SYNOPSYS INC. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the "safe harbor" created by those sections. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "could," "would," "can," "should," "anticipate," "expect," "intend," "believe," "estimate," "project," "continue," "forecast," or the negatives of such terms, and similar expressions, are intended to identify forward-looking statements. Without limiting the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements concerning the extent and duration of the novel coronavirus (COVID-19) pandemic and the impact of the COVID-19 pandemic on our business, operations and financial condition, expected growth in the semiconductor and electronics industries, the effects of consolidation among our customers and within the industries in which we operate, our business outlook, our business model, our growth strategy, the ability of our prior acquisitions to drive revenue growth, the sufficiency of our cash, cash equivalents and cash generated from operations, our future liquidity requirements, and other statements that involve certain known and unknown risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those identified below in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. The information included herein represents our estimates and assumptions as of the date of this filing. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. All subsequent written or oral forward-looking statements attributable toSynopsys 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 Quarterly Report on Form 10-Q and in other documents we file from time to time with theSecurities and Exchange Commission (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 endedOctober 31, 2019 , as filed with theSEC onDecember 20, 2019 . Overview Business SummarySynopsys, Inc. provides products and services used across the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the security and quality of their code. We are a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. We also offer semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, we provide technical services and support to help our customers develop advanced chips and electronic systems. These products and services are part of our Semiconductor & System Design segment. We are also a leading provider of software tools and services that improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials. These tools and services are part of our Software Integrity segment. Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help these companies overcome the challenges of developing increasingly advanced electronics products while also helping them reduce their design and manufacturing costs. While our products are an important part of our customers' development process, our sales could be affected based on their research and development budgets, and our customers' spending decisions may be affected by their business outlook and willingness to invest in new and increasingly complex chip designs. Our Software Integrity business delivers products and services that enable software developers to test their code - while it is being written - for known security vulnerabilities and quality defects, as well as testing for open source 26 -------------------------------------------------------------------------------- security vulnerabilities and license compliance. Our Software Integrity customers are software developers across many industries, including, but also well beyond, the semiconductor and systems industries. Our Software Integrity products and services form a platform that helps our customers build security into the software development lifecycle and across the entire cyber supply chain. We have consistently grown our revenue since 2005, despite periods of global economic uncertainty. We achieved these results because of our solid execution, leading technologies and strong customer relationships, and because we recognize our revenue for the software licenses over the arrangement period, which typically approximates three years. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for discussion on our revenue recognition policy. Time-based revenue consists of time-based products, maintenance and service revenue. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. As a result, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way. Our growth strategy is based on building on our leadership in our EDA products, expanding and proliferating our IP offerings, and driving growth in the software security and quality market. As we continue to expand our product portfolio and our total addressable market, for instance in the software security and quality space, we expect to experience increased variability in our total revenue. In addition, due to our adoption of ASC 606 in the beginning of fiscal 2019, the way in which we are required to account for certain types of arrangements has increased the variability in our total revenue from period to period. Nevertheless, the accounting impact has not affected our cash generated from our business. Based on our leading technologies, customer relationships, business model, diligent expense management, and acquisition strategy, we believe that we will continue to execute our strategies successfully. COVID-19 Pandemic Although the COVID-19 pandemic has caused minor disruptions to our business operations, it has had a limited impact on our operating results thus far. Given the unpredictable nature of the COVID-19 pandemic's impact on the global economy, historical results may not be an indication of future performance. The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors, including the duration and scope of the pandemic, its overall negative impact on the global economy generally and the semiconductor and electronics industries specifically, and continued responses by governments and businesses to COVID-19. We have not identified trends that we expect will materially impact our future operating results at this time. As we recognize our revenue for software licenses over the arrangement period, any potential impact related to COVID-19 may be delayed. We have not observed any changes in the design activity of customers, but we have experienced a slowdown in customer commitments in our Software Integrity segment. We have also experienced minor disruptions in our hardware supply chain, which we have been able to address with minimal impact to our business operations to date. We will continue to consider the potential impact of the COVID-19 pandemic on our business operations. Although no material impairment or other effects have been identified to date related to the