|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Unless otherwise indicated, numerical references are in millions, except for percentages, per share data, and conversion rate data.
OVERVIEW
The following discussion should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Form 10-K. Certain of the statements below contain forward-looking statements. These statements are predictions based upon our current expectations about future trends and events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. In particular, we refer you to the risks discussed in Part I, Item 1A. “Risk Factors” and in our other Securities and Exchange Commission filings, which identify important risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Form 10-K. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Form 10-K are made only as of the date of this Form 10-K. We do not intend, and undertake no obligation, to update these forward-looking statements.
THE COMPANY
We are a supplier of electronic design automation (EDA) tools — advanced computer software and emulation hardware systems used to automate the design, analysis, and testing of complex electro-mechanical systems, electronic hardware, and embedded systems software in electronic systems and components. We market our products and services worldwide, primarily to large companies in the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Through the diversification of our customer base among these various customer markets, we attempt to reduce our exposure to fluctuations within each market. We sell and license our products through our direct sales force and a channel of distributors and sales representatives. In addition to our corporate offices in Wilsonville, Oregon, we have sales, support, research and development, and professional service offices worldwide.
We generally focus on products and design platforms where we have or believe we can attain leading market share. Part of this approach includes developing new applications and exploring new markets where EDA companies have not generally participated. We believe this strategy leads to a more diversified product and customer mix and can help reduce the volatility of our business and our risk as a creditor, while increasing our potential for growth.
We derive system and software revenues primarily from the sale of term software license contracts, which are typically three to four years in length. We generally recognize revenue for these arrangements upon product delivery at the beginning of the license term. Larger enterprise-wide customer contracts, which are approximately
50%
or more of our system and software revenue, drive the majority of our period-to-period revenue variances. We identify term licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily include short-term term licenses as well as other term licenses where we provide the customer with rights to unspecified or unreleased future products. For these reasons, the timing of large contract renewals, customer circumstances, and license terms are the primary drivers of revenue changes from period to period, with revenue changes also being driven by new contracts and additional purchases under existing contracts, to a lesser extent.
The EDA industry is competitive and is characterized by very strong leadership positions in specific segments of the EDA market. These strong leadership positions can be maintained for significant periods of time as the software can be difficult to master and customers are disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from areas in which we are the leader. We expect to continue our strategy of developing high quality tools with number one market share potential, rather than being a broad-line supplier with undifferentiated product offerings. This strategy allows us to focus investment in areas where customer needs are greatest and where we have the opportunity to build significant market share.
Our products and services are dependent to a large degree on new design projects initiated by customers in the integrated circuit (IC) and electronics system industries. These industries can be cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, wide fluctuations in product supply and demand, and industry consolidation. Furthermore, extended economic downturns can result in reduced funding for
development due to downsizing and other business restructurings. These pressures are offset by the need for the development and introduction of next generation products once an economic recovery occurs.
KNOWN TRENDS AND UNCERTAINTIES IMPACTING FUTURE RESULTS OF OPERATIONS
Our revenue has historically fluctuated quarterly and has generally been the highest in the fourth quarter of our fiscal year due to our customers’ corporate calendar year-end spending trends and the timing of contract renewals.
Ten accounts make up approximately
45%
of our receivables, including both short and long-term balances. We have not experienced and do not presently expect to experience collection issues with these customers.
Net of reserves, we have no receivables greater than
60
days past due (net of cash based revenue invoices), and continue to experience no difficulty in factoring our high quality receivables.
Bad debt expense recorded for the fiscal year ended
January 31, 2017
was not material. However, we do have exposures within our receivables portfolio to customers with weak credit ratings. These receivable balances could have a material adverse effect on earnings in any given quarter, should significant additional allowances for doubtful accounts be necessary. However, as discussed in
Note 5
. “
Term Receivables and Trade Accounts Receivable
” in Part II, Item 8. “Financial Statements and Supplementary Data”, we regularly evaluate the collectibility of our trade accounts receivable and record specific and general reserves for bad debt as necessary.
Bookings during fiscal year
2017
increased
approximately
15%
compared to fiscal year
2016
primarily due to the timing of contract renewals and additional business with existing customers. Bookings are the value of executed orders during a period for which revenue has been or will be recognized within six months for software products and emulation hardware systems, and within twelve months for professional services and training. Ten customers accounted for approximately
35%
of total bookings for fiscal year
2017
compared to
40%
for fiscal year
2016
. The number of new customers for fiscal year
2017
was flat compared to fiscal year
2016
.
