are complex, involving hundreds of products and various license rights. No one factor drives our customers’ buying decisions and we compete on all fronts to capture a higher portion of our customers’ budgets in a highly competitive EDA market. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes. Collectively, the increase in the value of all of our customer contracts is the primary driver of our overall growth in revenue over time. As further described below, the effect of an increase in value for a particular customer is typically recognized over the life of the customer contract rather than in one particular period.

 

Our business model allows a substantial majority of our customers to pay for licenses over a period of time and generates recurring revenue for us over a period of time, generally three years. We continue to target achieving greater than 90% of our total revenue as recurring revenue, which we refer to in our financial statements as time-based license and maintenance and service revenue.  Accordingly, most of the revenue we recognize in any particular quarter results from our selling efforts in each of the prior periods during the last three or so years rather than from efforts or changes in the current period.  The timing of orders is less important to us in the short term and we have historically been able to resist typical software industry quarter-end pressures and minimize the closing of contracts with terms, including pricing terms, which may be less favorable to us.

 

Short-term fluctuations in industry or general economic conditions or in orders generally do not immediately affect our financial results due to our business model. While the electronics, semiconductor and EDA industries have experienced severe uncertainty and weakness due to the downturn in the global economy, to date our business model has substantially protected our financial results.

 

Nevertheless, our business model and longer-term financial results are not immune from sustained economic downturns. The turmoil and uncertainty caused by current economic conditions have caused some of our customers to postpone their decision-making, decrease their spending and/or delay their payments to us.  We expect committed average annual revenue from customers to be down slightly at the end of fiscal 2009 compared to the end of fiscal 2008. Continued periods of decreased committed average annual revenue, additional customer bankruptcies, or consolidation among our customers, could adversely affect our year-over-year revenue growth and decrease our backlog. The economic downturn has also negatively affected several of our principal competitors, and a few have recently announced lower revenues than they had previously expected. We will continue to monitor market conditions and may make adjustments to our business in order to reduce the adverse impact that the prolonged economic downturn could have on our business. We believe that the combination of our solid financials, leading technology and strong customer relationships will help us implement our strategies successfully.

 

Financial Performance Summary for the Three Months Ended July 31, 2009

 

·                  Total revenue of $345.2 million was up slightly by $1.1 million from $344.1 million in the same quarter in fiscal 2008.

 

·                  Time-based license revenue of $284.4 million was down by $4.9 million, or 2%, from $289.3 million in the same quarter in fiscal 2008.  The decrease was primarily due to less aggregate revenue from TSL contracts booked in periods prior to the third quarter of fiscal 2009 as compared to periods prior to the third quarter of fiscal 2008.

 

·                  We derived 94% of our total revenue from time-based, maintenance and services revenues, and 6% from upfront revenue, in both quarters ended July 31, 2009 and 2008, respectively. This reflects adherence to our current business model.

 

·                  Maintenance revenue of $21.0 million was up by $4.3 million, or 26%, from $16.7 million in the same quarter in fiscal 2008. The increase was primarily attributable to the maintenance contracts associated with the impact of Synplicity product sales.  Professional services and other revenue of $20.8 million were up 18% from $17.6 million in the same quarter in fiscal 2008. The increase of $3.2 million was primarily driven by the completion of large consulting projects during the three months ended July 31, 2009 and from new consulting service streams from a recent acquisition.

 

·                  Net income of $47.4 million was down by $10.3 million, or 18%, from $57.7 million in the same quarter in fiscal 2008. The decrease was primarily due to a one-time benefit from a tax settlement recognized in the third quarter of fiscal 2008.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial results under the heading Result of Operations below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing these financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses and net income. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.

 

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Table of Contents

 

We describe our revenue recognition and income taxes policies below. Our remaining critical accounting policies and estimates are discussed in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the SEC on December 22, 2008.

