ASPEN TECHNOLOGY You should read the following discussion in conjunction with our consolidated and combined financial statements and related notes beginning on page 56. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read "Item 1A. Risk Factors" for a discussion of important factors that could cause our actual results to differ materially from our expectations. In connection with the Transaction, we approved a change to our fiscal year end fromSeptember 30 to June 30 . References to a specific fiscal year are the nine-month period endedJune 30, 2022 , and our fiscal years 2021 and 2020 are for the twelve months endedSeptember 30, 2021 andSeptember 30, 2020 unless otherwise noted. (for example, "fiscal 2022" refers to the nine-month period endedJune 30, 2022 ). Refer to Note 1, "Operations" for additional information. 28 -------------------------------------------------------------------------------- The Transaction has been accounted for as a business combination in accordance withU.S. GAAP, with the OSI business and the SSE business treated as the "acquirer" and Heritage AspenTech treated as the "acquired" company for financial reporting purposes. Accordingly, the historical financial statements of the OSI business and the SSE business are the historical financial statements of New AspenTech following the completion of the Transaction. As such, the financial statements of New AspenTech are not indicative of future financial results. Business Overview We are a global leader in asset optimization software that enables industrial manufacturers to design, operate, and maintain their operations for maximum performance. We combine decades of modeling, simulation, and optimization capabilities with industrial operations expertise and apply advanced analytics to improve the profitability and sustainability of production assets. Our purpose-built software is proven to drive value creation levers for our customers; improving operational efficiency and maximizing productivity, reducing unplanned downtime and safety risks, and minimizing energy consumption and emissions. Our technology is at the center of their sustainability and decarbonization programs, enabling circularity through improved industrial technologies and more degradable and recyclable plastics, and supporting the broader energy transition with advanced solutions for power transmission and distribution, carbon capture, storage and utilization, batteries and energy storage. Cybersecurity is foundational in the design of our software. OnMay 16, 2022 ,Heritage AspenTech and Emerson Electric Co. ("Emerson") and certain of its subsidiaries, entered into a definitive agreement pursuant to, among other matters Emerson and its subsidiaries contributed to Heritage AspenTech Shareholders$6,014,000,000 in cash and itsOpen Systems International, Inc. business (the "OSI business" or "OSI Inc. ") andGeological Simulation Software business, which we have renamed as Subsurface Science & Engineering (the "SSE business" or "SSE") in exchange for 55% of our outstanding common stock (on a fully diluted basis). By combining the software capabilities, deep domain expertise and leadership of Heritage AspenTech with the OSI and SSE businesses, we have created a company that we believe will deliver superior value to customers across diverse end markets including energy, chemicals, power transmission and distribution, engineering, procurement, and construction, pharmaceuticals, and metals and mining, among others.
Relationship with Emerson
At the closing of the Transaction, we entered into a Stockholders Agreement with Emerson. In addition to that agreement, we also entered into a Commercial Agreement and a Transition Services Agreement related to certain operations going forward.
Pursuant to the Commercial Agreement, New AspenTech granted a subsidiary of Emerson the right to distribute, on a non-exclusive basis, certain (i) existing Heritage AspenTech products, (ii) existing Emerson products transferred to NewAspenTech pursuant to the Transaction and (iii) future New AspenTech products as mutually agreed upon by the parties during the term of the Commercial Agreement, in each case, to end-users through such subsidiary of Emerson acting as an agent, reseller or original equipment manufacturer. Pursuant to the Transition Services Agreement, Emerson provides New AspenTech and its subsidiaries with certain services, including information technology, human resources and other specified services, as well as access to certain of Emerson's existing facilities, for a limited time.
Heritage
HeritageAspenTech was founded over 40 years ago with a focus on industrial process efficiency and optimization. As a global leader in asset optimization software, Heritage AspenTech combines decades of modeling and operations expertise with big data, artificial intelligence, and advanced analytics. HeritageAspenTech's unique asset lifecycle approach and market-leading solutions help customers achieve new levels of efficiency, accelerate innovation and reduce emissions and waste, without compromising safety. HeritageAspenTech has developed its applications to design and optimize industrial operations across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. HeritageAspenTech is the recognized technology leader in providing process optimization and asset performance management software for each of these business areas. With its mission to digitally transform the industries we serve by optimizing their assets to run safer, greener, longer and faster, Heritage AspenTech is also a global leader in helping companies achieve their sustainability goals while achieving operational excellence. 29 -------------------------------------------------------------------------------- Customers use our solutions to help advance sustainability technology pathways in improving resource efficiencies, such as energy, water or feedstock; supporting energy transition and decarbonization initiatives, including integrating renewable and alternative energy sources, such as biofuels; innovating new approaches for the hydrogen economy and carbon capture; and, enabling recycling efficiencies for waste reduction throughout operations with advanced simulation and scale-up solutions.
OSI Business (Digital Grid Management)
Our OSI business offers operational technology (OT) solutions that enable electric, gas, and water utilities and asset operators to manage and optimize the digital grid, incorporating all types of generation, industrial cogeneration, transmission, distribution, and microgrids. Our OSI business' systems are also crucial in electrification as the world's power demand is anticipated to double by 2050 underInternational Energy Agency (IEA) andU.S. Energy Information Administration (EIA) scenarios. Utilities, industry, and institutions use OSI solutions to transform and digitize the grid to seamlessly incorporate renewable energy and storage, to achieve reliability, maximize cybersecurity, and minimize peak loading. Our OSI business' energy management solution (EMS) monitors, controls, and optimizes the increasingly interconnected transmission networks and generation fleets to manage grid stability and ensure security and regulatory compliance. Our advanced distribution management solution (ADMS), distributed energy resource management solution (DERMS) and Outage Management offerings provide system resiliency, efficiency, and safety by monitoring, controlling and modeling the distribution network as utilities seek to increase reliability, predict and react to increasingly dynamics supply and demand patterns, resolve outages faster and in a more automated manner, and manage field service digitally.
SSE Business (Subsurface Science & Engineering)
Our SSE business is a leading provider of geoscience and modeling software for optimization across subsurface engineering and operations. With over 30 years of technology leadership in geophysics, petrophysics, geological and reservoir modeling, SSE software empowers decision makers to reduce uncertainty, improve confidence, minimize risk, and support responsible asset management. Used extensively by the global energy industry, SSE solutions also have applications that extend into geothermal energy, and carbon capture and storage. Our SSE business provides end-to-end workflows from seismic analysis and interpretation to reservoir and production simulation and from asset appraisal to operational planning and execution, to optimize production and utilization and minimize energy use, water use, and fugitive emissions. SSE software is also employed to screen and assess oil and saline aquifer reservoirs for CO2 sequestration and to monitor CO2 storage.
Business Segments
Prior to the Transactions and Merger, we had two operating and reportable segments:OSI Inc. and GSS (subsequently renamed Subsurface Science & Engineering Solutions, or "SSE", after the Closing Date). The Transaction and Merger resulted in the creation of a third operating and reportable segment: Heritage AspenTech. Refer to "Business Overview" above for a description of the product and service offerings by each of the three business segments.