COVID-19 pandemic, there is substantial uncertainty in the nature and degree of its continued effects over time. That uncertainty affects management's accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. See Part II, Item 1A, Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business, operations and financial condition. Business Segments The CODMs regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and other associated revenue categories, and (2) Software Integrity, which includes a comprehensive solution for building integrity-security, quality and compliance testing-into our customers' software development lifecycle and supply chain. Semiconductor & System Design. This segment includes our advanced silicon design, verification products and services, and semiconductor IP portfolio, which encompasses products and services that serve companies primarily in the semiconductor and electronics industries. EDA includes digital, custom and Field Programmable Gate Array (FPGA) IC design software, verification products, and manufacturing software products. Designers use these 27 -------------------------------------------------------------------------------- products to automate the highly complex IC design process and to reduce defects that could lead to expensive design or manufacturing re-spins or suboptimal end products. For IP, we are a leading provider of high-quality, silicon-proven IP solutions for system-on-chips (SoCs). This includes IP that has been optimized to address specific application requirements for the mobile, automotive, digital home, internet of things, and cloud computing markets, enabling designers to quickly develop SoCs in these areas. Software Integrity. This segment includes a broad portfolio of products and services such as leading quality testing technologies, automated analysis, and consulting experts. Beginning in fiscal 2019, we launched thePolaris Software Integrity Platform™, an integrated cloud-based solution that unites key elements to provide an even more valuable way for developers to better develop personalized approaches for open source license compliance and detect and remediate known security vulnerabilities and quality defects early in the development process, thereby minimizing risk and maximizing productivity. Fiscal Year End Our fiscal year ends on the Saturday nearest toOctober 31 and consists of 52 weeks, with the exception that approximately every five years, we have a 53-week year. When a 53-week year occurs, we include the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2020 and 2019 are 52-week years ending onOctober 31, 2020 andNovember 2, 2019 , respectively. Our results of operations for the three and six months of fiscal 2020 and 2019 ended onMay 2, 2020 andMay 4, 2019 , respectively. For presentation purposes, this Form 10-Q refers to the closest calendar month end. Financial Performance Summary In the second quarter of fiscal 2020 compared to the same period of fiscal 2019, our financial performance reflects the following: • Revenues were$861.3 million , an increase of$25.1 million , primarily
due to our continued organic growth.
• Total cost of revenue and operating expenses were
increase of $14.7 million , primarily due to increases in
employee-related costs of $33.0 million resulting from increases in
organic growth and acquisitions, and restructuring costs of $15.3
million , partially offset by lower deferred compensation expenses of
$34.8 million .
• Operating income was
Critical Accounting Policies and Estimates Our discussion and analysis of our financial results under Results of Operations below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance withU.S. GAAP. 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 ongoing 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. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for further information on our significant accounting policies. The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, are: • Revenue recognition;
• Valuation of business combinations; and
• Income taxes.
See Critical Accounting Policies and Estimates in our Annual Report on Form 10-K
for the year ended
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Results of Operations
Revenue
Our revenues are generated from two business segments: the Semiconductor &
System Design segment and the Software Integrity segment. See Note 15 of Notes
to Unaudited Condensed Consolidated Financial Statements for additional
information about our reportable segments and revenue by geographic regions.
Further disaggregation of the revenues into various products and services within
these two segments is summarized as follows:
Semiconductor & System Design Segment
This segment is comprised of the following:
• EDA software includes digital, custom and Field Programmable Gate Array
(FPGA) IC design software, verification products and obligations to
provide unspecified updates and support services. EDA products and
services are typically sold through TSL arrangements that grantcustomers the right to access and use all of the licensed products at
the outset of an arrangement and software updates are generally made
available throughout the entire term of the arrangement, which is
typically three years. Under ASC 606, we have concluded that thesoftware licenses in TSL contracts are not distinct from the obligation
to provide unspecified software updates to the licensed software
throughout the license term, because the multiple software licenses
represent inputs to a single, combined offering, and timely, relevant
software updates are integral to maintaining the utility of thesoftware licenses. We recognize revenue for the combined performance
obligation under TSL contracts ratably over the term of the license.
• IP & System Integration includes our DesignWare® IP portfolio andsystem-level products and services. Under ASC 606, these arrangements
generally have two performance obligations which consist of
transferring of the licensed IP and providing related support, which
includes rights to technical support and software updates that areprovided over the support term and are transferred to the customer over
a time. Revenue allocated to the IP licenses is recognized at a point
in time upon the later of the delivery date or the beginning of thelicense period, and revenue allocated to support is recognized over the
support term. Royalties are recognized as revenue in the quarter in
which the applicable customer sells its products that incorporate ourIP. Payments for IP contracts are generally received upon delivery of
the IP. Revenue related to the customization of certain IP is
recognized as "Professional Services."