PRODUCT DEVELOPMENT
During the fiscal year ended
January 31, 2017
, we continued to execute our strategy of focusing on technical challenges encountered by customers, as well as building upon our well-established product families. We believe that customers, faced with leading-edge design challenges in creating new products, generally choose the best EDA products in each category to build their design environment. Through both internal development and strategic acquisitions, we have focused on areas where we believe we can build a leading market position or extend an existing leading market position.
We believe that the development and commercialization of EDA software tools is generally a three to five year process with limited customer adoption and sales in the first years of tool availability. Once tools are adopted, however, their life spans tend to be long. During the fiscal year ended
January 31, 2017
, we introduced both new products and upgrades to existing products.
CRITICAL ACCOUNTING POLICIES
We base our discussion and analysis of our financial condition and results of operations upon our consolidated financial statements which have been prepared in accordance with United States (U.S.) generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, current facts, and on 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 and the recording of revenues, costs, and expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.
We believe that the accounting for revenue recognition, valuation of trade accounts receivable, income taxes, business combinations, goodwill, intangible assets, and long-lived assets, special charges, and stock-based compensation are the critical accounting estimates and judgments used in the preparation of our consolidated financial statements. For further discussion of our significant accounting policies, see the discussion in “Critical Accounting Estimates” in
Note 2
. “
Summary of Significant Accounting Policies
” in Part II, Item 8. “Financial Statements and Supplementary Data.”
RESULTS OF OPERATIONS
Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
System and software revenues
|
$
|
794.5
|
|
|
13
|
%
|
|
$
|
700.6
|
|
|
(12
|
)%
|
|
$
|
799.1
|
|
System and software gross profit
|
$
|
738.9
|
|
|
15
|
%
|
|
$
|
645.0
|
|
|
(11
|
)%
|
|
$
|
722.2
|
|
Gross profit percent
|
93
|
%
|
|
|
|
92
|
%
|
|
|
|
90
|
%
|
Service and support revenues
|
$
|
488.0
|
|
|
2
|
%
|
|
$
|
480.4
|
|
|
8
|
%
|
|
$
|
445.0
|
|
Service and support gross profit
|
$
|
349.3
|
|
|
1
|
%
|
|
$
|
346.3
|
|
|
9
|
%
|
|
$
|
317.6
|
|
Gross profit percent
|
72
|
%
|
|
|
|
72
|
%
|
|
|
|
71
|
%
|
Total revenues
|
$
|
1,282.5
|
|
|
9
|
%
|
|
$
|
1,181.0
|
|
|
(5
|
)%
|
|
$
|
1,244.1
|
|
Total gross profit
|
$
|
1,088.2
|
|
|
10
|
%
|
|
$
|
991.3
|
|
|
(5
|
)%
|
|
$
|
1,039.8
|
|
Gross profit percent
|
85
|
%
|
|
|
|
84
|
%
|
|
|
|
84
|
%
|
System and Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
Upfront license revenues
|
$
|
682.4
|
|
|
17
|
%
|
|
$
|
582.0
|
|
|
(17
|
)%
|
|
$
|
704.8
|
|
Ratable license revenues
|
112.1
|
|
|
(5
|
)%
|
|
118.6
|
|
|
26
|
%
|
|
94.3
|
|
Total system and software revenues
|
$
|
794.5
|
|
|
13
|
%
|
|
$
|
700.6
|
|
|
(12
|
)%
|
|
$
|
799.1
|
|
We derive system and software revenues from the sale of licenses of software products and emulation hardware systems, including finance fee revenues from our long-term installment receivables resulting from term product sales. Upfront license revenues consist of perpetual licenses and term licenses for which we recognize revenue upon product delivery at the start of a license term. We identify licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily consist of short-term term licenses and finance fees from the accretion of the discount on long-term installment receivables.
Ten customers accounted for approximately
35%
of system and software revenues for fiscal year
2017
,
45%
of system and software revenues for fiscal year
2016
and
40%
of system and software revenues for fiscal year
2015
. No single customer accounted for 10% of total revenues for fiscal years
2017
,
2016
, and
2015
.
System and software revenues
increase
d
$93.9
in fiscal year
2017
compared to fiscal year
2016
primarily due to an increase in software license revenues driven by the timing of contract renewals and additional business with existing customers.
System and software revenues
decrease
d
$98.5
in fiscal year
2016
compared to fiscal year
2015
. The effect of acquisitions completed in fiscal years
2016
and
2015
on fiscal year
2016
system and software revenues was
$7.3
. The decrease in system and software revenues was driven by a decrease in software license revenues of approximately
$45.0
primarily due to a decrease in the growth percentage of contract renewals during the period. The remaining decrease was primarily due to a decrease in sales of emulation hardware systems.