Recent Events
Over the course of fiscal year 2022, there was a normalization of transaction closing cycles and customer payment timing issues previously associated with the COVID 19 pandemic. However, there have been some immaterial unanticipated impacts from COVID-19 related lockdowns inChina which began in lateFebruary 2022 and ended earlyAugust 2022 , as well as continued volatility in oil price. We are continuing to assess the impact of these items, and the extent of their impact on our operational and financial performance going forward will depend on customer capital expenditure and operational expenditure budgetary cycles, which are informed by oil prices and environmental factors such as COVID-19, each of which are uncertain and cannot be predicted.Russia's invasion ofUkraine onFebruary 24, 2022 and the ongoing military conflict betweenUkraine andRussia have resulted in sanctions and other regulatory measures. While the conflict has not had a material impact on our financial results, we continue to evaluate the impact, of the various sanctions and export control measures imposed bythe United States and other governments on our ability to do business inRussia , maintain contracts with vendors and pay employees inRussia , receive payment from customers inRussia andUkraine , and assess our operations for potential asset impairment. 30 -------------------------------------------------------------------------------- OnJuly 27, 2022 , we announced that we entered into a definitive agreement to acquireMicromine , a global leader in design and operational management solutions for the mining industry, from private equity firmPotentia Capital and other sellers for AUD$900 million in cash (approximately$623 million USD ). We currently intend to finance the transaction through a combination of cash on hand and an unsecured bridge term loan in the amount ofUS$475 million , subject to customary limited conditions. The acquisition is expected to close in the fiscal second quarter of 2023, subject to receipt of regulatory approvals. In connection with the agreement to purchaseMicromine , we also entered into foreign currency forward contracts onAugust 2, 2022 for a six-month period ending onFebruary 6, 2023 to mitigate the impact of foreign currency exchange associated with the forecasted payment of purchase price.
Key Components of Operations
Revenue
We generate revenue primarily from the following sources:
License and Solutions Revenue. We sell our software products to end users primarily under fixed term licenses, through a subscription offering by HeritageAspenTech and SSE. We also sell integrated solutions to our end users under perpetual software licenses along with professional services and hardware by OSI. Maintenance Revenue. We provide customers technical support, software assurance patch management services and the right to receive any when-and-if available updates to software. Our technical support services are provided from our customer support centers throughout the world, as well as via email and through our support website. Services and Other Revenue. We provide training and professional services to our customers. Our professional services are focused on implementing our technology in order to improve customers' plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis. We provide training services to our customers, including on-site, Internet-based and customized training.
Cost of Revenue
Cost of License and Solutions. Our cost of license revenue consists of (i) royalties, (ii) amortization of capitalized software and intangible assets associated with developed technology, and (iii) distribution fees.
Cost of Maintenance. Our cost of maintenance revenue consists primarily of personnel-related costs of providing our customers technical support, software assurance patch management services and the right to receive any when-and-if available updates to software.
Cost of Services and Other. Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing our customers professional services and training.
Operating Expenses
Selling and Marketing Expenses. Selling expenses consist primarily of the personnel and travel expenses related to the effort expended to license our products and services to current and potential customers, as well as for overall management of customer relationships. Marketing expenses include expenses needed to promote our company and our products and to conduct market research to help us better understand our customers and their business needs, and expenses resulted from amortization of intangible assets associated with customer relationships and backlog.
Research and Development Expenses. Research and development expenses consist primarily of personnel expenses related to the creation of new software products, enhancements and engineering changes to existing products.
General and Administrative Expenses. General and administrative expenses include
the personnel expenses of corporate and support functions, such as executive
leadership and administration groups, finance, legal, human resources and
corporate communications, and other costs, such as outside professional and
consultant fees, amortization of intangible assets associated with certain
purchased software, and the provision for bad debt on accounts receivable.
Restructuring Costs. Restructuring costs were related to the undertaking of
certain restructuring transactions in accordance with the restructuring plan
attached to the Transaction Agreement to separate the OSI business and the SSE
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business from Emerson's other business activities and consolidate such separated
business under a holding company to be contributed to New AspenTech as part of
the Contribution.
Other Income and Expenses
Interest Income (Expense). Interest income is recorded for financing components
under Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts
with Customers (Topic 606) or Topic 606. When a contract includes a significant
financing component, we generally receive the majority of the customer
consideration after the recognition of a substantial portion of the arrangement
fee as license revenue. As a result, we decrease the amount of revenue
recognized and increase interest income by a corresponding amount. Interest
income also includes interest earned on the Company's receivable balances under
the cash pooling arrangements and debt agreements with Emerson and on the
interest-bearing cash balances held at the Company's designated financial
institutions worldwide. Interest expense is primarily related to outstanding
borrowings under our Amended and Restated Credit Agreement and the Company's
payable balances under the cash pooling arrangements and debt agreements with
Emerson.
Other (Expense) Income, Net. Other (expense) income, net is comprised primarily
of foreign currency exchange gains (losses) generated from the settlement and
remeasurement of transactions denominated in currencies other than the
functional currency of our entities.
Provision for Income Taxes. Provision for income taxes is comprised of domestic
and foreign taxes. We record interest and penalties related to income tax
matters as a component of income tax expense. Our effective income tax rate may
fluctuate between fiscal years and from quarter to quarter due to items arising
from discrete events, such as tax benefits from the disposition of employee
equity awards, settlements of tax audits and assessments and tax law changes.
Our effective income tax rate is also impacted by, and may fluctuate in any
given period because of, the composition of income in foreign jurisdictions
where tax rates differ.
Change in Fiscal Year
On the Closing Date, the Company changed its fiscal year end fromSeptember 30 to June 30 . As a result, the Company's results of operations, cash flows, and all transactions impacting stockholders' equity presented in this Transition Report on Form 10-KT are for the nine months endedJune 30, 2022 whereas its fiscal years 2021 and 2020 are for the twelve months endedSeptember 30, 2021 and 2020 unless otherwise noted. As such, the Company's fiscal year 2022, or fiscal 2022, refers to the period fromOctober 1, 2021 toJune 30, 2022 . This Transition Report on Form 10-KT also includes unaudited consolidated and combined statements of operations and cash flows for the comparable stub period ofOctober 1, 2020 toJune 30, 2021 ; see Note 21, "Transition Period Comparative Data (unaudited)" for further information. The discussion below provides a comparison for (1) the nine-month transition period endedJune 30, 2022 to the nine-month stub period endedJune 30, 2021 and (2) our fiscal year endedSeptember 30, 2021 to our fiscal year endedSeptember 30, 2020 . All information for the nine-month period endedJune 30, 2021 is unaudited.
Key Business Metrics
Background
We utilize key business metrics to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business:
•Annual Contract Value •Total Contract Value •Bookings
We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:
•Free cash flow
•Non-GAAP operating income We also use Annual Spend as a business metric when referring to Heritage AspenTech.
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Annual Contract Value
Annual contract value (ACV) is an estimate of the annual value of our portfolio of term license and software maintenance and support (SMS) contracts, the annual value of SMS agreements purchased with perpetual licenses, and the annual value of standalone SMS agreements purchased with certain legacy term license agreements, which have become an immaterial part of our business Comparing ACV for different dates can provide insight into the growth and retention rates of our recurring software business because ACV represents the estimated annual billings associated with our recurring license and maintenance agreements at any point in time. Management uses the ACV business metric to evaluate the growth and performance of our business as well as for planning and forecasting purposes. We believe that ACV is a useful business metric to investors as it provides insight into the growth component of our software business. ACV generally increases as a result of new term license and SMS agreements with new or existing customers, renewals or modifications of existing term license agreements that result in higher license fees due to contractually-agreed price escalation or an increase in the number of tokens (units of software usage) or products licensed, or an increase in the value of licenses delivered. ACV is adversely affected by term license and SMS agreements that are renewed at a lower entitlement level or not renewed, a decrease in the value of licenses delivered, and, to a lesser extent, by customer agreements that become inactive during the agreement's term because, in our determination, amounts due (or which will become due) under the agreement are not collectible. As ACV is an estimate of annual billings, it will generally not include contracts with a term of less than one year. Because ACV represents all other active term software and SMS agreements, it may include amounts under agreements with customers that are delinquent in paying invoices, that are in bankruptcy proceedings, are subject to termination by the customer or where payment is otherwise in doubt. As ofJune 30, 2022 , customer agreements representing approximately 85% of our ACV (by value) were denominated inU.S. dollars. For agreements denominated in other currencies, we use a fixed historical exchange rate to calculate ACV in dollars rather than using current exchange rates, so that our calculation of growth in ACV is not affected by fluctuations in foreign currencies. We have not applied this methodology retroactively for OSI software amounts delivered prior toOctober 2020 , but do not believe this to have a material impact on our reported ACV metric due to the high USD-denominated concentration of the OSI business. As ofJune 30, 2022 , approximately 95% of OSI ACV was denominated in USD. For term license agreements that contain professional services or other products and services, we have included in ACV the portion of the invoice allocable to the term license under Topic 606 rather than the portion of the invoice attributed to the license in the agreement. We believe that methodology more accurately allocates any discounts or premiums to the different elements of the agreement. We estimate that the pro forma ACV of Heritage AspenTech, the OSI business and the SSE business grew by approximately 7.8% during 2022, from$733.8 million as ofJune 30, 2021 to$791.2 million as ofJune 30, 2022 . We estimate that pro forma ACV grew by approximately 2.5% during 2021, from$716.2 million as ofJune 30, 2020 to$733.8 million as ofJune 30, 2021 .
