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 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 security vulnerabilities and license compliance. Our Software Integrity customers are software developers across 26 -------------------------------------------------------------------------------- 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. Despite global economic uncertainty, we have consistently grown our revenue since 2005. We achieved these results because of our solid execution, leading technologies and strong customer relationships. 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. 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 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 first three months of fiscal 2020 and 2019 ended onFebruary 1, 2020 andFebruary 2, 2019 , respectively. For presentation purposes, this Form 10-Q refers to the closest calendar month end. Financial Performance Summary 27 -------------------------------------------------------------------------------- In the first quarter of fiscal 2020 compared to the same period of fiscal 2019, our financial performance reflects the following: • Revenues were$834.4 million , an increase of$14.0 million , primarily
due to our continued growth organically.
• Total cost of revenue and operating expenses were
increase of $73.9 million , primarily due to increases in
employee-related costs of $40.6 million resulting from increases in
headcount and restructuring costs of $8.8 million .
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 with U.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 endedOctober 31, 2019 for further information. 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 grant
customers 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
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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 the license 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 our IP. 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 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 thefunctionality 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
January 31,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
Semiconductor & System Design Segment $ 748.8 $ 737.9 $ 10.9 1 %
Software Integrity Segment 85.6 82.5 3.1 4 %
Total $ 834.4 $ 820.4 $ 14.0 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.
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The increase in total revenue for the three months ended January 31, 2020
compared to the same period in fiscal 2019 was primarily attributable to the
continued organic growth of the business in all product categories.
See Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements
for a discussion of revenue by geographic areas.
Time-Based Products Revenue
January 31,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
The revenue in time-based products remained relatively flat for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019. The slight increase was primarily attributable to an increase in TSL license revenue from arrangements booked in prior periods. Upfront Products Revenue January 31, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
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 increase in upfront products revenue for the three months endedJanuary 31, 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. 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. Maintenance and Service Revenue January 31, 2020 2019 $ Change % Change (dollars in millions) Three months ended Maintenance revenue$ 40.2 $ 55.5 $ (15.3 ) (28 )% Professional services and other revenue 87.0 80.7 6.3 8 % Total$ 127.2 $ 136.2 $ (9.0 ) (7 )% Percentage of total revenue 15 % 17 % The decrease in maintenance revenue for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to a decrease in the volume of arrangements that include maintenance. The increase in professional services and other revenue for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to the timing of IP consulting projects. 30 --------------------------------------------------------------------------------
Cost of Revenue
January 31,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
Cost of products revenue $ 117.8 $ 116.6 $ 1.2 1 %
Cost of maintenance and service revenue 61.9 58.8 3.1 5 %
Amortization of intangible assets 13.2 17.5 (4.3 ) (25 )%
Total $ 192.9 $ 192.9 $ - - %
Percentage of total revenue 23 % 24 %
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 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.
Cost of revenue for the three months ended January 31, 2020 remained relatively
flat compared to the same period in fiscal 2019, primarily due to increases of
$6.5 million in personnel-related costs as a result of headcount increases from
organic hiring and acquisitions, $2.1 million in depreciation and maintenance
expenses, $1.9 million in facility expenses, and $1.6 million in consulting
costs primarily related to servicing IP consulting arrangements, partially
offset by decreases of $7.5 million in hardware costs and $4.3 million in
amortization of intangible assets.
Changes in other cost of revenue categories for the above-mentioned periods were
not individually material.
Operating Expenses
Research and Development
January 31,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
The increase in research and development expenses for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to increases of$31.0 million in personnel-related costs as a result of headcount increases,$7.4 million in facility expenses, and$1.8 million in consultants and contractor costs. Changes in other research and development expense categories for the above-mentioned periods were not individually material. 31 --------------------------------------------------------------------------------
Sales and Marketing
January 31,
2020 2019 $ Change % Change
(dollars in millions)
Three months ended
The decrease in sales and marketing expenses for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to decreases of$2.2 million in personnel-related costs as a result of a decrease in sales commissions and bonus and$1.9 million in travel and marketing communication expenses, partially offset by an increase of$1.0 million in facility expenses. Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material. General and Administrative January 31, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
The increase in general and administrative expenses for the three months endedJanuary 31, 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$5.3 million in personnel-related costs and$4.5 million in depreciation and maintenance expenses. 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: January 31, 2020 2019 $ Change % Change (dollars in millions)
Three months ended
Included in cost of revenue
$ 22.6 $ 28.2 $ (5.6 ) (20 )%
Percentage of total revenue 3 % 3 %