System and software gross profit percentage was higher for fiscal year
2017
compared to fiscal year
2016
and for fiscal year
2016
compared to fiscal year
2015
primarily due to a more favorable product mix.
Service and Support
We derive service and support revenues from software and hardware post-contract maintenance or support services and professional services, which includes consulting, training, and other services. Professional services are lower margin offerings which are staffed according to fluctuations in demand. Support services operate under a less variable cost structure.
Service and support revenues increased
$7.6
in fiscal year
2017
compared to fiscal year
2016
. The effect of acquisitions completed in fiscal years
2017
and
2016
on fiscal year
2017
service and support revenues resulted in a
$10.1
decrease in service and support revenues from acquisitions compared to fiscal year
2016
. This decrease was offset by a
$10.7
increase in consulting and training revenues due to increased customer demand for services and a
$6.5
increase in support revenues resulting from an
increase
in our installed base.
Service and support revenues increased
$35.4
in fiscal year
2016
compared to fiscal year
2015
. The effect of acquisitions completed in fiscal years
2016
and
2015
on fiscal year
2016
service and support revenues was
$11.3
. The remaining increase was primarily driven by increased support revenues resulting from an
increase
in our installed base.
Revenues Information
Revenues by Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
North America
|
$
|
490.1
|
|
|
(3
|
)%
|
|
$
|
503.2
|
|
|
(10
|
)%
|
|
$
|
559.0
|
|
Europe
|
287.4
|
|
|
13
|
%
|
|
254.8
|
|
|
—
|
%
|
|
255.9
|
|
Japan
|
119.8
|
|
|
37
|
%
|
|
87.2
|
|
|
(1
|
)%
|
|
87.7
|
|
Pacific Rim
|
385.2
|
|
|
15
|
%
|
|
335.8
|
|
|
(2
|
)%
|
|
341.5
|
|
Total revenues
|
$
|
1,282.5
|
|
|
9
|
%
|
|
$
|
1,181.0
|
|
|
(5
|
)%
|
|
$
|
1,244.1
|
|
The increase in revenues in Europe, Japan and Pacific Rim for fiscal year
2017
compared to fiscal year
2016
is due to the timing of contract renewals. The decrease in revenues in North America for fiscal year
2016
compared to fiscal year
2015
is due to decreased sales of emulation hardware systems and a decrease in the growth percentage of contract renewals during the period.
We recognize additional revenues in periods when the U.S. dollar weakens in value against foreign currencies. Likewise, we recognize lower revenues in periods when the U.S. dollar strengthens in value against foreign currencies. For fiscal year
2017
, approximately 30% of European and approximately 90% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. For fiscal year
2016
, approximately 30% of European and approximately 75% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. For fiscal year
2015
, approximately 25% of European and approximately 75% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies.
Foreign currency had an immaterial impact on revenues for fiscal year
2017
compared to fiscal year
2016
. Foreign currency had an unfavorable impact of
$21.1
for fiscal year
2016
compared to fiscal year
2015
primarily as a result of the strengthening of the U.S. dollar against euro and Japanese yen.
For additional description of how changes in foreign exchange rates affect our consolidated financial statements, see discussion in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk–Foreign Currency Risk.”