Total Contract Value
Total Contract Value ("TCV") is the aggregate value of all payments received or
to be received under all active term license and perpetual SMS agreements,
including maintenance and escalation. The pro forma TCV of Heritage AspenTech,
the OSI business and the SSE business was $3.2 billion and $3.0 billion as of
June 30, 2022 and June 30, 2021 , respectively.
Bookings
Bookings is the total value of customer term license and perpetual SMS contracts
signed in the current period, less the value of such contracts signed in the
current period where the initial licenses and SMS agreements are not yet deemed
delivered, plus term license contracts and SMS agreements signed in a previous
period for which the initial licenses are deemed delivered in the current
period.
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The pro forma bookings of Heritage AspenTech, the OSI business and the SSE
business was $937.9 million during the twelve-month period ended June 30, 2022 ,
compared to $906.7 million and $748.0 million during the twelve-month period
ended June 30, 2021 and 2020, respectively. The change in bookings during the
twelve-month periods ended June 30, 2022 , 2021, and 2020 is related to the
timing of renewals.
Free Cash Flow
We use a non-GAAP measure of free cash flow to analyze cash flows generated from our operations. Management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals. We believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives or to repay borrowings under the Amended and Restated Credit Agreement, and it is a basis for comparing our performance with that of our competitors. The presentation of free cash flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity.
Free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of (a) purchases of property, equipment and leasehold improvements, (b) payments for capitalized computer software costs, and (c) other nonrecurring items, such as acquisition related payments.
The following table provides a reconciliation of GAAP cash flow from operating activities to free cash flow for the indicated periods:
Nine-Month Period June 30, Year Ended September 30,
2022 2021 2021 2020
(unaudited)
(Dollars in Thousands)
Net cash provided by operating activities
(GAAP) $ 28,962 $ 63,987 $ 54,800 $ 15,205
Purchase of property, equipment, and
leasehold improvements (2,263) (3,165) (6,185) (2,459)
Payments for capitalized computer software
development costs (508) - - -
Acquisition and integration planning related
fee payments 6,738 6,048 6,102 3,329
Free cash flow (non-GAAP) $ 32,929 $ 66,870 $ 54,717 $ 16,075 Nine-Month Period Ended
Total free cash flow decreased$33.9 million during the nine-month period endedJune 30, 2022 as compared to the same period in prior fiscal year, primarily due to the Transaction. The Company recorded a discrete tax payment subsequent to the closing of the Transaction which resulted in nearly break-even free cash flow contributed from Heritage AspenTech during the nine-month period endedJune 30, 2022 and unfavorable working capital from the OSI business and SSE business. For a more detailed description of these changes refer to "Liquidity and Capital Resources."
Fiscal 2021 Compared to Fiscal 2020
Total free cash flow increased$38.6 million during fiscal 2021 as compared to the prior fiscal year primarily due to theOSI Inc. acquisition by Emerson. For a more detailed description of these changes refer to "Liquidity and Capital Resources."
Non-GAAP Income from Operations
Non-GAAP income from operations excludes certain non-cash and non-recurring
expenses, and is used as a supplement to income from operations presented on a
GAAP basis. We believe that non-GAAP income from operations is a useful
financial measure because removing certain non-cash and other items provides
additional insight into recurring profitability and cash flow from operations.
The following table presents our income from operations, as adjusted for
stock-based compensation expense, amortization of intangible assets, and other
items, such as the impact of acquisition and integration planning related fees,
for the indicated periods:
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Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
GAAP income (loss) from
operations $ 36,157 $ (46,555) $ (60,439) $ (18,060) $ 82,712 (177.7) % $ (42,379) 234.7 %
Plus:
Stock-based compensation 15,763 1,377 1,744 606 14,386 1,044.7 % $ 1,138 187.8 %
Amortization of intangible
assets 116,743 91,047 120,330 24,636 25,696 28.2 % $ 95,694 388.4 %
Acquisition and integration
planning related fees 3,749 6,048 6,102 3,329 (2,299) (38.0) % $ 2,773 83.3 %
Non-GAAP income from
operations $ 172,412 $ 51,917 $ 67,737 $ 10,511 $ 120,495 232.1 % $ 57,226 544.4 %
Annual Spend - Heritage AspenTech Only
Annual spend is an estimate of the annualized value of our portfolio of term license agreements, as of a specific date. Annual spend is calculated by summing the most recent annual invoice value of each of our active term license agreements. Annual spend also includes the annualized value of standalone SMS agreements purchased with certain legacy term license agreements, which have become an immaterial part of our business. Comparing annual spend for different dates can provide insight into the growth and retention rates of our business, because annual spend represents the estimated annualized billings associated with our active term license agreements. Management utilizes the annual spend business metric to evaluate the growth and performance of our business as well as for planning and forecasting. In addition, our corporate and executive bonus programs are based in part on our success in meeting targets for growth in annual spend that are approved by our Board of Directors. We believe that annual spend is a useful business metric to investors as it provides insight into the growth component of our term licenses and to how management evaluates and forecasts the results of the business. Annual spend increases as a result of new term license agreements with new or existing customers, renewals or modifications of existing term license agreements that result in higher license fees due to contractually-agreed price escalation or an increase in the number of tokens (units of software usage) or products licensed, and escalation of annual payments in our active term license agreements. Annual spend is adversely affected by term license and standalone SMS agreements that are renewed at a lower entitlement level or not renewed and, to a lesser extent, by customer agreements that become inactive during the agreement's term because, in our determination, amounts due (or which will become due) under the agreement are not collectible. Because the annual spend calculation includes all of our active term license agreements, the reported balance may include agreements with customers that are delinquent in paying invoices, that are in bankruptcy proceedings, or where payment is otherwise in doubt. As ofJune 30, 2022 , approximately 85% of our term license agreements (by value) from Heritage AspenTech are denominated inU.S. dollars. For agreements denominated in other currencies, we use a fixed historical exchange rate to calculate annual spend in dollars rather than using current exchange rates, so that our calculation of growth in annual spend is not affected by fluctuations in foreign currencies. For term license agreements that contain professional services or other products and services, we have included in the annual spend calculation the portion of the invoice allocable to the term license under Topic 606 rather than the portion of the invoice attributed to the license in the agreement. We believe that methodology more accurately allocates any discounts or premiums to the different elements of the agreement. We have not applied this methodology retroactively for agreements entered into in prior fiscal years. We estimate that annual spend of Heritage AspenTech grew by approximately 8.5% during fiscal 2022, from$621.3 million as ofJune 30, 2021 to$673.9 million as ofJune 30, 2022 . We estimated that annual spend of Heritage AspenTech grew by approximately 4.8% during fiscal 2021, from$593.1 million as ofJune 30, 2020 to$621.3 million as ofJune 30, 2021 . 