The decrease in amortization of intangible assets for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to intangible assets that were fully amortized, partially offset by additions of acquired intangible assets. 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 are expected to be$56 million to$65 million and consist primarily of severance, termination, and retirement benefits under the 2019 Voluntary Retirement Program (VRP). Restructuring charges under the Plan are anticipated to be completed by the second quarter of fiscal 2020.During the three months endedJanuary 31, 2020 , we incurred restructuring charges of approximately 32 --------------------------------------------------------------------------------$8.8 million for involuntary employee termination actions and the VRP. As ofJanuary 31, 2020 ,$25.3 million remained outstanding and was recorded in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets. During the three months endedJanuary 31, 2019 , we did not incur any restructuring charges. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Other Income (Expense), Net January 31, 2020 2019 $ Change % Change (dollars in millions) Three months ended Interest income$ 1.5 $ 1.6 $ (0.1 ) (6 )% Interest expense (1.6 ) (4.6 ) 3.0 (65 )% Gain (loss) on assets related to executive deferred compensation plan 12.5 4.3 8.2 191 % Foreign currency exchange gain (loss) 0.1 (0.4 ) 0.5 (125 )% Other, net (0.4 ) (1.3 ) 0.9 (69 )% Total$ 12.1 $ (0.4 ) $ 12.5 (3,125 )% The net increase in other income (expense) for the three months endedJanuary 31, 2020 as compared to the same period in fiscal 2019 was primarily due to higher gains in the market value of our executive deferred compensation plan assets. 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. Semiconductor & System Design Segment January 31, 2020 2019 Change % Change (dollars in millions)
Three months ended
Adjusted operating income
The decrease in adjusted operating income for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to lower upfront IP and hardware revenue. Software Integrity Segment January 31, 2020 2019 Change % Change (dollars in millions)
Three months ended
Adjusted operating income
The increase in adjusted operating income for the three months endedJanuary 31, 2020 compared to the same period in fiscal 2019 was primarily due to an increase in revenue from arrangements booked in prior periods. 33 -------------------------------------------------------------------------------- Income Taxes The difference between the statutory federal tax rate and our effective tax rate for the three months endedJanuary 31, 2020 is primarily due to the realizability ofU.S. foreign tax credits and excess tax benefits from stock-based compensation. The difference between the statutory federal tax rate and our effective tax rate for the three months endedJanuary 31, 2019 is primarily due to the benefit resulting from a decrease in unrecognized foreign tax benefits. 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. As ofJanuary 31, 2020 , we held an aggregate of$214.8 million in cash and cash equivalents inthe United States and an aggregate of$485.6 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 theU.S. in the future, the earnings made afterDecember 31, 2017 would not be subject to furtherU.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 three months endedJanuary 31, 2020 . Cash and Cash Equivalents January 31, October 31, 2020 2019 $ Change % Change (dollars in millions) Cash and cash equivalents$ 700.4 $ 728.6 $ (28.2 ) (4 )% Cash and cash equivalents decreased primarily due to cash used for acquisitions, stock repurchases, annual variable compensation payouts and purchases of property and equipment. The decrease in cash and cash equivalents was partially offset by cash from our operations and net proceeds from our credit facilities. Cash Flows Three Months Ended January 31, 2020 2019 $ Change (dollars in millions)
Cash provided by (used in) operating activities
(133.6 ) (29.7 ) (103.9 )
Cash provided by financing activities 93.5 38.1 55.4
Cash Provided by (Used in) 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 three months endedJanuary 31, 2020 was higher compared to the same period in fiscal 2019, primarily due to lower disbursements in operations, including vendors and tax payments, partially offset by higher annual variable compensation payouts. Cash Used in Investing Activities 34 -------------------------------------------------------------------------------- Cash used in investing activities for the three months endedJanuary 31, 2020 was higher compared to the same period in fiscal 2019, primarily due to higher cash paid for acquisitions of$75.4 million . Cash Provided by Financing Activities Cash provided by financing activities for the three months endedJanuary 31, 2020 was higher compared to the same period in fiscal 2019, primarily due to lower debt repayments of$109.1 million , partially offset by higher stock repurchase activities of$70.8 million . Accounts Receivable, netJanuary 31 ,October 31 ,
2020 2019 $ Change % Change
(dollars in millions)
Accounts Receivable, net $ 799.1 $ 553.9 $ 245.2 44 %
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:
January 31, October 31,
2020 2019 $ Change % Change
(dollars in millions)
Current assets $ 1,951.4 $ 1,738.9 $ 212.5 12 %
Current liabilities 2,055.7 1,752.5 303.2 17 %
Working capital (deficit) $ (104.3 ) $ (13.6 ) $ (90.7 ) 667 %
Increases in our working capital deficit were primarily due to an increase in
deferred revenue of $192.3 million , an increase in short-term debt of $191.0
million , an increase in current operating lease liabilities of $68.3 million and
a decrease in cash and cash equivalents of $28.2 million , partially offset by an
increase in accounts receivable of $245.2 million and a decrease in accounts
payable and accrued liabilities of $151.1 million .
Other Commitments - Credit and Term Loan Facilities
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 January 31, 2020 , we had $25.0 million
outstanding under the agreement.
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 January 31, 2020 , we were in compliance
with all financial covenants.
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As of January 31, 2020 , we had $116.1 million outstanding balance, net of debt
issuance costs, under the Term Loan, of which $97.5 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 $ 14,063
2021 27,187
2022 75,000
Total $ 116,250
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 .
There was $190.0 million outstanding balance under the Revolver as of
January 31, 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 January 31, 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 January 31, 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 January 31, 2020 are as follows:
Remainder of Fiscal 2021/ Fiscal 2023/
Total Fiscal 2020 Fiscal 2022 Fiscal 2024 Thereafter Other
(in thousands)
Operating Leases $ 598,322 $ 58,228 $ 146,573 $ 101,171 $ 292,350
Purchase
Obligations(1) 376,235 194,000 182,224 11
Other Obligations(2) 332,776 229,726 103,050 -
Long-Term Accrued
Income Taxes(3) 29,884 - - - - 29,884
Total $ 1,337,217 $ 481,954 $ 431,847 $ 101,182 $ 292,350 $ 29,884 (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.
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(3) Long-term accrued income taxes represent uncertain tax benefits as of
January 31, 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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