• In the case of arrangements involving the sale of Hardware products, we
generally have two performance obligations. The first performance
obligation is to transfer the hardware product, which includes software
integral to the functionality of the hardware product. The second
performance obligation is to provide maintenance on the hardware and
its embedded software, which includes rights to technical support,
hardware repairs and software updates that are all provided over the
same term and have the same time-based pattern of transfer to the
customer. The portion of the transaction price allocated to the
hardware product is generally recognized as revenue at the time of
delivery because the customer obtains control of the product at that
point in time. We have concluded that control generally transfers atthat point in time because the customer has title to the hardware,
physical possession, and a present obligation to pay for the hardware.
The portion of the transaction price allocated to the maintenance
obligation is recognized as revenue ratably over the maintenance term.
• Revenue from Professional Service contracts is recognized over time,generally using costs incurred or hours expended to measure progress.
We have a history of reasonably 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.
Software Integrity Segment • We sell Software Integrity products in arrangements that provide
customers the right to software licenses, maintenance updates and
technical support. Over the term of these arrangements, the customer
expects us to provide integral maintenance updates to the software
licenses, which help
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customers protect their own software from new critical quality defects and
potential security vulnerabilities. The licenses and maintenance updates serve
together to fulfill our commitment to the customer as both work together to
provide the functionality to the customer and represent a combined performance
obligation. We will recognize revenue for the combined performance obligation
over the term of the arrangement.
Most of our customer arrangements are complex, involving hundreds of products
and various license rights, and our customers bargain with us over many aspects
of these arrangements. For example, they 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. No single factor typically drives our customers' buying
decisions, and we compete on all fronts to serve customers in highly competitive
markets. Customers generally negotiate the total value of the arrangement rather
than just unit pricing or volumes.
Total Revenue
April 30,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
Semiconductor & System Design Segment $ 773.0 $ 753.0 $ 20.0 3 %
Software Integrity Segment 88.3 83.2 5.1 6 %
Total $ 861.3 $ 836.2 $ 25.1 3 %
Six months ended
Semiconductor & System Design Segment $ 1,521.8 $ 1,490.9 $ 30.9 2 %
Software Integrity Segment 173.9 165.7 8.2 5 %
Total $ 1,695.7 $ 1,656.6 $ 39.1 2 %
The overall growth of our business has been the primary driver of the increase
in our revenue. Our revenues are subject to fluctuations, primarily due to
customer requirements including the timing and value of contract renewals. For
example, we experience fluctuations in our revenue due to factors such as the
timing of IP product sales, consulting projects, FSA drawdowns, royalties, and
hardware sales. As revenue from IP products sales and hardware sales are
recognized upfront, customer demand and timing requirements for such IP products
and hardware have resulted in increased variability of our total revenue.
The increase in total revenue for the three months ended April 30, 2020 compared
to the same period in fiscal 2019 was primarily attributable to the continued
organic growth of the business in time-based and upfront license products, and
to a lesser extent, higher maintenance and service revenue. The increase was
partially offset by a decrease in the sale of hardware products driven by timing
of customer requirements.
The increase in total revenue for the six months ended April 30, 2020 compared
to the same period in fiscal 2019 was primarily attributable to the continued
organic growth of the business in time-based and upfront license products. The
increase was partially offset by a decrease in the sale of hardware products,
and maintenance and service revenue due to a decrease in the volume of
arrangements that include maintenance.
See Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements
for a discussion of revenue by geographic areas.