35 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth the results of operations, percentage of total revenue and the period-over-period percentage change in certain financial data for the nine-month period endedJune 30, 2022 and 2021, and the twelve months endedSeptember 30, 2021 and 2020. Nine-Month Period Nine-Month Period Ended June 30, Year Ended September 30, 2022 Compared to Nine-Month Period 2021 Compared to 2022 2021 2021 2020 2021 % 2020 % (unaudited) (Dollars in Thousands) Revenue: License and solutions$ 278,589 68.7 %$ 136,699 61.1 %$ 180,914 60.2 %$ 42,038 32.2 % 103.8 % 330.4 % Maintenance 103,786 25.6 68,027 30.4 92,562 30.8 65,591 50.3 52.6 41.1 Services and other 22,921 5.7 18,899 8.5 27,164 9.0 22,866 17.5 21.3 18.8 Total revenue 405,296 100.0 223,625 100.0 300,640 100.0 130,495 100.0 81.2 130.4 Cost of revenue: License and solutions 125,258 30.9 90,793 40.6 125,181 41.6 17,462 13.4 38.0 616.9 Maintenance 15,030 3.7 14,376 6.4 18,610 6.2 16,092 12.3 4.5 15.6 Services and other 16,108 4.0 14,321 6.4 19,219 6.4 17,336 13.3 12.5 10.9 Total cost of revenue 156,396 38.6 119,490 53.4 163,010 54.2 50,890 39.0 30.9 220.3 Gross profit 248,900 61.4 104,135 46.6 137,630 45.8 79,605 61.0 139.0 72.9 Operating expenses: Selling and marketing 108,463 26.8 78,311 35.0 103,311 34.4 32,876 25.2 38.5 214.2 Research and development 64,285 15.9 44,091 19.7 59,646 19.8 36,842 28.2 45.8 61.9 General and administrative 39,878 9.8 26,021 11.6 32,638 10.9 21,717 16.6 53.3 50.3 Restructuring costs 117 - 2,267 1.0 2,474 0.8 6,230 4.8 (94.8) (60.3) Total operating expenses 212,743 52.5 150,690 67.3 198,069 65.9 97,665 74.8 41.2 102.8 Income (loss) from operations 36,157 8.9 (46,555) (20.8) (60,439) (20.1) (18,060) (13.8) (177.7) 234.7 Other income (expense), net 310 0.1 (4,000) (1.8) (5,359) (1.8) (4,335) (3.3) (107.8) 23.6 Interest income (expense), net 3,494 0.9 157 0.1 (115) - (50) - 2,125.5 130.0 Income (loss) before provision for income taxes 39,961 9.9 (50,398) (19.1) (65,913) (21.9) (22,445) (17.1) (179.3) 193.7 (Benefit) for income taxes (13,185) (3.3) (40,992) (18.3) (45,305) (15.1) (2,128) (1.6) (67.8) 2,029.0 Net income (loss)$ 53,146 13.2 %$ (9,406) (0.8) %$ (20,608) (6.8) %$ (20,317) (15.5) % (665.0) % 1.4 % Revenue
Nine-Month Period Ended
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Total revenue for the nine-month period ended June 30, 2022 was $405.3 million ,
an increase of $181.7 million , or 81.2% compared with the nine-month period
ended June 30, 2021 . The increase reflected the Transaction which contributed
$173.8 million of revenue during the nine-month period ended June 30, 2022 .
Fiscal 2021 Compared to Fiscal 2020
Total revenue for fiscal 2021 was
License and Solutions Revenue
License and solutions revenue includes primarily term software licenses sold by Heritage AspenTech and SSE and integrated solutions sold byOSI Inc. License and solutions revenue changes are due to sales to new customers or the loss of existing customers, the timing of multi-year term license renewals, new offerings to existing customers, and the timing of progress on integrated solutions. Nine-Month Period 2022 Compared to Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020 2022 2021 2021 2020 $ % $ % (unaudited) (Dollars in Thousands) License and solutions revenue$ 278,589 $ 136,699 $ 180,914 $ 42,038 $ 141,890 103.8 %$ 138,876 330.4 % As a percent of total revenue 68.7 % 61.1 % 60.2 % 32.2 %
Nine-Month Period Ended
The increase in license and solutions revenue of$141.9 million , during nine-month period endedJune 30, 2022 as compared to the same period in prior fiscal year, was largely due to the Heritage AspenTech acquisition, which contributed$144.7 million of revenue. Software license and solutions revenue from OSI increased by$8.0 million , which was primarily driven by an increase in sales of perpetual licenses during the nine-month period endedJune 30, 2022 , while software license revenue from SSE decreased by$10.8 million due to lower bookings for both perpetual and term licenses during the same period.
Fiscal 2021 Compared to Fiscal 2020
The increase in license and solutions revenue of
Maintenance Revenue
Maintenance revenue includes technical support, software assurance patch
management services and the right to receive any when-and-if available updates
to software. Maintenance revenue changes as a result of adding new term or
perpetual software license customers, the timing of maintenance renewals for
existing perpetual software license customers, the scope of maintenance
offerings customers subscribe to, and the escalation of annual payments.
Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Maintenance revenue $ 103,786 $ 68,027 $ 92,562 $ 65,591 $ 35,759 52.6 % $ 26,971 41.1 %
As a percent of
total revenue 25.6 % 30.4 % 30.8 % 50.3 %
Nine-Month Period Ended
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The increase in maintenance revenue of $35.8 million , during nine-month period
ended June 30, 2022 as compared to the same period in the prior fiscal year, was
largely due to the Heritage AspenTech acquisition, which contributed $25.3
million . Maintenance revenue from OSI increased by $8.4 million due to the
completion and timing of certain integrated solution projects and the timing of
annual payments escalation, while maintenance revenue from SSE increased by $2.1
million primarily attributable to the timing of existing customers' maintenance
renewals.
Fiscal 2021 Compared to Fiscal 2020
The increase in maintenance revenue of$27.0 million , during fiscal 2021 as compared to the prior fiscal year, was primarily due to theOSI Inc. acquisition, which contributed$31.8 million , partially offset by a$4.8 million decrease by SSE due to certain customers not renewing maintenance or renewing with a lower scope. Services and Other Revenue Services and other revenue includes professional services that are not considered part of an integrated software, in addition to training services. Time-and-materials contracts are based upon hours worked and contractually agreed-upon hourly rates. Fixed-price engagements recognize revenue using the proportional performance method by comparing the costs incurred to the total estimated project cost. Nine-Month Period 2022 Compared Nine-Month Period Ended June 30, Year Ended September 30, to Nine-Month Period 2021 2021 Compared to 2020 2022 2021 2021 2020 $ % $ % (unaudited) (Dollars in Thousands) Services and other revenue$ 22,921 $ 18,899 $ 27,164 $ 22,866 $ 4,022 21.3 %$ 4,298 18.8 % As a percent of total revenue 5.7 % 8.5 % 9.0 % 17.5 %
Nine-Month Period Ended
Services and other revenue increased by$4.0 million , during the nine-month period endedJune 30, 2022 as compared to the same period in the prior fiscal year, primarily due to the Transaction, which contributed$3.8 million . Services and other revenue from OSI increased by$1.5 million reflecting an increase in training and staff augmentation services, partially offset by a decrease of$1.3 million in services and other revenue reflected a reduction in revenue from geoscience services including customers inRussia .