Revenues by Category
We segregate revenues into five categories of similar products and services. Each category includes both product and related support revenues. Revenues for each category as a percent of total revenues are as follows (percentages rounded to the nearest 5%):
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
IC Design to Silicon
|
40
|
%
|
|
40
|
%
|
|
40
|
%
|
Scalable Verification
|
20
|
%
|
|
25
|
%
|
|
25
|
%
|
Integrated System Design
|
20
|
%
|
|
20
|
%
|
|
20
|
%
|
New and Emerging Markets
|
10
|
%
|
|
5
|
%
|
|
5
|
%
|
Services and Other
|
10
|
%
|
|
10
|
%
|
|
10
|
%
|
Total revenues
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
As described in
Note 2
. “
Summary of Significant Accounting Policies
,” term license arrangements may allow a customer to remix product usage from a fixed list of products at regular intervals during the license term. As a result, actual usage of our products by customers could differ, which could result in the percentages presented above being different.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
Research and development
|
$
|
412.3
|
|
|
8
|
%
|
|
$
|
381.4
|
|
|
—
|
%
|
|
$
|
381.1
|
|
Marketing and selling
|
369.1
|
|
|
5
|
%
|
|
351.3
|
|
|
(4
|
)%
|
|
365.7
|
|
General and administration
|
85.4
|
|
|
16
|
%
|
|
73.9
|
|
|
(7
|
)%
|
|
79.2
|
|
Equity in earnings of Frontline
|
(3.4
|
)
|
|
(41
|
)%
|
|
(5.8
|
)
|
|
2
|
%
|
|
(5.7
|
)
|
Amortization of intangible assets
|
6.0
|
|
|
(31
|
)%
|
|
8.7
|
|
|
6
|
%
|
|
8.2
|
|
Special charges
|
15.8
|
|
|
(65
|
)%
|
|
45.1
|
|
|
92
|
%
|
|
23.5
|
|
Total operating expenses
|
$
|
885.2
|
|
|
4
|
%
|
|
$
|
854.6
|
|
|
—
|
%
|
|
$
|
852.0
|
|
Selected Operating Expenses as a Percentage of Total Revenues
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Research and development
|
32
|
%
|
|
32
|
%
|
|
31
|
%
|
Marketing and selling
|
29
|
%
|
|
30
|
%
|
|
29
|
%
|
General and administration
|
7
|
%
|
|
6
|
%
|
|
6
|
%
|
Total selected operating expenses
|
68
|
%
|
|
68
|
%
|
|
66
|
%
|
We incur a substantial portion of our operating expenses outside the U.S. in various foreign currencies. We recognize additional operating expense in periods when the U.S. dollar weakens in value against foreign currencies and lower operating expenses in periods when the U.S. dollar strengthens in value against foreign currencies. For fiscal year
2017
compared to fiscal year
2016
, we experienced
favorable
currency movements of
$6.4
in total operating expenses, primarily due to movements in the Great British pound, Egyptian pound and Indian rupee. For fiscal year
2016
compared to fiscal year
2015
, we experienced
favorable
currency movements of
$36.5
in total operating expenses, primarily due to movements in the euro, Russian ruble, Japanese yen and Great British pound. The impact of these currency effects is reflected in the movements in operating expenses detailed below.
Research and Development
Research and development expenses
increase
d by
$30.9
for fiscal year
2017
compared to fiscal year
2016
and
increase
d by
$0.3
for fiscal year
2016
compared to fiscal year
2015
. The components of these changes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Change
|
Fiscal year ended January 31,
|
2017 vs 2016
|
|
2016 vs 2015
|
Salaries, incentive compensation, and benefits expenses
|
$
|
24.8
|
|
|
$
|
(9.2
|
)
|
Supplies and equipment
|
3.5
|
|
|
2.5
|
|
Expenses associated with acquired businesses
|
2.8
|
|
|
8.1
|
|
Stock-based compensation
|
2.0
|
|
|
2.2
|
|
Outside services
|
(1.8
|
)
|
|
(1.3
|
)
|
Other expenses
|
(0.4
|
)
|
|
(2.0
|
)
|
Total change in research and development expenses
|
$
|
30.9
|
|
|
$
|
0.3
|
|
Marketing and Selling
Marketing and selling expenses
increase
d by
$17.8
for fiscal year
2017
compared to fiscal year
2016
and
decrease
d by
$14.4
for fiscal year
2016
compared to fiscal year
2015
. The components of these changes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Change
|
Fiscal year ended January 31,
|
2017 vs 2016
|
|
2016 vs 2015
|
Salaries, incentive compensation, and benefits expenses
|
$
|
28.0
|
|
|
$
|
(23.8
|
)
|
Stock compensation
|
2.7
|
|
|
0.5
|
|
Expenses associated with acquired businesses
|
1.1
|
|
|
3.3
|
|
Emulation demonstration inventory amortization
|
(7.3
|
)
|
|
7.4
|
|
Outside services
|
(1.4
|
)
|
|
0.8
|
|
Other expenses
|
(5.3
|
)
|
|
(2.6
|
)
|
Total change in marketing and selling expenses
|
$
|
17.8
|
|
|
$
|
(14.4
|
)
|
General and Administration
General and administration expenses
increase
d by
$11.5
for fiscal year
2017
compared to fiscal year
2016
and
decrease
d by
$5.3
for fiscal year
2016
compared to fiscal year
2015
. The components of these changes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Change
|
Fiscal year ended January 31,
|
2017 vs 2016
|
|
2016 vs 2015
|
Salaries, incentive compensation, and benefits expenses
|
$
|
11.5
|
|
|
$
|
(6.4
|
)
|
Outside services
|
1.8
|
|
|
(1.5
|
)
|
Stock-based compensation
|
1.2
|
|
|
1.7
|
|
Other expenses
|
(3.0
|
)
|
|
0.9
|
|
Total change in general and administration expenses
|
$
|
11.5
|
|
|
$
|
(5.3
|
)
|
Special Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
Employee severance and related costs
|
$
|
6.8
|
|
|
(50
|
)%
|
|
$
|
13.5
|
|
|
286
|
%
|
|
$
|
3.5
|
|
Merger costs
|
5.5
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
Litigation costs
|
1.5
|
|
|
(63
|
)%
|
|
4.1
|
|
|
(78
|
)%
|
|
18.4
|
|
Other costs, net
|
2.0
|
|
|
(13
|
)%
|
|
2.3
|
|
|
44
|
%
|
|
1.6
|
|
Voluntary early retirement program
|
—
|
|
|
(100
|
)%
|
|
25.2
|
|
|
—
|
%
|
|
—
|
|
Total special charges
|
$
|
15.8
|
|
|
(65
|
)%
|
|
$
|
45.1
|
|
|
92
|
%
|
|
$
|
23.5
|
|
Special charges include expenses incurred related to employee severance, certain litigation costs, mergers and acquisitions, excess facility costs, and asset related charges.
