CADENCE DESIGN SYSTEMS, INC. 
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K and with Part I, Item 1A, "Risk Factors." Please refer to the cautionary language at the beginning of Part I of this Annual Report on Form 10-K regarding forward-looking statements. Business Overview We enable our customers to develop electronic products. Our products and services are designed to give our customers a competitive edge in their development of electronic devices and systems, SoCs, ICs and increasingly sophisticated manufactured products. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers' products to market and reducing their design, development and manufacturing costs. We offer software, hardware, services and reusable IC design blocks, which are commonly referred to as IP. Our strategy, which we call Intelligent System Design™, is to provide the technologies necessary for our electronic system and semiconductor customers to develop electronic products across a variety of vertical markets including mobile, consumer, automotive, aerospace and defense, industrial and medical segments. Our products and services enable our customers to develop complex and innovative electronic products, so demand for our technology is driven by our customers' investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as EDA. Today, our offerings include and extend beyond EDA. We combine our products and technologies into categories related to major design activities: • Functional Verification, including Emulation and Prototyping Hardware;
• Digital IC Design and Signoff;
• Custom IC Design and Simulation;
• System Interconnect and Analysis; and
• IP.
For additional information about our products, see the discussion in Item 1, "Business," under the heading "Products and Product Strategy." OnJanuary 15, 2020 , we completed our acquisition of AWR. OnFebruary 6, 2020 , we also acquiredIntegrand Software . The aggregate cash consideration for these acquisitions of approximately$195 million will be allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates. These acquisitions enhance our technology portfolio to address growing RF/microwave design activity, driven by expanding use of 5G communications. We expect these acquisitions will result in more expenses, including amortization of acquired intangible assets, than revenue during fiscal 2020. We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings "Results of Operations" and "Liquidity and Capital Resources." Results of Operations The discussion of our fiscal 2019 consolidated results of operations include year-over-year comparisons versus fiscal 2018 for revenue, cost of revenue, operating expenses, other non-operating expenses, income taxes and cash flows. For a discussion of the fiscal 2018 changes compared to fiscal 2017, see the discussion in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2018 , filed onFebruary 27, 2019 . Results of operations for fiscal 2019, as compared to fiscal 2018, reflect the following: • increased product and maintenance revenue resulting from overall growth in each geographic area, particularly inChina and Other Asia;
• increased IP revenue;
• increased selling costs, including additional investment in technical
sales support in response to our customers' increasing technological
requirements; and
• continued investment in research and development activities focused on
creating and enhancing our products; and
• a non-cash tax benefit resulting from intercompany transfers of certain
intangible property rights to our Irish subsidiary.
Our fiscal years are 52- or 53-week periods ending on the Saturday closest toDecember 31 . Fiscal 2019 and 2018 were each 52-week fiscal years. Fiscal 2020 will be a 53-week fiscal year. 26
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Revenue
We primarily generate revenue from licensing our software and IP, selling or
leasing our emulation and prototyping hardware technology, providing maintenance
for our software, hardware and IP, providing engineering services and earning
royalties generated from the use of our IP. The timing of our revenue is
significantly affected by the mix of software, hardware and IP products
generating revenue in any given period and whether the revenue is recognized
over time or at a point in time, upon completion of delivery.
Between 85% and 90% of our revenue is characterized as recurring revenue.
Revenue characterized as recurring includes revenue recognized over time from
our software arrangements, services, royalties, maintenance on IP licenses and
hardware, and operating leases of hardware and revenue recognized at varying
points in time over the term of our IP Access Agreements.
The remainder of our revenue is characterized as up-front revenue. Up-front
revenue is primarily generated by our sales of emulation and prototyping
hardware and individual IP licenses. The percentage of our recurring and
up-front revenue may be impacted by delivery of hardware and IP products to our
customers in any single fiscal period.