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April 30,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
$ 1,146.5 $ 1,112.0 $ 34.5 3 %
Percentage of total revenue 68 % 67 %
The increase in time-based products for the three and six months endedApril 30, 2020 compared to the same periods in fiscal 2019 was primarily attributable to an increase in TSL license revenue from arrangements booked in prior periods. Upfront Products Revenue April 30, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
$ 280.5 $ 273.9 $ 6.6 2 %
Percentage of total revenue 16 % 17 %
Changes in upfront products revenue are generally attributable to normal fluctuations in the extent and timing of customer requirements, which can drive the amount of upfront orders and revenue in any particular period. The decrease in upfront products revenue for the three months endedApril 30, 2020 compared to the same period in fiscal 2019 was primarily due to a decrease in the sale of hardware products driven by timing of customer requirements. The decrease was partially offset by an increase in the sale of IP products driven by higher demand from customers and to a lesser extent contributions from acquisitions. The increase in upfront products revenue for the six months endedApril 30, 2020 compared to the same period in fiscal 2019 was primarily due to an increase in the sale of IP products driven by higher demand from customers and contributions from acquisitions. The increase was partially offset by a decrease in the sale of hardware products driven by timing of customer requirements. Upfront products revenue as a percentage of total revenue will likely fluctuate based on the timing of IP products and hardware sales. Such fluctuations will continue to be impacted by the timing of shipments or FSA drawdowns due to customer requirements. 31 --------------------------------------------------------------------------------
Maintenance and Service Revenue
April 30,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
Maintenance revenue $ 44.9 $ 39.4 $ 5.5 14 %
Professional services and other revenue 96.6 95.1 1.5 2 %
Total $ 141.5 $ 134.5 $ 7.0 5 %
Percentage of total revenue 16 % 16 %
Six months ended
Maintenance revenue $ 85.0 $ 94.8 $ (9.8 ) (10 )%
Professional services and other revenue 183.7 175.9 7.8 4 %
Total maintenance and service revenue $ 268.7 $ 270.7 $ (2.0 ) (1 )%
Percentage of total revenue 16 % 16 %
The increase and decrease, respectively, in maintenance revenue for the three
and six months ended April 30, 2020 compared to the same periods in fiscal 2019
were primarily due to changes in the volume of arrangements that include
maintenance.
The increase in professional services and other revenue for the three and six
months ended April 30, 2020 compared to the same periods in fiscal 2019 was
primarily due to the timing of IP consulting projects.
Cost of Revenue
April 30,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
Cost of products revenue $ 108.2 $ 116.0 $ (7.8 ) (7 )%
Cost of maintenance and service revenue 62.2 59.8 2.4 4 %
Amortization of intangible assets 13.8 14.9 (1.1 ) (7 )%
Total $ 184.3 $ 190.7 $ (6.4 ) (3 )%
Percentage of total revenue 21 % 23 %
Six months ended
Cost of products revenue $ 226.0 $ 232.6 $ (6.6 ) (3 )%
Cost of maintenance and service revenue 124.1 118.6 5.5 5 %
Amortization of intangible assets 27.0 32.3 (5.3 ) (16 )%
Total $ 377.1 $ 383.6 $ (6.5 ) (2 )%
Percentage of total revenue 22 % 23 %
We divide cost of revenue into three categories: cost of products revenue, cost
of maintenance and service revenue, and amortization of intangible assets. We
segregate expenses directly associated with consulting and training services
from cost of products revenue associated with internal functions providing
license delivery and post-customer contract support services. We then allocate
these group costs between cost of products revenue and cost of maintenance and
service revenue based on products and maintenance and service revenue reported.
Cost of products revenue. Cost of products revenue includes costs related to
products sold and software licensed, allocated operating costs related to
product support and distribution costs, royalties paid to third-party vendors,
and the amortization of capitalized research and development costs associated
with software products that had reached technological feasibility.
Cost of maintenance and service revenue. Cost of maintenance and service revenue
includes operating costs related to maintaining the infrastructure necessary to
operate our services and costs to deliver our consulting services, such as
hotline and on-site support, production services and documentation of
maintenance updates. We
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expect our cost of maintenance and service revenue to increase in future periods
because of recent acquisitions, but we do not expect the impact to be material
to our total cost of revenue.
Amortization of intangible assets. Amortization of intangible assets, which is
recorded to cost of revenue and operating expenses, includes the amortization of
core/developed technology, trademarks, trade names, customer relationships,
covenants not to compete related to acquisitions and certain contract rights
related to acquisitions.
The decrease in cost of revenue for the three months ended April 30, 2020
compared to the same period in fiscal 2019 was primarily due to a decrease of
$7.5 million in hardware costs and lower deferred compensation expenses of $3.7
million , partially offset by an increase of $3.0 million in personnel-related
expenses as a result of headcount increase from organic hiring and acquisitions.
The decrease in cost of revenue for the six months ended April 30, 2020 compared
to the same period in fiscal 2019 was primarily due to a decrease of $15.0
million in hardware costs and lower deferred compensation expenses of $2.8
million , partially offset by increases of $8.6 million in personnel-related
costs as a result of headcount increases from organic hiring and acquisitions,
$3.1 million in depreciation and maintenance expenses, $2.4 million in facility
expenses, and $2.0 million in consulting costs primarily related to servicing IP
consulting arrangements.