Employee severance and related costs include severance benefits and notice pay. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.
Merger costs for fiscal year 2017 primarily consist of costs incurred related to advisory fees and legal costs associated with the potential merger with Siemens Industry, Inc. (Siemens) and Meadowlark Subsidiary Corporation, a wholly-owned subsidiary of Siemens.
Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), and Synopsys, Inc. regarding emulation technology.
We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 in which 110 employees elected to participate. The costs presented here are for severance benefits.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
Income tax expense
|
$
|
30.0
|
|
|
21
|
%
|
|
$
|
24.8
|
|
|
10
|
%
|
|
$
|
22.6
|
|
Effective tax rate
|
16
|
%
|
|
|
|
21
|
%
|
|
|
|
6
|
%
|
In fiscal year
2017
, our income before taxes of
$184.9
consisted of
$216.8
of pre-tax income in foreign jurisdictions and a pre-tax loss of
$31.9
in the U.S., reflecting substantial earnings by certain foreign operations, including our Irish subsidiaries, and a higher proportion of our operating expenses and financing costs occurring in the U.S.
Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, the provision for U.S. taxes on undistributed earnings of foreign subsidiaries not deemed to be permanently invested, and the application of valuation allowances on deferred tax assets.
Our effective tax rate was
16%
for fiscal year
2017
. Our tax expense differs from tax expense computed at the U.S. federal statutory rate primarily due to:
|
|
•
|
The benefit of lower tax rates on earnings of foreign subsidiaries;
|
|
|
•
|
Recognition of net operating loss carryforwards, foreign tax credit carryforwards and research and experimentation credit carryforwards for which no tax benefit has been recognized in the U.S.; and
|
|
|
•
|
The application of tax incentives for research and development.
|
These differences are partially offset by:
|
|
•
|
Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to account for the impact of future repatriations;
|
|
|
•
|
Increase in reserves for uncertain tax positions; and
|
The effective tax rate for fiscal year
2017
was lower than our effective tax rate for fiscal year
2016
primarily due to the benefit of the reduction of U.S. valuation allowance on deferred tax assets recorded in the adoption of Accounting Standards Update (ASU) 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,
and an increase in the proportion of foreign earnings in fiscal year
2017
over fiscal year
2016
that are permanently reinvested outside of the U.S. In contrast, the provision for income taxes increased by $5.2 in fiscal year
2017
compared to fiscal year
2016
primarily due to the overall increase in foreign earnings and the provision of U.S. tax on the significant portion of those earnings that are not permanently reinvested outside of the U.S.
Net deferred tax liabilities
increase
d by $2.2 from January 31, 2016 to January 31, 2017. Gross deferred tax assets
increase
d by
$17.0
from January 31,
2016
to January 31,
2017
, principally due to the creation of additional research and experimentation credits in the U.S. and the availability of additional foreign tax credits. There was an
$8.7
increase
in deferred tax liabilities from January 31,
2016
to January 31,
2017
and a valuation allowance
increase
of
$10.5
from January 31,
2016
to January 31,
2017
. The changes in both the deferred tax liabilities and the valuation allowance principally related to the amount, and prospective tax thereon, of current year foreign subsidiary earnings treated as not permanently reinvested.
The liability for income taxes associated with net uncertain tax positions was
$28.9
as of January 31,
2017
and
$19.3
as of January 31,
2016
. As of January 31,
2017
, within the liability,
$5.4
was classified as a short-term liability in income tax payable in our consolidated balance sheet as we generally anticipate the settlement of these liabilities will require payment of cash within the next twelve months. The remaining
$23.5
of income tax associated with uncertain tax positions was classified as long-term, in income tax liability in our consolidated balance sheet. We expect uncertain tax positions of
$28.9
, if recognized, would favorably affect our effective tax rate.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding applicable recent accounting pronouncements applicable is discussed in
Note 3
. “
Recent Accounting Pronouncements
” in Part II, Item 8. “Financial Statements and Supplemental Data.”