Revenue by Year
The following table shows our revenue for fiscal 2019 and 2018 and the change in
revenue between years:
Change
2019 2018 2019 vs. 2018
(In millions, except percentages)
Product and maintenance $ 2,204.6 $ 1,997.9 $ 206.7 10 %
Services 131.7 140.1 (8.4 ) (6 )%
Total revenue $ 2,336.3 $ 2,138.0 $ 198.3 9 %
Product and maintenance revenue increased during fiscal 2019, as compared to
fiscal 2018, primarily because of increased investments by our customers in new,
complex designs for their products that include the design of electronic systems
for AI, 5G networks, aerospace and defense, automotive, cloud data center and
other market segments. This demand has resulted in revenue growth in each
geographic area and each of our five product categories. Services revenue may
fluctuate from period to period based on the timing of fulfillment of our
services and IP performance obligations.
No one customer accounted for 10% or more of total revenue during fiscal 2019 or
2018.
Revenue by Product Category
The following table shows the percentage of product and related maintenance
revenue contributed by each of our five product categories and services during
fiscal 2019 and 2018:
2019 2018
Functional Verification, including hardware for emulation and prototyping
23 % 24 %
Digital IC Design and Signoff 30 % 29 %
Custom IC Design and Simulation 25 % 26 %
System Interconnect and Analysis 9 % 9 %
IP 13 % 12 %
Total 100 % 100 %
Revenue by product group fluctuates from period to period based on demand for
our products and services and our available resources to deliver and support
them. Certain of our licensing arrangements allow customers the ability to remix
among software products. Additionally, we have arrangements with customers that
include a combination of our products, with the actual product selection and
number of licensed users to be determined at a later date. For these
arrangements, we estimate the allocation of the revenue to product groups based
upon the expected usage of our products. The actual usage of our products by
these customers may differ and, if that proves to be the case, the revenue
allocation in the table above would differ.
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Revenue by Geography
Change
2019 2018 2019 vs. 2018
(In millions, except percentages)
United States $ 982.4 $ 924.6 $ 57.8 6 %
Other Americas 43.5 32.5 11.0 34 %
China 241.5 210.2 31.3 15 %
Other Asia 459.0 395.2 63.8 16 %
Europe, Middle East and Africa 433.3 406.9 26.4 6 %
Japan 176.6 168.6 8.0 5 %
Total revenue $ 2,336.3 $ 2,138.0 $ 198.3 9 %
For the primary factors contributing to the increase in revenue for each
geographic area during fiscal 2019, as compared to fiscal 2018, see the general
description under "Revenue by Year" above. Revenue in China increased during
fiscal 2019, as compared to fiscal 2018, primarily due to an increase in revenue
for IP, digital IC design and signoff, and system interconnect software
products. Revenue growth in China slowed during the second half of fiscal 2019
because we were unable to deliver maintenance or support for certain customers
in China due to the U.S. Department of Commerce's designation of certain
customers to the "Entity List." We expect these restrictions will continue to
impact revenue from certain customers in China in fiscal 2020.
Revenue by Geography as a Percent of Total Revenue
2019 2018
United States 42 % 43 %
Other Americas 2 % 2 %
China 10 % 10 %
Other Asia 20 % 18 %
Europe, Middle East and Africa 18 % 19 %
Japan 8 % 8 %
Total 100 % 100 %
Most of our revenue is transacted in the United States dollar. However, certain
revenue transactions are denominated in foreign currencies. For an additional
description of how changes in foreign exchange rates affect our consolidated
financial statements, see the discussion under Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk - Foreign Currency Risk."
Cost of Revenue
Change
2019 2018 2019 vs. 2018
(In millions, except percentages)
Product and maintenance $ 189.1 $ 173.0 $ 16.1 9 %
Services 77.2 85.7 (8.5 ) (10 )%
Total cost of revenue $ 266.3 $ 258.7 $ 7.6 3 %
The following table shows cost of revenue as a percentage of related revenue for fiscal 2019 and 2018:
2019 2018
Product and maintenance 9 % 9 %
Services 59 % 61 %
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Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and
lease of our emulation and prototyping hardware and licensing of our software
and IP products, certain employee salary and benefits and other employee-related
costs, cost of our customer support services, amortization of technology-related
and maintenance-related acquired intangibles, costs of technical documentation
and royalties payable to third-party vendors. Costs associated with our
emulation and prototyping hardware products include components, assembly,
testing, applicable reserves and overhead. These costs make our cost of
emulation and prototyping hardware products higher, as a percentage of revenue,
than our cost of software and IP products.