Fiscal 2021 Compared to Fiscal 2020
Services and other revenue increased by$4.3 million , during fiscal 2021 as compared to the prior fiscal year, primarily due to theOSI Inc. acquisition, which contributed$6.7 million . This was, partially offset by a$2.4 million decrease from SSE, primarily due to the termination of a relationship with a major customer in fiscal 2020 reflecting a$3.9 million reduction.
Cost of Revenue
Cost of License and Solutions Revenue
Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Cost of license
revenue $ 125,258 $ 90,793 $ 125,181 $ 17,462 $ 34,465 38.0 % $ 107,719 616.9 %
As a percent of
license revenue 45.0 % 66.4 % 69.2 % 41.5 %
38--------------------------------------------------------------------------------
Nine-Month Period Ended
Cost of license revenue increased by$34.5 million , during the nine-month period endedJune 30, 2022 as compared to the same period in the prior fiscal year. The Transaction contributed$17.2 million to the increase. OSI had an increase of$16.4 million in cost of license revenue due to increased compensation expenses, completion and timing of certain integrated solution projects, and higher facility costs. License gross profit margin was 55.0% for the nine-month period endedJune 30, 2022 , compared to 33.6% for the same period in fiscal 2021. The improvement on gross profit margin in fiscal 2022 was attributable to the Heritage AspenTech acquisition, which contributed a higher gross profit margin on a weighted average basis as compared to the prior fiscal year.
Fiscal 2021 Compared to Fiscal 2020
Cost of license and solutions revenue increased by$107.7 million , during fiscal 2021 as compared to the prior fiscal year. The increase was due to theOSI Inc. acquisition, which contributed$108.0 million and included$38.6 million of amortization of intangible assets. License and solutions gross profit margin was 30.8% in fiscal 2021, a decrease of 27.7 percentage points compared to 58.5% in the prior year, primarily due to the increase in amortization of intangible assets related to theOSI Inc. acquisition. Cost of Maintenance Revenue Nine-Month Period 2022 Compared to Nine-Month Period Nine-Month Period Ended June 30, Year Ended September 30, 2021 2021 Compared to 2020 2022 2021 2021 2020 $ % $ % (unaudited) (Dollars in Thousands) Cost of maintenance revenue$ 15,030 $ 14,376 $ 18,610 $ 16,092 $ 654 4.5 %$ 2,518 15.6 % As a percent of maintenance revenue 14.5 % 21.1 % 20.1 % 24.5 %
Nine-Month Period Ended
Cost of maintenance revenue remained relatively consistent, during the nine-month period endedJune 30, 2022 as compared to the same period in the prior fiscal year, which was primarily due to the Heritage AspenTech acquisition which contributed$2.7 million . This was offset by a$1.4 million decrease in cost of maintenance revenue from SSE due to reduced compensation expenses resulting from prior restructuring and a$0.6 million decrease in cost of maintenance revenue from OSI due to attrition. Maintenance gross profit margin was 85.5% during the nine-month period endedJune 30, 2022 , compared to 78.9% for the same period in fiscal 2021.
Fiscal 2021 Compared to Fiscal 2020
Cost of maintenance revenue increased by$2.5 million for fiscal 2021 compared to the prior year. The increase was due to theOSI Inc. acquisition which contributed$3.6 million , while cost of maintenance revenue from SSE decreased by$1.1 million . Maintenance gross profit margin was 79.9% in fiscal 2021 and was relatively consistent with 2020.
Cost of Services and Other Revenue
Nine-Month Period 2022 Compared
Nine-Month Period Ended June 30, Year Ended September 30, to Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Cost of services and
other revenue $ 16,108 $ 14,321 $ 19,219 $ 17,336 $ 1,787 12.5 % $ 1,883 10.9 %
As a percent of
services and other
revenue 70.3 % 75.8 % 70.8 % 75.8 %
The timing of revenue and expense recognition on professional service arrangements can impact the comparability of cost and gross profit margin of professional services revenue from year to year. For example, revenue from fixed-price
39
--------------------------------------------------------------------------------engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs.
Nine-Month Period Ended
Cost of services and other revenue remained relatively consistent and only increased by$1.8 million , during the nine-month period endedJune 30, 2022 as compared to the same period in the prior fiscal year which is primarily due to the Transaction which contributed$3.8 million . This was partially offset by a decrease of$1.0 million in cost of services and other from SSE and a decrease of$0.9 million from OSI. Service and other revenue gross profit margin was 70.3% for the nine-month period endedJune 30, 2022 and 75.8% for the same period in fiscal 2021.
Fiscal 2021 Compared to Fiscal 2020
Cost of services and other revenue increased by$1.9 million during fiscal 2021 as compared to the prior fiscal year, primarily due to an increase of$3.8 million contributed from theOSI Inc. acquisition. Services and other gross profit margin was 29.2% in fiscal 2021, an increase of 5.0 percentage points compared to the prior year, reflecting the impact of theOSI Inc. acquisition. Gross Profit Nine-Month Period 2022 Compared to Nine-Month Period EndedJune 30 , Year
Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Gross profit $ 248,900 $ 104,135 $ 137,630 $ 79,605 $ 144,765 139.0 % $ 58,025 72.9 %
As a percent of
total revenue 61.4 % 46.6 % 45.8 % 61.0 %
For further discussion of subscription and software gross profit and services and other gross profit, please refer to the "Cost of License and Solutions Revenue," "Cost of Maintenance Revenue," and "Cost of Services and Other Revenue" sections above.
Nine-Month Period Ended
Gross profit increased by$144.8 million during the nine-month period endedJune 30, 2022 as compared to the same period in the prior fiscal year. Gross profit margin increased to 61.4% during the nine-month period endedJune 30, 2022 compared to 46.6% in the same period in fiscal 2021 primarily due to the Transaction.
Fiscal 2021 Compared to Fiscal 2020
Gross profit was$137.6 million in fiscal 2021, an increase of$58.0 million , while gross profit margin decreased 15.2 percentage points to 45.8%. These changes largely related to theOSI Inc. acquisition, which resulted in$38.6 million of amortization of intangible assets.
Operating Expenses
Selling and Marketing Expense
Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Selling and
marketing expense $ 108,463 $ 78,311 $ 103,311 $ 32,876 $ 30,152 38.5 % $ 70,435 214.2 %
As a percent of
total revenue 26.8 % 35.0 % 34.4 % 25.2 %
40--------------------------------------------------------------------------------
Nine-Month Period Ended
Selling and marketing expenses were$108.5 million for the nine-month period endedJune 30, 2022 , an increase of$30.2 million as compared to the same period in the prior fiscal year. The increase was largely attributable to the HeritageAspenTech acquisition, which contributed$52.6 million of expenses primarily related to amortization of intangible assets of$49.0 million . This was partially offset by a decrease of$22.9 million in selling and marketing expenses from OSI due to certain intangible assets that were fully amortized in fiscal 2021.
Fiscal 2021 Compared to Fiscal 2020
Selling and marketing expenses were$103.3 million in fiscal 2021, an increase of$70.4 million compared with 2020.The OSI Inc. acquisition resulted in$74.0 million of additional selling and marketing expenses primarily related to the amortization of intangible assets of$58.3 million , while SSE expenses declined by$3.6 million due to headcount reductions that were initiated in the second half of fiscal 2020 in response to COVID-19, as well as lower travel-related costs.
Research and Development Expense
Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Research and
development expense $ 64,285 $ 44,091 $ 59,646 $ 36,842 $ 20,194 45.8 % $ 22,804 61.9 %
As a percent of total
revenue 15.9 % 19.7 % 19.8 % 28.2 %
Nine-Month Period Ended
Research and development expenses were$64.3 million for the nine months endedJune 30, 2022 , an increase of$20.2 million as compared to the same period in the prior fiscal year. The increase was largely due to the Heritage AspenTech acquisition, which contributed$16.0 million , and an increase of$4.7 million in research and development expenses from OSI as a result of higher headcount.