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for product development, operating activities, capital expenditures, repurchases of common stock, dividends, debt service, and acquisition opportunities that may arise. Our primary sources of liquidity are cash generated from operations and borrowings on our revolving credit facility.
We currently have access to sufficient funds for domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings for use in U.S. operations. As of
January 31, 2017
, we have cash totaling
$313.9
held by our foreign subsidiaries. A significant portion of our cash held by our foreign subsidiaries is accessible without a significant cash tax cost as the repatriation of foreign earnings will be sheltered from U.S. federal tax by tax credits. To the extent our foreign earnings are not permanently reinvested, we have provided for the tax consequences that would ensue upon their repatriation. In the event funds which are treated as permanently reinvested are repatriated, we will be required to accrue and pay additional taxes to repatriate these funds.
On February 23, 2016 we paid an intercompany dividend from foreign subsidiaries of $150,000. As the earnings associated with these funds were not treated as permanently reinvested, any U.S. tax consequences had already been included in our tax provision in prior periods.
To date, we have experienced no loss or lack of access to our invested cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.
At any point in time, we have significant balances in operating accounts that are with individual third-party financial institutions, which may exceed the Federal Deposit Insurance Corporation insurance limits or other regulatory insurance program limits. We monitor daily the cash balances in our operating accounts and adjust them as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.
We anticipate that the following will be sufficient to meet our working capital needs on a short-term (twelve months or less) and a long-term (more than twelve months) basis:
|
|
•
|
Anticipated cash flows from operating activities, including the effects of selling and financing customer term receivables;
|
|
|
•
|
Amounts available under existing revolving credit facilities; and
|
|
|
•
|
Other available financing sources, such as the issuance of debt or equity securities.
|
We have experienced no difficulties to date in raising debt. However, capital markets can be volatile, and we cannot assure that we will be able to raise debt or equity capital on acceptable terms, if at all.
Cash Flow Information
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
Cash provided by operating activities
|
$
|
321.8
|
|
|
$
|
231.3
|
|
Cash used in investing activities
|
$
|
(72.0
|
)
|
|
$
|
(53.0
|
)
|
Cash used in financing activities
|
$
|
(145.3
|
)
|
|
$
|
(72.6
|
)
|
Operating Activities
Cash flows from operating activities consist of our net income adjusted for certain non-cash items and changes in operating assets and liabilities.
Trade Accounts and Term Receivables
Our cash flows from operating activities are significantly influenced by the payment terms on our license agreements and by our sales of qualifying accounts receivable. Our customers’ inability to fulfill payment obligations could adversely affect our cash flow. We monitor our accounts receivable portfolio for customers with low or declining credit ratings and increase our collection efforts when necessary. Trade accounts and term receivables consisted of the following:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Trade accounts receivable, net
|
$
|
512.6
|
|
|
$
|
493.2
|
|
Term receivables, short-term (included in trade accounts receivable on the balance sheet)
|
$
|
298.0
|
|
|
$
|
317.2
|
|
Term receivables, long-term
|
$
|
303.7
|
|
|
$
|
268.7
|
|
Average days sales outstanding, including the short-term portion of term receivables
|
97
|
|
|
132
|
|
Average days sales outstanding in trade accounts receivable, excluding the short-term portion of term receivables
|
40
|
|
|
47
|
|
The
decrease
in the average days sales outstanding, including and excluding the short-term portion of term receivables, as of
January 31, 2017
was primarily due to
an increase
in revenues in the
fourth
quarter of fiscal year
2017
compared to the fourth quarter of fiscal year
2016
.
Term receivables are attributable to multi-year term license sales agreements. We include amounts for term agreements that are due within one year in trade accounts receivable, net, on our balance sheet and balances that are due in more than one year in term receivables, long-term. We use term agreements as a standard business practice and have a history of successfully collecting under the original payment terms without making concessions on payments, products, or services. Total term receivables were
$601.7
as of
January 31, 2017
compared to
$585.8
as of
January 31, 2016
.
We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of
$45.7
for fiscal year 2017 compared to
$42.7
for fiscal year 2016. We continue to have no difficulty in factoring receivables and continue to evaluate the economics of the sale of accounts receivable. We have not set a target for the sale of accounts receivables for fiscal year
2018
.