A summary of cost of product and maintenance for fiscal 2019 and 2018 is as
follows:
Change
2019 2018 2019 vs. 2018
(In millions, except percentages)
Product and maintenance-related costs
11 % Amortization of acquired intangibles 41.0 39.2 1.8 5 % Total cost of product and maintenance$ 189.1 $ 173.0 $ 16.1
9 %
Cost of product and maintenance depends primarily on our hardware product sales in any given period. Cost of product and maintenance is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, as well as the timing and extent to which we acquire intangible assets, acquire or license third-parties' IP or technology, and sell our products that include such acquired or licensed IP or technology. The changes in product and maintenance-related costs were due to the following:
Change
2019 vs. 2018
(In millions)
Emulation and prototyping hardware costs $ 12.6
Salary, benefits and other employee-related costs 3.6
Other items (1.9 )
Total change in product and maintenance-related costs
Costs of emulation and prototyping increased during fiscal 2019, as compared to fiscal 2018, primarily due to increased reserves for inventory and the mix of products generating revenue. Cost of Services Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects and costs to maintain the infrastructure necessary to manage a services organization. Cost of services may fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects rather than internal development projects. Operating Expenses Our operating expenses include marketing and sales, research and development, and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, foreign exchange rate movements, stock-based compensation, restructuring activities and the impact of our variable compensation programs that are driven by operating results. Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods whenthe United States dollar strengthens in value against other currencies and we recognize higher expenses whenthe United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our consolidated financial statements, see the discussion in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk." 29
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Our operating expenses for fiscal 2019 and 2018 were as follows:
Change
2019 2018 2019 vs. 2018
(In millions, except percentages)
Marketing and sales
Our operating expenses, as a percentage of total revenue, for fiscal 2019 and
2018 were as follows:
2019 2018
Marketing and sales 21 % 21 %
Research and development 40 % 41 %
General and administrative 6 % 6 %
Total operating expenses 67 % 68 %
Marketing and Sales
The changes in marketing and sales expense were due to the following:
Change
2019 vs. 2018
(In millions)
Salary, benefits and other employee-related costs $ 30.6 Stock-based compensation
4.4
Travel and sales meetings 2.8
Facilities and other infrastructure costs 2.4
Other items 1.8
Total change in marketing and sales expense $ 42.0
Salary, benefits and other employee-related costs included in marketing and sales increased during fiscal 2019, as compared to fiscal 2018, primarily due to additional headcount as a result of hiring and an increase in employee incentive compensation. Research and Development
The changes in research and development expense were due to the following:
Change
2019 vs. 2018
(In millions)
Salary, benefits and other employee-related costs
10.3
Depreciation 4.3
Product development costs 3.3
Other items (0.4 )
Total change in research and development expense
Costs included in research and development increased during fiscal 2019, as compared to fiscal 2018, primarily due to additional headcount as a result of hiring.
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General and Administrative
The changes in general and administrative expense were due to the following:
Change
2019 vs. 2018
(In millions)
Professional services $ 4.5
University endowment 3.0
Acquisition-related costs 2.2
Bad debt expense (4.5 )
Other items 1.2Total change in general and administrative expense $ 6.4
Professional services included in general and administrative costs increased
during fiscal 2019, as compared to fiscal 2018, primarily due to consulting fees
related to an internal realignment of our international operating structure. For
further discussion regarding the realignment of our international operating
structure, see Note 6 in the notes to the consolidated financial statements.
Amortization of Acquired Intangibles
Change
2019 2018 2019 vs. 2018
(In millions, except percentages)
Amortization of acquired intangibles $ 12.1 $ 14.1 $ (2.0 ) (14 )%
The decrease in amortization of acquired intangibles was due to certain
intangible assets becoming fully amortized during fiscal 2019 and 2018.
Restructuring and Other Charges
We have initiated restructuring plans in recent years to better align our
resources with our business strategy. Because the restructuring charges and
related benefits are derived from management's estimates made during the
formulation of the restructuring plans, based on then-currently available
information, our restructuring plans may not achieve the benefits anticipated on
the timetable or at the level contemplated. Additional actions, including
further restructuring of our operations, may be required in the future.