Fiscal 2021 Compared to Fiscal 2020
Research and development expenses were$59.6 million in fiscal 2021, an increase of$22.8 million compared with 2020.The OSI Inc. acquisition resulted in$29.2 million of additional research and development expense, while SSE expense declined by$6.4 million , reflecting headcount reductions which were initiated in 2020 due to the negative impacts from COVID-19.
General and Administrative Expense
Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
General and
administrative expense $ 39,878 $ 26,021 $ 32,638 $ 21,717 $ 13,857 53.3 % $ 10,921 50.3 %
As a percent of total
revenue 9.8 % 11.6 % 10.9 % 16.6 %
Nine-Month Period Ended
The increase of$13.9 million in general and administrative expenses, during the nine-month period endedJune 30, 2022 as compared to the same period in the prior fiscal year was primarily related to the Heritage AspenTech acquisition, which contributed$18.0 million , partially offset by a$5.8 million decrease in SSE general and administrative expenses due to reduced acquisition costs associated withOSI Inc. acquisition. 41 --------------------------------------------------------------------------------
Fiscal 2021 Compared to Fiscal 2020
General and administrative expenses were$32.6 million during fiscal 2021, an increase of$10.9 million compared with 2020.The OSI Inc. acquisition resulted in$11.8 million of additional general and administrative expenses. SSE expenses decreased by$0.9 million , reflecting headcount reductions, which began in the second half of fiscal 2020 in response to COVID-19, and lower travel-related costs, partially offset by higher transaction costs which increased$2.8 million . Restructuring Costs Nine-Month Period 2022 Compared to Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020 2022 2021 2021 2020 $ % $ % (unaudited) (Dollars in Thousands) Restructuring costs $ 117$ 2,267 $ 2,474 $ 6,230 $ (2,150) (94.8) %$ (3,756) (60.3) % As a percent of total revenue - % 1.0 % 0.8 % 4.8 %
Nine-Month Period Ended
Restructuring costs were$0.1 million during the nine-month period endedJune 30, 2022 , a decrease of$2.2 million compared with the same period in fiscal 2021, which was primarily attributable to higher severance costs in the nine-month period endedJune 30, 2021 related to SSE headcount reductions initiated in response to the negative effects of COVID-19.
Fiscal 2021 Compared to Fiscal 2020
Restructuring costs were
Non-Operating Income (Expense)
Other Income (Expense), Net
Nine-Month Period 2022 Compared
Nine-Month Period Ended June 30, Year Ended September 30, to Nine-Month Period 2021
2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Other income (expense),
net $ 310 $ (4,000) $ (5,359) $ (4,335) $ 4,310 (107.8) % $ (1,024) 23.6 %
As a percent of total
revenue 0.1 % (1.8) % (1.8) % (3.3) %
Nine-Month Period Ended
Other income (expense), net was$0.3 million for the nine-month period endedJune 30, 2022 , an increase of$4.3 million compared to the same period in fiscal 2021. This increase was primarily related to higher foreign currency transaction gains from SSE of$3.6 million , higher foreign currency transaction gains of$1.5 million resulting from the Heritage AspenTech acquisition, partially offset by the lower foreign currency transaction gains of$1.1 million from OSI.
Fiscal 2021 Compared to Fiscal 2020
Other income (expense), net was
42
--------------------------------------------------------------------------------Interest Income (Expense), Net
Nine-Month Period 2022 Compared
Nine-Month Period Ended June 30, Year Ended September 30, to Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
Interest income
(expense), net $ 3,494 $ 157 $ (115) $ (50) $ 3,337 2,125.5 % $ (65) 130.0 %
As a percent of
total revenue 0.9 % 0.1 % - % - %
Nine-Month Period Ended
Interest income (expense), net was$3.5 million for the nine-month period endedJune 30, 2022 , an increase of$3.3 million as compared to the same period in fiscal 2021. The increase was largely attributable to the Heritage AspenTech acquisition, which contributed$3.5 million resulting from interest income earned on the company's long-term term revenue contracts.
Fiscal 2021 Compared to Fiscal 2020
Interest income remained consistent during fiscal 2021 as compared to the prior fiscal year.
Provision (Benefit) for Income Taxes
For the periods prior to the Transaction, our consolidated and combined
financial statements reflect income tax expense (benefit) computed on a separate
company basis, as if operating as a standalone entity or a separate consolidated
group in each material jurisdiction in which we operate. Our consolidated and
combined financial statements for the periods prior to the Transaction also
reflect certain deferred tax assets and liabilities and income taxes payable
based on this approach that did not transfer to us upon the separation, as the
underlying tax attributes were used by Emerson or retained by Emerson. As a
result of potential changes to our business model and the fact that certain
deferred tax assets and liabilities and income taxes payable did not transfer to
us, income tax expense (benefit) included in the consolidated and combined
financial statements may not be indicative of our future expected tax rate.
Nine-Month Period 2022 Compared to
Nine-Month Period Ended June 30, Year Ended September 30, Nine-Month Period 2021 2021 Compared to 2020
2022 2021 2021 2020 $ % $ %
(unaudited)
(Dollars in Thousands)
(Benefit) for
income taxes
(67.8) % $ (43,177) 2,029.0 %
Effective tax rate (33.0) % (81.3) % (68.7) % (9.5) %
Nine-Month Period Ended
The effective tax rate for the periods presented is primarily the result of income earned in theU.S. taxed atU.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.
Our effective tax rate was (33.0)% and (81.3)% for the nine-month period ended
We recognized income tax benefits of$(13.2) million for the nine-month period endedJune 30, 2022 compared to$(41.0) million for the nine-month period endedJune 30, 2021 . Our tax benefits for the nine-month period endedJune 30, 2022 was favorably impacted primarily by the Foreign-Derived Intangible Income ("FDII") deduction, the benefit from the remeasurement of state deferred taxes related to the Transaction, tax credits, and the release of the uncertain tax position due to the statute expiration, offset by the valuation allowance on certain jurisdictions. The tax benefits for the nine-month period endedJune 30, 2021 was favorably impacted primarily by the change in valuation allowance and the resolution of uncertain tax 43 -------------------------------------------------------------------------------- benefits in the period. The acquisition ofOSI Inc. during the nine-month period endedJune 30, 2021 changed the assessment as to the recoverability of certainU.S. deferred tax assets such that they became realizable, and, accordingly, associated valuation allowance was reversed. As ofJune 30, 2022 , we maintained a valuation allowance in theU.S primarily for certain deferred tax assets related to the investment in a joint venture and on state research and development (R&D) credits. We also maintain a valuation allowance on certain foreign subsidiary tax attributes, primarily net operating loss carryforwards and other deferred tax assets because it is more likely than not that a benefit will not be realized. As ofJune 30, 2022 our total valuation allowance was$24.1 million .
Fiscal 2021 Compared to Fiscal 2020
The effective tax rate for the periods presented is primarily the result of income earned in theU.S. taxed atU.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.
Our effective tax rate was (68.7)% and (9.5)% during fiscal 2021 and 2020, respectively.
We recognized income tax benefits of$(45.3) million during fiscal 2021 compared to$(2.1) million during fiscal 2020. The increased income tax benefit in fiscal 2021 was due to theOSI Inc. acquisition, which allowed for the reversal of the valuation allowance for certainU.S. deferred tax assets of almost$28 million , and also due to the resolution of uncertain tax benefits which increased the income tax benefit in both fiscal 2021 and 2020. As ofSeptember 30, 2021 , we maintained a valuation allowance in theU.S. primarily for federal foreign tax credits. We also maintain a valuation allowance on certain foreign subsidiary tax attributes, primarily net operating loss carryforwards because it is more likely than not that a benefit will not be realized. As ofSeptember 2021 our total valuation allowance was$14.6 million .