Changes in other cost of revenue categories for the above-mentioned periods were
not individually material.
Operating Expenses
Research and Development
April 30,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
$ 616.9 $ 561.6 $ 55.3 10 %
Percentage of total revenue 36 % 34 %
The increase in research and development expenses for the three and six months endedApril 30, 2020 compared to the same periods in fiscal 2019 was primarily due to increases of$25.3 million and$51.7 million , respectively, in personnel-related costs as a result of headcount increases, including those from acquisitions,$4.6 million and$12.0 million , respectively, in facility expenses, and$2.7 million and$4.5 million , respectively, in consultants and contractor costs, partially offset by lower deferred compensation expenses of$20.4 million and$15.8 million , respectively. Changes in other research and development expense categories for the above-mentioned periods were not individually material. Sales and Marketing April 30, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
$ 299.1 $ 314.6 $ (15.5 ) (5 )%
Percentage of total revenue 18 % 19 %
The decrease in sales and marketing expenses for the three months endedApril 30, 2020 compared to the same period in fiscal 2019 was primarily due to lower deferred compensation expenses of$6.8 million and a decrease of$5.8 million in travel and marketing communication expenses as a result of travel restrictions related to COVID-19, partially offset by an increase in personnel-related costs of$1.1 million . 33 -------------------------------------------------------------------------------- The decrease in sales and marketing expenses for the six months endedApril 30, 2020 compared to the same period in fiscal 2019 was primarily due to decreases of$7.7 million in travel and marketing communication expenses as a result of travel restrictions related to COVID-19,$2.8 million in personnel-related costs and lower deferred compensation expenses of$5.2 million . Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material. General and Administrative April 30, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
$ 131.2 $ 98.4 $ 32.8 33 %
Percentage of total revenue 8 % 6 %
The increase in general and administrative expenses for the three months endedApril 30, 2020 compared to the same period in fiscal 2019 was primarily due to increases of$3.6 million in personnel-related costs and$1.6 million in professional service costs primarily due to additional legal services related to various projects, partially offset by lower deferred compensation expenses of$3.9 million . The increase in general and administrative expenses for the six months endedApril 30, 2020 compared to the same period in fiscal 2019 was primarily due to a legal settlement of$18.3 million in our favor in the first quarter of fiscal 2019 and increases of$8.0 million in personnel-related expenses and$5.6 million in depreciation and maintenance expenses, partially offset by lower deferred compensation expenses of$2.9 million . Changes in other general and administrative expense categories for the above-mentioned periods were not individually material. Amortization of Intangible Assets Amortization of intangible assets includes the amortization of contract rights and the amortization of core/developed technology, trademarks, trade names, customer relationships, and in-process research and development related to acquisitions completed in prior years. Amortization expense is included in the unaudited condensed consolidated statements of operations as follows: April 30, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
Included in cost of revenue
- - %
Total $ 24.1 $ 25.2 $ (1.1 ) (4 )%
Percentage of total revenue 3 % 3 %
Six months ended
Included in cost of revenue
$ 46.6 $ 53.4 $ (6.8 ) (13 )%
Percentage of total revenue 3 % 3 %
The decrease in amortization of intangible assets for the three and six months endedApril 30, 2020 compared to the same periods in fiscal 2019 was primarily due to intangible assets that were fully amortized, partially offset by additions of acquired intangible assets. 34 -------------------------------------------------------------------------------- Restructuring Charges In the second quarter of fiscal 2019, our management approved, committed and initiated a restructuring plan (the Plan) as part of a business reorganization. Total charges under the Plan was$86.0 million and consisted primarily of severance, termination, and retirement benefits under the 2019 Voluntary Retirement Program (VRP). During the three and six months endedApril 30, 2020 , we incurred restructuring charges of approximately$29.7 million and$38.4 million , respectively, for involuntary employee termination actions and the VRP related to the 2019 restructuring plan. As ofApril 30, 2020 ,$30.3 million remained outstanding. During the three and six months endedApril 30, 2019 , we incurred restructuring charges of approximately$14.7 million as part of a business realignment under both the 2019 VRP and the 2018 restructuring plan. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Other Income (Expense), Net April 30, 2020 2019 $ Change % Change (dollars in millions) Three months ended Interest income$ 0.9 $ 1.9 $ (1.0 ) (53 )% Interest expense (1.8 ) (3.8 ) 2.0 (53 )% Gain (loss) on assets related to executive deferred compensation plan (18.5 ) 16.2 (34.7 ) (214 )% Foreign currency exchange gain (loss) 5.0 2.7 2.3 85 % Other, net (1.3 ) 1.4 (2.7 ) (193 )% Total$ (15.7 ) $ 18.4 $ (34.1 ) (185 )% Six months ended Interest income$ 2.4 $ 3.5 $ (1.1 ) (31 )% Interest expense (3.4 ) (8.4 ) 5.0 (60 )% Gain (loss) on assets related to executive deferred compensation plan (6.0 ) 20.5 (26.5 ) (129 )% Foreign currency exchange gain (loss) 5.1 2.3 2.8 122 % Other, net (1.8 ) 0.2 (2.0 ) (1,000 )% Total$ (3.7 ) $ 18.1 $ (21.8 ) (120 )% The net decrease in other income (expense) for the three and six months endedApril 30, 2020 as compared to the same periods in fiscal 2019 was primarily due to a loss in the market value of our executive deferred compensation plan assets compared to a gain in the corresponding periods. Segment Operating Results We do not allocate certain operating expenses managed at a consolidated level to our reportable segments. These unallocated expenses consist primarily of stock-based compensation expense, amortization of intangible assets, restructuring, litigation and acquisition-related costs. See Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements for more information. 35 --------------------------------------------------------------------------------
Semiconductor & System Design Segment
April 30,
2020 2019 Change % Change
(dollars in millions)
Three months ended
Adjusted operating income $ 209.7 $ 201.4 $ 8.3 4 %
Adjusted operating margin 27 % 27 % - % - %
Six months ended
Adjusted operating income $ 388.5 $ 396.7 $ (8.2 ) (2 )%
Adjusted operating margin 26 % 27 % (1 )% (4 )%
The increase in adjusted operating income for the three months ended April 30,
2020 compared to the same period in fiscal 2019 was primarily due to an increase
in revenue from arrangements booked in prior periods.
The decrease in adjusted operating income for the six months ended April 30,
2020 compared to the same period in fiscal 2019 was primarily due to lower
hardware and maintenance and service revenue.
Software Integrity Segment
April 30,
2020 2019 Change % Change
(dollars in millions)
Three months ended
Adjusted operating income $ 11.7 $ 8.4 $ 3.3 39 %
Adjusted operating margin 13 % 10 % 3 % 30 %
Six months ended
Adjusted operating income $ 19.8 $ 14.1 $ 5.7 40 %
Adjusted operating margin 11 % 8 % 3 % 38 %
The increase in adjusted operating income for the three and six months ended
April 30, 2020 compared to the same periods in fiscal 2019 was primarily due to
an increase in revenue from arrangements booked in prior periods.
Income Taxes
Our effective tax rate decreased in the three months ended April 30, 2020 as
compared to the same period in fiscal 2019, primarily due to an increase in
excess tax benefits from stock-based compensation and inclusion of unrecognized
foreign tax benefits for the three months ended April 30, 2019 . Our effective
tax rate decreased in the six months ended April 30, 2020 , as compared to the
same period in fiscal 2019, primarily due to an increase in excess tax benefits
from stock-based compensation and the realization of U.S. foreign tax credits.
See Note 17 of Notes to Unaudited Condensed Consolidated Financial Statements
for further discussion of the provision for income taxes and impacts related to
the Tax Act.
Liquidity and Capital Resources
Our sources of cash and cash equivalents are funds generated from our business
operations and funds that may be drawn down under our revolving credit and term
loan facilities.
We have considered the potential impact of the COVID-19 pandemic on our
liquidity and capital resources. Although we have not observed any material
effects on our liquidity, collections from customers or other working capital
requirements due to the COVID-19 pandemic to date, there is substantial
uncertainty that could result in greater variability as additional events and
information become known. We believe that our existing balances of cash and cash
equivalents will be sufficient to satisfy our working capital needs, capital
asset purchases, share repurchases, acquisitions, debt repayments and other
liquidity requirements associated with our existing operations. We are
continuously evaluating the COVID-19 pandemic's effects and taking steps to
mitigate known risks, including potential constraints on our liquidity and
capital resources as a result of customers' reduced
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expenditures or disruptions to our supply chain. In light of that ongoing
assessment, we may choose to temporarily defer certain expenditures due to the
effects of the COVID-19 pandemic.