The following table presents restructuring and other charges, net for our
restructuring plans:
2019 2018
(In millions)
Severance and benefits $ 8.6 $ 10.3
Excess facilities - 0.8
Total $ 8.6 $ 11.1 For an additional description of our restructuring plans, see Note 13 in the notes to consolidated financial statements.
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Interest Expense
Interest expense for fiscal 2019 and 2018 was comprised of the following:
2019 2018
(In millions)
Contractual cash interest expense:
2019 Term Loan $ - $ 5.3
2024 Notes 15.3 15.3
Revolving credit facility 2.4 1.1
Amortization of debt discount:
2019 Term Loan - 0.2
2024 Notes 0.7 0.7
Other 0.4 0.5
Total interest expense $ 18.8 $ 23.1
During fiscal 2018, we prepaid the outstanding principal balance and accrued
interest on our $300.0 million 2019 Term Loan. For an additional description of
our debt arrangements, see Note 3 in the notes to consolidated financial
statements.
Income Taxes
The following table presents the provision (benefit) for income taxes and the
effective tax rate for fiscal 2019 and 2018:
2019 2018
(In millions, except percentages)
Provision (benefit) for income taxes $ (510.0 )
(106.5 )% 8.1 %
During the fourth quarter of fiscal 2019, we completed intercompany transfers of
certain intangible property rights to our Irish subsidiary, which resulted in
the establishment of a net deferred tax asset and the recognition of an income
tax benefit of $575.6 million . We expect to be able to realize the deferred tax
asset in future periods and did not provide for a valuation allowance.
This income tax benefit was partially offset by the federal, state and foreign
income taxes on our fiscal 2019 income. We also recognized $36.8 million of tax
benefit related to stock-based compensation that vested or was exercised during
the year.
Our provision for income taxes for fiscal 2018 primarily resulted from the
federal, state and foreign income taxes on our fiscal 2018 income, partially
offset by $21.3 million of tax benefit related to stock-based compensation that
vested or was exercised during the year. During fiscal 2018, we finalized our
fiscal 2017 deemed repatriation transition tax calculation and reduced our
estimate from $67.2 million to $65.8 million . We finalized our other fiscal 2017
provisional estimates without change. For further discussion regarding our
accounting for the Tax Act, see Note 6 in the notes to the consolidated
financial statements.
Our future effective tax rates may be materially impacted by tax amounts
associated with our foreign earnings at rates different from the United States
federal statutory rate, research credits, the tax impact of stock-based
compensation, accounting for uncertain tax positions, business combinations,
closure of statutes of limitations or settlement of tax audits, changes in
valuation allowance and changes in tax law. A significant amount of our foreign
earnings is generated by our subsidiaries organized in Ireland and Hungary . Our
future effective tax rates may be adversely affected if our earnings were to be
lower in countries where we have lower statutory tax rates. We currently expect
that our fiscal 2020 effective tax rate will be approximately 20%. We expect
that our quarterly effective tax rates will vary from our fiscal 2020 effective
tax rate as a result of recognizing the income tax effects of stock-based awards
in the quarterly periods that the awards vest or are settled and other items
that we cannot anticipate. For additional discussion about how our effective tax
rate could be affected by various risks, see Part I, Item 1A, "Risk Factors."
For further discussion regarding our income taxes, see Note 6 in the notes to
consolidated financial statements.
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Liquidity and Capital Resources
As of Change
December 28, December 29, December 30,
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(Inmillions)
Cash and cash equivalents
$ 171.9 $ (154.8 )
Net working capital 497.0 242.1 337.6 254.9 (95.5 )
Cash and Cash Equivalents
As of December 28, 2019 , our principal sources of liquidity consisted of $705.2
million of cash and cash equivalents as compared to $533.3 million as of
December 29, 2018 .
Our primary sources of cash and cash equivalents during fiscal 2019 were cash
generated from operations, proceeds from borrowings under our revolving credit
facility, proceeds from the exercise of stock options and proceeds from stock
purchases under our employee stock purchase plan.