 

Revenue Recognition

 

We recognize revenue from software licenses and related maintenance and service revenue and, to a lesser extent, from hardware sales. Software license revenue consists of fees associated with the licensing of our software. Maintenance and service revenue consists of maintenance fees associated with perpetual and term licenses and professional service fees.  Hardware revenue consists of Field Programmable Gate Array (FPGA) design products.

 

We have designed and implemented revenue recognition policies in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, and EITF 00-21, Revenue Arrangements with Multiple Deliverables.

 

With respect to software licenses, we utilize three license types:

 

·                  Technology Subscription Licenses (TSLs) are time-based licenses for a finite term, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. We bundle and do not charge separately for post-contract customer support (maintenance) for the term of the license.

 

·                  Term Licenses are also for a finite term, but do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually for the balance of the term. The annual maintenance fee is typically calculated as a percentage of the net license fee.

 

·                  Perpetual Licenses continue as long as the customer renews maintenance plus an additional 20 years. Perpetual licenses do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually.

 

For the three software license types, we recognize revenue as follows:

 

·                  TSLs.  We typically recognize revenue from TSL fees (which include bundled maintenance) ratably over the term of the license period, or as customer installments become due and payable, whichever is later. Revenue attributable to TSLs is reported as “time-based license revenue” in the unaudited condensed consolidated statement of operations.

 

·                  Term Licenses.  We recognize revenue from term licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee within one year from shipment and all other revenue recognition criteria are met. Revenue attributable to these term licenses is reported as “upfront license revenue” in the unaudited condensed consolidated statement of operations. For term licenses in which less than 75% of the license fee is payable within one year from shipment, we recognize revenue as customer installments become due and payable. Such revenue is reported as “time-based license revenue” in the unaudited condensed consolidated statement of operations.

 

·                  Perpetual Licenses. We recognize revenue from perpetual licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee within one year from shipment and all other revenue recognition criteria are met. Revenue attributable to these perpetual licenses is reported as “upfront license revenue” in the unaudited condensed consolidated statement of operations. For perpetual licenses in which less than 75% of the license fee is payable within one year from shipment, we recognize revenue as customer installments become due and payable. Such revenue is reported as “time-based license revenue” in the unaudited condensed consolidated statement of operations.

 

We recognize revenue from hardware sales in full upon shipment if all other revenue recognition criteria are met. Revenue attributable to these hardware sales is generally reported as “upfront license revenue” in the unaudited condensed consolidated statement of operations. If a technology subscription license is sold together with the hardware, we recognize total revenue ratably over the term of the software license period, or as customer installments become due and payable, whichever is later.

 

In addition, we recognize revenue from maintenance fees ratably over the maintenance period to the extent cash has been received or fees become due and payable, and recognize revenue from professional service and training fees as such services are performed and accepted by the customer. Revenue attributable to maintenance, professional services and training is reported as “maintenance and service revenue” in the unaudited condensed consolidated statement of operations.

 

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Table of Contents

 

Our determination of fair value of each element in multiple element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE of fair value for each element to the price charged when such element is sold separately.

 

We have analyzed all of the elements included in our multiple-element software arrangements and have determined that we have sufficient VSOE to allocate revenue to the maintenance components of our perpetual and term license products and to professional services. Accordingly, assuming all other revenue recognition criteria are met, we recognize license revenue from perpetual and term licenses upon delivery using the residual method, we recognize revenue from maintenance ratably over the maintenance term, and we recognize revenue from professional services as milestones are performed and accepted. We recognize revenue from TSLs ratably over the term of the license, assuming all other revenue recognition criteria are met, since there is not sufficient VSOE to allocate the TSL fee between license and maintenance services.

 

We make significant judgments related to revenue recognition. Specifically, in connection with each transaction involving our products, we must evaluate whether: (1) persuasive evidence of an arrangement exists, (2) delivery of software or services has occurred, (3) the fee for such software or services is fixed or determinable, and (4) collectability of the full license or service fee is probable. All four of these criteria must be met in order for us to recognize revenue with respect to a particular arrangement. We apply these revenue recognition criteria as follows:

 

·                 Persuasive Evidence of an Arrangement Exists. Prior to recognizing revenue on an arrangement, our customary policy is to have a written contract, signed by both the customer and us or a purchase order from those customers that have previously negotiated a standard end-user license arrangement or purchase agreement.