Accrued Payroll and Related Liabilities
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Accrued payroll and related liabilities
|
$
|
116.5
|
|
|
$
|
73.4
|
|
The increase in accrued payroll and related liabilities as of
January 31, 2017
compared to
January 31, 2016
was primarily due to an increase in incentive compensation and commissions accrued for fiscal year 2017 compared to fiscal year 2016 related to increased operating income in fiscal year 2017.
Investing Activities
Cash used in investing activities for fiscal year 2017 primarily consisted of cash paid for capital expenditures and business acquisitions.
Expenditures for property, plant, and equipment were
$60.3
for fiscal year 2017 compared to
$43.3
for fiscal year 2016. The expenditures for property, plant, and equipment for fiscal year
2017
were primarily a result of spending on information technology and infrastructure improvements within facilities.
During fiscal year 2017, we had
$11.8
of expenditures for acquisitions of businesses and equity interests, compared to
$11.7
during fiscal year 2016. We plan to finance future business acquisitions through cash and possible common stock issuances. The cash expected to be utilized includes cash on hand, cash generated from operating activities, and borrowings on our revolving credit facility.
Financing Activities
For fiscal year 2017, cash used in financing activities consisted primarily of the repurchase of common stock, the payment of dividends, repayments on the revolving credit facility, and payments related to tax withholding on the vesting of share based awards partially offset by proceeds received from the employee stock purchase plans (ESPP) purchases and exercises of stock options.
During fiscal year 2017, we paid four quarterly dividends of
$0.055
per share of outstanding common stock for a total of
$23.8
. On
March 2, 2017
we announced a quarterly dividend of
$0.055
per share of outstanding common stock, payable on
March 30, 2017
to shareholders of record as of the close of business on
March 14, 2017
. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.
We currently have a share repurchase program, approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock. We did not repurchase any shares of common stock under the repurchase program during fiscal year 2017. During fiscal year 2016, we repurchased
4.5
shares of common stock for
$85.0
. As of
January 31, 2017
,
$90.0
remains available for repurchase under the program. During fiscal year 2017, we repurchased
8.1
shares of common stock for
$146.1
in a single transaction that was not part of our repurchase program.
The terms of our revolving credit facility limit the combination of the amount of our common stock we can repurchase and the amount of dividends we can pay over the term of the facility to $200.0 plus 70% of our cumulative consolidated net income (loss) for periods after February 1, 2016. An additional
$138.5
is available for common stock repurchases or dividend payments under this limit as of
January 31, 2017
.
During fiscal year 2017 we paid $5.0 on our revolving line of credit. During fiscal year 2016 we received proceeds of $25.0 from our revolving credit facility.
Other Factors Affecting Liquidity and Capital Resources
4.00% Convertible Subordinated Debentures due 2031
In April 2011, we issued $253.0 of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures). Interest on the 4.00% Debentures is payable semi-annually in April and October.
Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into
50.4551
shares of our common stock (equivalent to a conversion price of
$19.82
per share). The events that permit conversion are described in
Note 7
. “
Notes Payable
” in Part II, Item 8. “Financial Statements and Supplementary Data.”
Upon conversion of any 4.00% Debentures, a holder will receive:
|
|
(i)
|
Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and
|
|
|
(ii)
|
Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.
|
If any one of the conversion events occurs, the 4.00% Debentures become convertible and the net balance of the 4.00% Debentures is classified as a current liability in our consolidated balance sheet. The classification of the 4.00% Debentures as current or long-term in the consolidated balance sheet is evaluated at each balance sheet date and may change from quarter to quarter depending on whether any of the conversion conditions are met.
During the fiscal quarter ended
January 31, 2017
, the market price of our common stock exceeded
120%
of the conversion price for at least
20
of the last
30
trading days of the period. Accordingly, the 4.00% Debentures are convertible at the option of the holders through
April 30, 2017
. Therefore, the carrying value of the 4.00% Debentures is classified as a current liability. Additionally, the excess of the principal amount over the carrying amount of the 4.00% Debentures is reclassified from permanent equity to temporary equity in our consolidated balance sheet as of
January 31, 2017
. If the market price of our common stock does not exceed
120%
of the conversion price for at least
20
of the last
30
trading days for the fiscal quarter ended
April 30, 2017
, the 4.00% Debentures will be reclassified as a long-term liability and the temporary equity will be reclassified to permanent equity in our consolidated balance sheet.
If all of the holders of the 4.00% Debentures elect to convert their debentures, we would be required to make cash payments of at least
$253.0
prior to the maturity of the 4.00% Debentures.