Our primary uses of cash and cash equivalents during fiscal 2019 were payments
related to salaries and benefits, operating expenses, repurchases of our common
stock, payments on our revolving credit facility, purchases of property, plant
and equipment and purchases of non-marketable investments.
Approximately 43% of our cash and cash equivalents were held by our foreign
subsidiaries as of December 28, 2019 . Our cash and cash equivalents held by our
foreign subsidiaries may vary from period to period due to the timing of
collections and repatriation of foreign earnings. We expect that current cash
and cash equivalent balances, cash flows that are generated from operations and
cash borrowings available under our revolving credit facility will be sufficient
to meet our domestic and international working capital needs, and other capital
and liquidity requirements, including acquisitions and share repurchases for at
least the next 12 months.
Net Working Capital
Net working capital is comprised of current assets less current liabilities, as
shown on our consolidated balance sheets. The increase in our net working
capital as of December 28, 2019 , as compared to December 29, 2018 , is primarily
due to improved results from operations, the timing of cash receipts from
customers and disbursements made to vendors.
Cash Flows from Operating Activities
Cash flows from operating activities during fiscal 2019 and 2018 were as
follows:
Change
2019 2018 2019 vs. 2018
(In millions)
Cash provided by operating activities
Cash flows from operating activities include net income, adjusted for certain
non-cash items, as well as changes in the balances of certain assets and
liabilities. Our cash flows from operating activities are significantly
influenced by business levels and the payment terms set forth in our customer
agreements. The increase in cash flows from operating activities during fiscal
2019, as compared to fiscal 2018, was primarily due to the improved results from
operations and timing of cash receipts from customers and disbursements made to
vendors.
Cash Flows from Investing Activities
Cash flows used for investing activities during fiscal 2019 and 2018 were as
follows:
Change
2019 2018 2019 vs. 2018
(In millions)
Cash used for investing activities
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The decrease in cash used for investing activities during fiscal 2019, as compared to fiscal 2018, was primarily due to a decrease in payments to acquire equity instruments of other entities. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, business combinations, purchasing software licenses, and making strategic investments. During the first quarter of fiscal 2020, we completed two business combinations for cash consideration of approximately$195 million , which will be classified as cash used for investing activities. Cash Flows from Financing Activities Cash flows used for financing activities during fiscal 2019 and 2018 were as follows: Change 2019 2018 2019 vs. 2018 (In millions)
Cash used for financing activities
The decrease in cash used for financing activities during fiscal 2019, as compared to fiscal 2018, was primarily due to a decrease in net cash paid for debt arrangements, partially offset by an increase in payments for repurchases of our common stock. Other Factors Affecting Liquidity and Capital Resources Stock Repurchase Program InFebruary 2019 , our Board of Directors authorized the repurchase of$500 million of our common stock. The actual timing and amount of future repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors. As ofDecember 28, 2019 , approximately$369.0 million remained available under this authorization. See Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " for additional information. Revolving Credit Facility Our senior unsecured revolving credit facility provides for borrowings up to$350.0 million , with the right to request increased capacity up to an additional$250.0 million upon the receipt of lender commitments, for total maximum borrowings of$600.0 million . The credit facility expires onJanuary 28, 2022 and currently has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity onJanuary 28, 2022 . Outstanding borrowings may be paid at any time prior to maturity. As ofDecember 28, 2019 , there were no borrowings outstanding under our revolving credit facility, and we were in compliance with all financial covenants associated with the revolving credit facility. 2024 Notes InOctober 2014 , we issued$350.0 million aggregate principal amount of 4.375% Senior Notes dueOctober 15, 2024 . We received net proceeds of$342.4 million from the issuance of the 2024 Notes, net of a discount of$1.4 million and issuance costs of$6.2 million . Interest is payable in cash semi-annually. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. As ofDecember 28, 2019 , we were in compliance with all covenants associated with the 2024 Notes. For additional information relating to our debt arrangements, see Note 3 in the notes to consolidated financial statements. 34
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Contractual Obligations
A summary of our contractual obligations as ofDecember 28, 2019 is as follows: Payments Due by Period Less More Total Than 1 Year 1-3 Years 3-5 Years Than 5 Years (In millions)
Operating lease obligations
$ 26.0 $ 19.4 Purchase obligations (1) 42.7 20.3 16.5 5.6 0.3 Long-term debt 350.0 - - 350.0 - Contractual interest payments 77.6 15.8 31.2 30.6 - Current income tax payable 9.5 9.5 - - - Other long-term contractual obligations (2) 38.6 - 19.6
4.7 14.3
Total $ 643.2 $ 74.9 $ 117.4 $ 416.9 $ 34.0
_________________
(1) With respect to purchase obligations that are cancelable by us, this table
includes the amount that would have been payable if we had canceled the
obligation as of December 28, 2019 or the earliest cancellation date.