As of April 30, 2020 , we held an aggregate of $313.1 million in cash and cash
equivalents in the United States and an aggregate of $543.3 million in our
foreign subsidiaries. As a result of the Tax Act, if we decide to repatriate the
undistributed earnings of our foreign subsidiaries for use in the U.S. in the
future, the earnings made after December 31, 2017 would not be subject to
further U.S. federal tax. In addition, we have provided foreign deferred taxes
on our undistributed earnings, which is sufficient to address the incremental
tax that would be due on future foreign earnings.
The following sections discuss changes in our unaudited condensed consolidated
balance sheets and statements of cash flows, and other commitments of our
liquidity and capital resources during the six months ended April 30, 2020 .
Cash and Cash Equivalents
April 30, October 31,
2020 2019 $ Change % Change
(dollars in millions)
Cash and cash equivalents $ 856.4 $ 728.6 $ 127.8 18 %
Cash and cash equivalents increased primarily due to cash from our operations
and net proceeds from our credit facilities. The increase in cash and cash
equivalents was partially offset by stock repurchases, repayment of debt, cash
used for acquisitions, and purchases of property and equipment.
Cash Flows
Six Months Ended
April 30,
2020 2019 $ Change
(dollars in millions)
Cash provided by operating activities
Cash Provided by Operating Activities We expect cash from our operating activities to fluctuate as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing and amount of tax and other liability payments. Cash provided by our operations is dependent primarily upon the payment terms of our license agreements. We generally receive cash from upfront arrangements much sooner than from time-based products revenue, in which the license fee is typically paid either quarterly or annually over the term of the license. Cash provided by operating activities for the six months endedApril 30, 2020 was higher compared to the same period in fiscal 2019, primarily attributable to higher deferred revenue due to timing of contracts and invoicing and lower disbursements in operations, including vendors and tax payments. Cash Used in Investing Activities Cash used in investing activities for the six months endedApril 30, 2020 was higher compared to the same period in fiscal 2019, primarily due to higher cash paid for acquisitions of$151.2 million . Cash Used in Financing Activities Cash used in financing activities for the six months endedApril 30, 2020 was lower compared to the same period in fiscal 2019, primarily due to lower debt repayments of$188.1 million and higher proceeds of$87.7 million from credit facilities drawdowns, partially offset by higher stock repurchase activities of$70.8 million . 37 --------------------------------------------------------------------------------
Accounts Receivable, net
April 30, October 31,
2020 2019 $ Change % Change
(dollars in millions)
Accounts Receivable, net $ 634.8 $ 553.9 $ 80.9 15 %
Changes in our accounts receivable balance are primarily driven by the timing of
customer billing and collection activities.
Working Capital
Working capital is comprised of current assets less current liabilities, as
shown on our unaudited condensed consolidated balance sheets:
April 30, October 31,
2020 2019 $ Change % Change
(dollars in millions)
Current assets $ 1,960.8 $ 1,738.9 $ 221.9 13 %
Current liabilities 2,054.2 1,752.5 301.7 17 %
Working capital (deficit) $ (93.4 ) $ (13.6 ) $ (79.8 ) 587 %
Increases in our working capital deficit were primarily due to an increase in
deferred revenue of $184.0 million , an increase in short-term debt of $103.8
million , an increase in current operating lease liabilities of $72.5 million ,
partially offset by an increase in cash and cash equivalents of $127.8 million ,
an increase in accounts receivable of $80.9 million and a decrease in accounts
payable and accrued liabilities of $59.4 million . We did not see an impact on
our working capital deficit during this period from the COVID-19 pandemic.
Other Commitments - Credit and Term Loan Facilities
On November 28, 2016 , we entered into an amended and restated credit agreement
with several lenders (the Credit Agreement) providing for (i) a $650.0 million
senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0
million senior unsecured term loan facility (the Term Loan). The Credit
Agreement amended and restated our previous credit agreement dated May 19, 2015 ,
in order to increase the size of the revolving credit facility from $500.0
million to $650.0 million , provide a new $150.0 million senior unsecured term
loan facility, and extend the termination date of the revolving credit facility
from May 19, 2020 to November 28, 2021 . Subject to obtaining additional
commitments from lenders, the principal amount of the loans provided under the
Credit Agreement may be increased by us by up to an additional $150.0 million .