Liquidity and Capital Resources
Resources
As of
We believe our existing cash on hand and cash flows generated by operations are sufficient for at least the next 12 months to meet our operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Amended and Restated Credit Agreement described below, we may not be able to effect a receivable, equity or debt financing on terms acceptable to us or at all.
Credit Agreement
OnMay 16, 2022 , New AspenTech and certain of its subsidiaries entered into a Borrower Assignment and Accession Agreement (the "Borrower Assignment and Accession Agreement") relating to the Amended and Restated Credit Agreement datedDecember 23, 2019 , as amended from time to time, among Heritage AspenTech, the other loan parties from time to time party thereto, the lenders party thereto, andJPMorgan Chase Bank, N.A ., as Administrative Agent (as previously amended, the "Credit Agreement"). The Borrower Assignment and Accession Agreement was entered into in connection with the Transactions. Pursuant to the Borrower Assignment and Accession Agreement, among other things, Heritage AspenTech assigned all of its obligations under the Credit Agreement and related documents to New AspenTech and New AspenTech became the borrower and a loan party under the Credit Agreement. In connection with the Borrower Assignment and Accession Agreement certain subsidiaries acquired in connection with the Transactions also were joined as guarantors and loan parties under the Credit Agreement. The Credit Agreement, provides for a$200.0 million secured revolving credit facility and a$320.0 million secured term loan facility. The indebtedness under the revolving credit facility matures onDecember 23, 2024 . Prior to the maturity of the revolving credit facility under the Credit Agreement, any amounts borrowed under the facility may be repaid and, subject to the terms and conditions of the Credit Agreement, borrowed again in whole or in part without penalty. 44 -------------------------------------------------------------------------------- As ofJune 30, 2022 , our current borrowings of$28.0 million consist of the term loan facility. Our non-current borrowings of$245.6 million consist of$248.0 million of our term loan facility, net of$2.4 million in debt issuance costs. For a more detailed description of the Amended and Restated Credit Agreement, refer to Note 13, "Credit Agreement," to our audited consolidated and combined financial statements. Cash Flows The following table summarizes our cash flow activities for the periods indicated: Nine-Month Period Ended June 30, Year Ended September 30, 2022 2021 2021 2020 (unaudited) (Dollars in Thousands) Cash flow provided by (used in): Operating activities$ 28,962 $ 63,987 $ 54,800 $ 15,205 Investing activities (5,575,188) (1,591,025) (1,594,982) (2,456) Financing activities 5,968,821 1,536,341 1,551,537 (17,874) Effect of exchange rates on cash and cash equivalents 1,417 (143) (141) (551) Increase (decrease) in cash and cash equivalents$ 424,012 $ 9,160 $ 11,214 $ (5,676)
Operating Activities
Our primary source of cash is from term and perpetual software license sales, maintenance renewals, and to a lesser extent from professional services and training.
Operating cash flow for the nine-month period endedJune 30, 2022 was$29.0 million , a$35.0 million or 54.7% decrease compared to the same period in 2021, and was primarily due to the Heritage AspenTech acquisition, which contributed a negative$7.0 million as the result of recording a discrete tax payment subsequent to the closing of the Transaction. Operating cash flow for 2021 was$54.8 million , a$40.2 million or 275% increase compared with 2020, and was primarily due to theOSI Inc. acquisition in fiscal 2021.
Investing Activities
Cash outflows from investing activities were$5,576.4 million ,$1,595.0 million , and$2.5 million for the years endedJune 30, 2022 ,September 30, 2021 , andSeptember 30, 2020 , respectively. The significant outflows in 2022 were due to the payments made to acquire Heritage AspenTech offset by acquired cash and cash equivalents. The significant outflows in 2021 were due to payments made to acquireOSI Inc. offset by acquired cash and cash equivalents.
Financing Activities
Cash flows provided by (used in) financing activities were$5,970.0 million ,$1,551.5 million , and$(17.3) million for the nine-month period endedJune 30, 2022 , and twelve-month period endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. As stated previously, these primarily represent changes in the cash pool balance accounts in the OSI's business and the SSE's business cash pooling arrangement with Emerson. The significant cash inflows in fiscal 2022 and 2021, respectively, were primarily due to the cash fundings from Emerson to the OSI business and the SSE business in order to close the Heritage AspenTech acquisition and theOSI Inc. acquisition.
Contractual Obligations and Requirements
Our contractual obligations, which consisted of borrowings, interest, and fees under our Amended and Restated Credit Agreement, operating lease commitments for our headquarters and other facilities, royalty obligations, equity method investments, deferred acquisition payments, and standby letters of credit and other obligations, were as follows as ofJune 30, 2022 : 45 --------------------------------------------------------------------------------
Payments due by Period
Less than 1 More than 5
Total Year 1 to 3 Years 3 to 5 Years Years
Contractual Cash Obligations:
Credit agreement (1) $ 293,045 $ 35,391 $ 257,654 $ - $ -
Operating leases (2) 92,169 16,560 25,063 13,012 37,534
Royalty obligations 7,076 3,114 3,065 723 174Equity method investments 1,388 1,388 - - - Deferred acquisition payments 3,852 3,852 - - - Other purchase obligations 32,569 29,129 3,440 - - Total contractual cash obligations$ 430,099 $ 89,434 $
289,222
343
289,565
(1)The$293.0 million of contractual obligations related to our Amended and Restated Credit Agreement includes$276.0 million in outstanding borrowings under our term loan facility, and$17.0 million of interest expense and commitment fees as ofJune 30, 2022 . (2)The$92.2 million of contractual obligations includes rent and fixed fees for all of our operating leases, including those not recognized on the balance sheet. We are not currently a party to any other material purchase contracts related to future capital expenditures. We do expect our investment in capital expenditures to increase in the next 12 months as a result of the Heritage AspenTech acquisition and associated integration activities. The standby letters of credit were issued bySilicon Valley Bank inthe United States and secure our performance on professional services contracts and certain facility leases. The above table does not reflect a liability for uncertain tax positions of$6.7 million as ofJune 30, 2022 . We estimate that none of this amount will be paid within the next year and we are currently unable to reasonably estimate the timing of payments for the remainder of the liability.
Off-Balance Sheet Arrangements
As of
Critical Accounting Estimates and Judgments
Our consolidated and combined financial statements are prepared in accordance
with GAAP. The preparation of our financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures. The most significant
areas where management judgments and estimates impact the primary consolidated
and combined financial statements are described below. We base our estimates on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
For further information on our significant accounting policies, refer to Note 2,
"Significant Accounting Policies," to our Consolidated and Combined Financial
Statements.
46
--------------------------------------------------------------------------------Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers, we account for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party's rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration to which we are entitled to. We evaluate our contracts with customers to identify the promised goods or services and recognizes revenue for the identified performance obligations at the amount we expect to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Revenue is recognized when, or as, performance obligations are satisfied, and control has transferred to the customer.
We disaggregate our revenue into three categories: (i) license and solutions, (ii) maintenance and (iii) services and other.
License and solutions
License and solutions revenue is primarily derived from term software licenses sold by the Heritage AspenTech and SSE segments, and perpetual software licenses, along with professional services, sold by the OSI segment. See Note 20, "Segment and Geographic Information," for additional information about our revenues disaggregated by region, type of performance obligation, and segment.
Term software license revenue is recognized at a point in time when control transfers to the customer, which generally aligns with the first day of the contractual term.