(2) Included in other long-term contractual obligations are long-term income tax
liabilities of
3 years,
years. The remaining portion of other long-term contractual obligations is
primarily liabilities associated with defined benefit retirement plans and
acquisitions.
Off-Balance Sheet Arrangements
As of December 28, 2019 , we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Estimates
In preparing our consolidated financial statements, we make assumptions,
judgments and estimates that can have a significant impact on our revenue,
operating income and net income, as well as on the value of certain assets and
liabilities on our consolidated balance sheets. We base our assumptions,
judgments and estimates on historical experience and various other factors that
we believe to be reasonable under the circumstances. Actual results could differ
materially from these estimates under different assumptions or conditions. At
least quarterly, we evaluate our assumptions, judgments and estimates, and make
changes as deemed necessary.
We believe that the assumptions, judgments and estimates involved in the
accounting for income taxes, revenue recognition and business combinations have
the greatest potential impact on our consolidated financial statements;
therefore, we consider these to be our critical accounting estimates. For
information on our significant accounting policies, see Note 2 in the notes to
consolidated financial statements.
Accounting for Income Taxes
We are subject to income taxes in the United States and numerous foreign
jurisdictions. Significant judgment is required in evaluating and estimating our
provision for these taxes. There are many transactions that occur during the
ordinary course of business for which the ultimate tax determination is
uncertain. The Tax Act has provisions that require additional guidance on
specific interpretations of the tax law changes. Our provision for income taxes
could be adversely affected by our earnings being lower than anticipated in
countries where we have lower statutory rates and higher than anticipated in
countries where we have higher statutory rates, losses incurred in jurisdictions
for which we are not able to realize the related tax benefit, changes in foreign
currency exchange rates, entry into new businesses and geographies and changes
to our existing businesses, acquisitions and investments, changes in our
deferred tax assets and liabilities including changes in our assessment of
valuation allowances, changes in the relevant tax laws or interpretations of
these tax laws, and developments in current and future tax examinations.
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We only recognize the tax benefit of an income tax position if we judge that it is more likely than not that the tax position will be sustained, solely on its technical merits, in a tax audit including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If we judge that an income tax position meets this recognition threshold, then we must measure the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% cumulative probability of being realized upon settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, the lapse of applicable statute of limitations, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. For a more detailed description of our unrecognized tax benefits, see Note 6 in the notes to consolidated financial statements. During fiscal 2019, we completed intercompany transfers of certain intangible property rights to our Irish subsidiary, which resulted in the establishment of a deferred tax asset and the recognition of an income tax benefit of$575.6 million . To determine the value of the deferred tax asset, we were required to make significant estimates in determining the fair value of the transferred IP rights. These estimates included, but are not limited to, the income and cash flows that the IP rights are expected to generate in the future, the appropriate discount rate to apply to the income and cash flow projections, and the useful lives of the IP rights. These estimates are inherently uncertain and unpredictable, and if different estimates were used, it would impact the fair value of the IP rights and the related value of the deferred tax asset and the income tax benefit recognized in fiscal 2019 and in future periods when the deferred tax asset is realized. In addition, we reviewed the need to establish a valuation allowance on the deferred tax asset of$575.6 million by evaluating whether there is a greater than 50% likelihood that some portion or all of the deferred tax asset will not be realized. To make this judgment, we must make significant estimates and predictions of the amount and category of future taxable income from various sources and weigh all available positive and negative evidence about these possible sources of taxable income. We give greater weight to evidence that can be objectively verified. Based on our evaluation and weighting of the positive and negative evidence, we concluded that it is greater than 50% likely that the deferred tax asset of$575.6 million will be realized in future periods and that a valuation allowance was not currently required. If, in the future, we evaluate that this deferred tax asset is not likely to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made. Revenue Recognition Our contracts with customers often include promises to transfer multiple software and/or IP licenses, hardware and services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of our IP license arrangements, we have concluded that the licenses and associated services are distinct from each other. In other arrangements, like our time-based software arrangements, the licenses and certain services are not distinct from each other. Our time-based software arrangements