 

·                 Delivery Has Occurred. We deliver our products to our customers electronically or physically. For electronic deliveries, delivery occurs when we provide access to our customers to take immediate possession of the software by downloading it to the customer’s hardware. For physical deliveries, the standard transfer terms are typically FOB shipping point. We generally ship our products or license keys promptly after acceptance of customer orders. However, a number of factors can affect the timing of product shipments and, as a result, timing of revenue recognition, including the delivery dates requested by customers and our operational capacity to fulfill product orders at the end of a fiscal quarter.

 

·                 The Fee is Fixed or Determinable. Our determination that an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. Our standard payment terms for perpetual and term licenses require 75% or more of the license fee to be paid within one year. If the arrangement includes these terms, we regard the fee as fixed or determinable, and recognize all license revenue under the arrangement in full upon delivery (assuming all other revenue recognition criteria are met). If the arrangement does not include these terms, we do not consider the fee to be fixed or determinable and generally recognize revenue when customer installments are due and payable. In the case of a TSL, because of the right to exchange products or receive unspecified future technology and because VSOE for maintenance services does not exist for a TSL, we recognize revenue ratably over the term of the license, but not in advance of when customers’ installments become due and payable.

 

·                 Collectability is Probable. We judge collectability of the arrangement fees on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For a new customer, or when an existing customer substantially expands its commitments to us, we evaluate the customer’s financial position and ability to pay and typically assign a credit limit based on that review. We increase the credit limit only after we have established a successful collection history with the customer. If we determine at any time that collectability is not probable under a particular arrangement based upon our credit review process or the customer’s payment history, we recognize revenue under that arrangement as customer payments are actually received.

 

Income Taxes

 

We calculate our current and deferred tax provisions in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Our estimates and assumptions used in such provisions may differ from the actual results as reflected in our income tax returns and we record the required adjustments when they are identified and resolved.

 

We recognize deferred tax assets and liabilities for the temporary differences between the book and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, the existence of

 

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Table of Contents

 

cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis, as well as feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. We believe that the net deferred tax assets of approximately $284 million that are recorded on our balance sheet as of July 31, 2009 will ultimately be realized. However, if we determine in the future that it is more likely than not we will not be able to realize a portion or the full amount of deferred tax assets, we would record an adjustment to the deferred tax asset valuation allowance as a charge to earnings in the period such determination is made.

 

Included in our net deferred tax assets as of October 31, 2008 are federal foreign tax credits of $70.1 million of which $63.9 million will expire from fiscal 2013 through 2018.  The remaining $6.2 million in foreign tax credits are from acquired companies, which have a valuation allowance of $3.4 million, and will expire between fiscal 2009 and 2017. Foreign tax credits can only be carried forward ten years, unlike net operating loss and federal research credit carryforwards that have a twenty year carryforward period, and may only be used after foreign tax credits arising in each subsequent year have been used first. Our ability to utilize foreign tax credits is dependent upon having sufficient foreign source income during the carryforward period. We have recorded a valuation allowance of $19.7 million with respect to our foreign tax credit carryforward. The need for a valuation allowance with respect to foreign tax credits is subject to change based upon a number of factors, including the amount of foreign tax credits arising in future years, our forecasts of future foreign source income, the amount of our undistributed earnings of our foreign subsidiaries, the outcome of tax audit settlements and changes in income tax laws that may affect our ability to use such credits.

 

The calculation of tax liabilities involves the inherent uncertainty associated with the application of complex tax laws. We are also subject to examination by various taxing authorities. We believe we have adequately provided in our financial statements for potential additional taxes. If we ultimately determine that these amounts are not owed, we would reverse the liability and recognize the tax benefit in the period in which we determine that the liability is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, we would record an additional charge to earnings. See Note 14 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of taxes and the Revenue Agent’s Reports from the IRS we received in June 2005 and July 2008 asserting very large net increases to our U.S. tax arising from the audit of fiscal 2000 through 2001 and fiscal 2002 through 2004, respectively.