OSI perpetual software licenses are primarily sold with professional services and hardware to form an integrated solution for the customer. Maintenance is also sold with the integrated solution but is accounted for as a separate performance obligation (see below). The professional services and hardware sold with the perpetual license significantly customize the underlying functionality and usability of the software. As such, neither the license, hardware, nor professional services are considered distinct within the context of the contract and are therefore considered a single performance obligation. Because the integrated solution has no alternative use to us and we have an enforceable right to payment, revenue is recognized over time (typically one to two years) using an input measure of progress based on the ratio of actual costs incurred to date to the total estimated cost to complete. Revenue recognition related to the integrated solution ends once implementation is complete. In limited circumstances, OSI sells perpetual software licenses on a stand-alone basis and recognizes revenue on those sales on a point in time basis.
Maintenance
Maintenance is derived from all three segments and consists of software maintenance, recognized ratably over the maintenance term.
Software maintenance revenue includes technical support, software assurance patch management services and the right to receive any when-and-if available updates to the software. For term software licenses, maintenance is included with the license. For perpetual software licenses, maintenance is initially sold with the license and subsequently sold separately, both primarily on an annual basis. Software maintenance does not significantly modify or otherwise depend on other performance obligations within the contracts and therefore is accounted for as a separate performance obligation. Software maintenance revenue is recognized ratably over the maintenance term. For maintenance sold with the integrated solution, the maintenance term begins once implementation is complete.
Services and other
All segments offer services, which consist of professional services and training.
Professional service revenue, not considered part of an integrated software
solution, is provided to customers on a time-and-materials ("T&M") or
fixed-price basis. The obligation to provide professional services is generally
satisfied over time, with the customer simultaneously receiving and consuming
the benefits as we satisfy our performance obligation. Professional service
revenue is recognized by measuring progress toward the completion of our
obligations. We recognize professional services revenue for our T&M contracts
based upon hours worked at contractually agreed-upon hourly rates. Fixed-price
engagements recognize revenue using the proportional performance method by
comparing the costs incurred to the total estimated project cost. The use of the
proportional performance method depends on our ability to reliably estimate the
costs to complete a project. Historical experience is used as a basis for future
estimates to complete current projects. Additionally, we
47
--------------------------------------------------------------------------------believe that costs are the best available measure of performance. Out-of-pocket expenses which are reimbursed by customers are recorded as revenue.
Training services provided to customers include on-site internet-based and customized training. These services are considered separate performance obligations as they do not significantly modify, integrate or otherwise depend on other performance obligations included in a contract. Revenue is recognized as the customer consumes the benefits of the services we provide.
Contracts with Multiple Performance Obligations
We allocate total contract consideration to each distinct performance obligation in an arrangement on a relative standalone selling price basis. The standalone selling price reflects the price that would be charged for a specific product or service if it was sold separately in similar circumstances and to similar customers. When two or more contracts are entered into at or near the same time with the same customer, we evaluate the facts and circumstances associated with the negotiation of those contracts. Where the contracts are negotiated as a package, we will account for them as a single arrangement and allocate the consideration for the combined contracts among the performance obligations accordingly. When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. If directly observable data is not available when software licenses are sold together with software maintenance in a bundled arrangement, we estimate a standalone selling price for these distinct performance obligations using relevant information, including our overall pricing objectives and strategies, historical pricing data, market consideration and other factors.
Contract Modifications
We sometimes enter into agreements to modify previously executed contracts, which constitute contract modifications. We assess each of these contract modifications to determine (i) if the additional products and services are distinct from the products and services in the original arrangement; and (ii) if the amount of consideration expected for the added products and services reflects the standalone selling price of those products and services, as adjusted for contract-specific circumstances. A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both requirements is considered a change to the original contract and is accounted for on either (i) a prospective basis as a termination of the existing contract and the creation of a new contract or (ii) a cumulative catch-up basis.
Contract Assets and Contract Liabilities
Payment terms and conditions vary by contract type. Terms generally include a
requirement of payment annually over the term of the license arrangement. During
the majority of each customer contract term, the amount invoiced is generally
less than the amount of revenue recognized to date, primarily because we
transfer control of the performance obligation related to the software license
at the inception of the contract term, and the allocation of contract
consideration to the license performance obligation is a significant portion of
the total contract consideration. Therefore, our contracts often result in the
recording of a contract asset throughout the majority of the contract term. We
record a contract asset when revenue recognized on a contract exceeds the
billings.
We record accounts receivable when it has the unconditional right to issue an
invoice and receive payment regardless of whether revenue has been recognized.
If revenue is not yet recognizable and we have a right to invoice or have
received consideration, a contract liability is recorded to defer the revenue
until recognition is appropriate. If revenue is recognizable in advance of the
right to invoice, and the right to consideration is conditional on something
other than the passage of time, a contract asset is recorded until invoicing
occurs.
We defer unearned maintenance and service revenue when it has the right to
invoice, with recognition of the revenue recognized over the support period. We
classify unearned maintenance and service revenue as a current liability on the
balance sheet if the related revenue is expected to be realized within 12
months. The remaining unearned maintenance and service revenue is classified as
long-term.
Payment Terms
48-------------------------------------------------------------------------------- We generally receive payment from a customer after the performance obligation related to the term license has been satisfied, and therefore, our contracts with terms greater than a year generally contain a significant financing component. The significant financing component is calculated utilizing an interest rate that derives the net present value of the performance obligations delivered on an upfront basis based on the allocation of consideration. We have instituted a customer portfolio approach in assigning interest rates. The rates are determined at contract inception and are based on the credit characteristics of the customers within each portfolio. Perpetual software licenses, sold along with professional services and hardware as an integrated solution, generally require payments from the customer aligned with progress milestones in the contract. Payment terms on invoiced amounts are typically net 30 days. The Company does not offer return rights for its products and services in the ordinary course of business, and contracts generally do not include customer acceptance clauses.
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values.Goodwill represents the excess of consideration paid over the net assets acquired and is assigned to the reporting unit that acquires the business. During the nine-month period endedJune 30, 2022 , we voluntarily changed the date of our annual goodwill impairment test from last day of September to the last day of May due to the Transaction and subsequent change in our fiscal year-end. We test goodwill between tests if events or circumstances indicate a reporting unit's fair value may be less than its carrying value. If an initial assessment indicates it is more likely than not goodwill may be impaired, it is evaluated by comparing the reporting unit's estimated fair value to its carrying value. An impairment charge would be recorded for the amount by which the carrying value of the reporting unit exceeds the estimated fair value. Estimated fair values are developed primarily under an income approach that discounts estimated future cash flows using risk-adjusted interest rates, as well as earnings multiples or other techniques as warranted. No goodwill impairment was recorded for any of the periods presented. With the exception of certain trade names, all of our identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives. Identifiable intangibles consist of intellectual property such as patented and unpatented technology and trademarks, customer relationships and capitalized software. Identifiable intangible assets are also subject to evaluation for potential impairment if events or circumstances indicate the carrying value may not be recoverable.
Valuation of Assets and Liabilities Acquired in a Business Combination
The accounting for a business combination requires the excess of the purchase price for an acquisition over the net book value of assets acquired to be allocated to identifiable assets, including intangible assets. We engaged an independent third-party valuation specialist to assist in the determination of the fair value of intangible assets related to the acquisitions of HeritageAspenTech and OSI. This included the use of certain assumptions and estimates, including the projected revenue for the customer relationship and developed technology intangible asset and the obsolescence rate for the developed technology intangible asset. Although we believe the assumptions and estimates to be reasonable and appropriate, they require judgement and are based on experience and historical information obtained from Heritage AspenTech and OSI.
Recent Accounting Pronouncements
Refer to Note 2 (p) "New Accounting Pronouncements Adopted in Fiscal 2022 and 2021" and Note 2 (q) "Recently Issued Accounting Pronouncements," to our Consolidated and Combined Financial Statements for information about recent accounting pronouncements.
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