include multiple software licenses and updates to the licensed software products, as well as technical support, and we have concluded that these promised goods and services are a single, combined performance obligation. Judgment is required to determine the stand-alone selling prices ("SSPs") for each distinct performance obligation. We rarely license or sell products on a standalone basis, so we are required to estimate the SSP for each performance obligation. In instances where the SSP is not directly observable because we do not sell the license, product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region of the customer in determining the SSP. Revenue is recognized over time for our combined performance obligations that include software licenses, updates, and technical support as well as for maintenance and professional services that are separate performance obligations. For our professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in 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 and specification and testing requirement changes. For our other performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term. If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. We exercise significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. Our judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved. We are required to estimate the total consideration expected to be received from contracts with customers. In some circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on our expectations of the term of the contract. Generally, we have not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on our results of operations during the periods involved. 36
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Business Combinations When we acquire businesses, we allocate the purchase price to the acquired tangible assets and assumed liabilities, including deferred revenue, liabilities associated with the fair value of contingent consideration and acquired identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires us to make significant estimates in determining the fair values of these acquired assets and assumed liabilities, especially with respect to intangible assets and goodwill. These estimates are based on information obtained from management of the acquired companies, our assessment of this information, and historical experience. These estimates can include, but are not limited to, the cash flows that an acquired business is expected to generate in the future, the cash flows that specific assets acquired with that business are expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made to the acquired assets and assumed liabilities. In addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such estimates, and if such events occur, we may be required to adjust the value allocated to acquired assets or assumed liabilities. We also make significant judgments and estimates when we assign useful lives to the definite-lived intangible assets identified as part of our acquisitions. These estimates are inherently uncertain and if we used different estimates, the useful life over which we amortize intangible assets would be different. In addition, unanticipated events and circumstances may occur that may impact the useful life assigned to our intangible assets, which would impact our amortization of intangible assets expense and our results of operations. New Accounting Standards Credit Losses InJune 2016 , the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. The new standard is effective for us in the first quarter of fiscal 2020. The adoption of this standard will not have a significant impact on our consolidated financial statements or the related disclosures. Goodwill Impairment InJanuary 2017 , the FASB issued ASU 2017-04, "Simplifying the Test forGoodwill Impairment," that eliminates "Step 2" from the goodwill impairment test. The new standard is effective for us in the first quarter of fiscal 2020. The new guidance must be applied on a prospective basis. The adoption of this standard will not have a significant impact on our consolidated financial statements or the related disclosures. Fair Value Measurements InAugust 2018 , the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which modifies the disclosure requirements on fair value measurements. The new standard is effective for us in the first quarter of fiscal 2020. The adoption of this standard will not have a significant impact on our consolidated financial statements or the related disclosures. Implementation Costs Incurred in a Cloud Computing Arrangement InAugust 2018 , the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard aligns the treatment of implementation costs incurred by customers in cloud computing arrangements that are service contracts with the treatment of similar costs incurred to develop or obtain internal-use software. Under the new standard, implementation costs are deferred and presented in the same line item as a prepayment of related arrangement fees. The deferred costs are recognized over the term of the arrangement in the same line item as the related fees of the arrangement. The new standard is effective for us in the first quarter of fiscal 2020 and will be applied prospectively to costs incurred after the date of adoption. The adoption of this standard will not have a significant impact on our consolidated financial statements or the related disclosures. Accounting for Income Taxes InDecember 2019 , the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning afterDecember 15, 2021 . Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impacts of the provisions of this standard on our financial condition, results of operations and cash flows. 37
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