 

Results of Operations

 

Revenue Background

 

We generate our revenue from the sale of software licenses, hardware products, maintenance and professional services. Under current accounting rules and policies, we recognize revenue from orders we receive for software licenses, hardware products and services at varying times. In most instances, we recognize revenue on a TSL software license order over the license term and on a term or perpetual software license order in the quarter in which the license is shipped. Substantially all of our current time-based licenses are TSLs with an average license term of approximately three years. Maintenance orders normally bring in revenue ratably over the maintenance period (normally one year). Professional service orders generally turn into revenue upon completion and customer acceptance of contractually agreed milestones.  A more complete description of our revenue recognition policy can be found above under Critical Accounting Policies and Estimates.

 

Our revenue in any fiscal quarter is equal to the sum of our time-based license, upfront license, maintenance and professional service and hardware revenue for the period. We derive time-based license revenue in any quarter largely from TSL orders received and delivered in prior quarters and to a small extent due to contracts in which revenue is recognized as customer installments become due and payable. We derive upfront license revenue directly from term and perpetual license and hardware product orders mostly booked and shipped during the quarter. We derive maintenance revenue in any quarter largely from maintenance orders received in prior quarters since our maintenance orders generally yield revenue ratably over a term of one year. We also derive professional service revenue primarily from orders received in prior quarters, since we recognize revenue from professional services when those services are delivered and accepted, not when they are booked.

 

Our license revenue is sensitive to the mix of TSLs and perpetual or term licenses delivered during a reporting period. A TSL order typically yields lower current quarter revenue but contributes to revenue in future periods. For example, a $120,000 order for a three-year TSL shipped on the last day of a quarter typically generates no revenue in that quarter, but $10,000 in each of the twelve succeeding quarters. Conversely, perpetual and term licenses with greater than 75% of the license fee due within one year from shipment typically generate current quarter revenue but no future revenue (e.g., a $120,000 order for a perpetual license generates $120,000 in revenue in the quarter the product is shipped, but no future revenue).  Additionally, revenue in a particular quarter may also be impacted by perpetual and term licenses in which less than 75% of the license fees is payable within one year from shipment as the related revenue will be recognized as revenue in the period when customer payments become due and payable.

 

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Total Revenue

 

 

 

July 31,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

345.2

 

$

344.1

 

$

1.1

 

<1

%

Nine months ended

 

$

1,021.8

 

$

984.1

 

$

37.7

 

4

%

 

The slight increase in total revenue for the three months ended July 31, 2009 compared to the same period in fiscal 2008 reflects higher maintenance and services revenue due to completions of milestones on larger consulting projects in the third quarter of fiscal 2009 offset by slightly lower time-based license revenue.

 

The increase in total revenue for the nine months ended July 31, 2009 compared to the same period in fiscal 2008 was primarily due to an increase in revenue from time-based licenses.

 

While the electronics, semiconductor and EDA industries are currently experiencing uncertainty and weakness due to the recent downturn in the global economy, to date, our business model has substantially protected our financial results and enabled us to achieve revenue growth compared to the same periods in the previous year. Nevertheless, our business model and longer-term financial results are not immune from sustained economic downturns. The turmoil and uncertainty caused by current economic conditions have caused some of our customers to postpone their decision-making, decrease their spending and/or delay their payments to us. We continue to experience a slight decrease in the committed average annual revenue from customers who renewed their contracts with us during the first three quarters of fiscal 2009 and we currently expect such committed average annual revenue be down slightly at the end of fiscal 2009 compared to the end of fiscal 2008. Continued periods of decreased committed average annual revenue, additional customer bankruptcies, or consolidation among our customers, could adversely affect our year-over-year revenue growth and could decrease our backlog.

 

Time-Based License Revenue

 

 

 

July 31,

 

Dollar

 

%

 

 

 

2009