The Credit Agreement contains financial covenants requiring us to operate within
a maximum leverage ratio and maintain a minimum interest coverage ratio, as well
as other non-financial covenants. As of April 30, 2020 , we were in compliance
with all financial covenants.
As of April 30, 2020 , we had $111.4 million outstanding balance, net of debt
issuance costs, under the Term Loan, of which $90.0 million was classified as
long-term liabilities. Outstanding principal payments under the Term Loan are
due as follows:
Fiscal year (in thousands)
Remainder of fiscal 2020 $ 9,376
2021 27,187
2022 75,000
Total $ 111,563
In July 2018 , we entered into a 220.0 million RMB (approximately $33.0 million )
credit agreement with a lender in China to support our facilities expansion.
Borrowings bear interest at a floating rate based on the Chinese Central Bank
rate plus 10% of such rate. As of April 30, 2020 , we had $24.4 million
outstanding under the agreement.
As of October 31, 2019 , we had $119.8 million outstanding balance, net of debt
issuance costs, under the Term Loan, of which $102.2 million was classified as
long-term liabilities. There was no outstanding balance under the Revolver as of
October 31, 2019 .
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There was $100.0 million outstanding balance under the Revolver as of April 30,
2020 . We expect our borrowings under the Revolver will fluctuate from quarter to
quarter. Borrowings bear interest at a floating rate based on a margin over our
choice of market observable base rates as defined in the Credit Agreement. As of
April 30, 2020 , borrowings under the Term Loan bore interest at LIBOR +1.125%
and the applicable interest rate for the Revolver was LIBOR +1.000%. In
addition, commitment fees are payable on the Revolver at rates between 0.125%
and 0.200% per year based on our leverage ratio on the daily amount of the
revolving commitment.
Other
As of April 30, 2020 , our cash equivalents consisted of taxable money market
mutual funds. We follow an established investment policy and set of guidelines
to monitor, manage and limit our exposure to interest rate and credit risk.
We proactively manage our cash equivalents balances and closely monitor our
capital and stock repurchase expenditures to ensure ample liquidity.
Additionally, we believe the overall credit quality of our portfolio is strong,
with our global excess cash, and our cash equivalents, invested in banks and
securities with a weighted-average credit rating exceeding AA. The majority of
our investments are classified as Level 1 or Level 2 investments, as measured
under fair value guidance. See Notes 6 and 7 of Notes to Unaudited Condensed
Consolidated Financial Statements.
We believe that our current cash and cash equivalents, cash generated from
operations, and available credit under our Revolver will satisfy our routine
business requirements for at least the next 12 months and the foreseeable
future.
Contractual Obligations
Contractual obligations as of April 30, 2020 are as follows:
Remainder of Fiscal 2021/ Fiscal 2023/
Total Fiscal 2020 Fiscal 2022 Fiscal 2024 Thereafter Other
(in thousands)
Operating leases $ 603,017 $ 43,314 $ 155,359 $ 109,844 $ 294,500 $ -
Purchase
obligations(1) 365,500 186,721 169,234 9,545 - -
Other obligations(2) 237,226 134,176 103,050 - - -
Long-term accrued
income taxes(3) 24,589 - - - 24,589 -
Total $ 1,230,332 $ 364,211 $ 427,643 $ 119,389 $ 319,089 $ -
(1) Purchase obligations represent an estimate of all open purchase orders and
contractual obligations in the ordinary course of business for which we have
not received the goods or services as of
purchase orders are considered enforceable and legally binding, the terms
generally allow us the option to cancel, reschedule, and adjust our
requirements based on our business needs prior to the delivery of goods or
performance of services.
(2) These other obligations include our Term Loan, Revolver, credit facilities,
and associated fees.
(3) Long-term accrued income taxes represent uncertain tax benefits as of
April 30, 2020 . Currently, a reasonably reliable estimate of timing ofpayments related to uncertain tax benefits in individual years beyond fiscal
2020 cannot be made due to uncertainties in timing of the commencement and
settlement of potential tax audits.
The expected timing of payments of the obligations discussed above is estimated
based on current information. Timing of payment and actual amounts paid may be
different depending on the time of receipt of goods or services or changes to
agreed-upon amounts for some obligations.
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