We believe that current cash balances, cash generated from our operating activities in future periods, access to our revolving credit facility, and additional financing arrangements will be sufficient to service any conversion of the 4.00% Debentures; however, future changes in our cash position; cash flows from operating, investing and financing activities; general business levels; and our access to additional financing, may impact our ability to settle the amount payable to the holders of any 4.00% Debentures that are converted.
Effective
April 5, 2016
, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices expressed as a percentage of principal, plus any accrued and unpaid interest:
|
|
|
|
Period
|
Redemption Price
|
Beginning on April 5, 2016 and ending on March 31, 2017
|
101.143
|
%
|
Beginning on April 1, 2017 and ending on March 31, 2018
|
100.571
|
%
|
On April 1, 2018 and thereafter
|
100.000
|
%
|
The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the Company. In each case, the repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.
For further information on the 4.00% Debentures, see
Note 7
. “
Notes Payable
” in Part II, Item 8. “Financial Statements and Supplementary Data.”
Revolving Credit Facility
We have a syndicated, senior, unsecured, revolving credit facility with a maximum borrowing capacity of $125.0, which expires on January 9, 2020. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates. Additionally, commitment fees can vary as they are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40%.
We had borrowings of
$20.0
against the revolving credit facility as of
January 31, 2017
compared to
$25.0
of borrowings as of
January 31, 2016
.
This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility.
We were in compliance with all financial covenants as of
January 31, 2017
. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.
For further information on our revolving credit facility, see
Note 6
. “
Short-Term Borrowings
” in Part II, Item 8. “Financial Statements and Supplementary Data.”
OFF-BALANCE SHEET ARRANGEMENTS
We do not have off-balance sheet arrangements, financings, or other similar relationships with unconsolidated entities or other persons, also known as special purpose entities. In the ordinary course of business, we lease certain real properties, primarily field sales offices, research and development facilities, and equipment.
CONTRACTUAL OBLIGATIONS
We are contractually obligated to make the following payments as of
January 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
Notes payable
(1)
|
$
|
258.1
|
|
|
$
|
—
|
|
|
$
|
5.1
|
|
|
$
|
—
|
|
|
$
|
253.0
|
|
Interest on debt
|
143.3
|
|
|
10.1
|
|
|
20.2
|
|
|
20.2
|
|
|
92.8
|
|
Other liabilities
(2)
|
17.0
|
|
|
3.0
|
|
|
7.0
|
|
|
0.4
|
|
|
6.6
|
|
Other borrowings
|
31.7
|
|
|
31.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating leases
|
98.7
|
|
|
22.1
|
|
|
38.2
|
|
|
24.5
|
|
|
13.9
|
|
Total contractual obligations
|
$
|
548.8
|
|
|
$
|
66.9
|
|
|
$
|
70.5
|
|
|
$
|
45.1
|
|
|
$
|
366.3
|
|
|
|
(1)
|
The 4.00% Debentures are currently convertible at the option of the holders and the $253.0 principal balance would be due immediately if all of the 4.00% Debentures were converted.
|
|
|
(2)
|
Our balance sheet as of
January 31, 2017
includes additional long-term taxes payable of
$26.7
related to uncertain income and other tax positions for which the timing of the ultimate resolution is uncertain. At this time, we are unable to make a
|
reasonably reliable estimate of the timing of any cash settlement with the respective tax authorities and the total amount of taxes payable. The timing of such tax payments may depend on the resolution of current and future tax examinations which cannot be estimated. As a result, this amount is not included in the above table.
OUTLOOK
On November 12, 2016, we entered into a definitive agreement to be acquired by Siemens Industry, Inc. (Siemens) and Meadowlark Subsidiary Corporation, a wholly-owned subsidiary of Siemens. As a result of the acquisition announcement, we will not provide an outlook for future financial results and have withdrawn all previously issued financial guidance.
|
|
Item 8.
|
Financial Statements and Supplementary Data.
|
Mentor Graphics Corporation
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
In thousands, except per share data
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
System and software
|
$
|
794,450
|
|
|
$
|
700,621
|
|
|
$
|
799,151
|
|
Service and support
|
488,017
|
|
|
480,367
|
|
|
444,982
|
|
Total revenues
|
1,282,467
|
|
|
1,180,988
|
|
|
1,244,133
|
|
Cost of revenues:
|
|
|
|
|
|
System and software
|
48,249
|
|
|
48,330
|
|
|
69,811
|
|
Service and support
|
138,651
|
|
|
134,025
|
|
|
127,403
|
|
Amortization of purchased technology
|
7,328
|
|
|
7,303
|
|
|
7,099
|
|
Total cost of revenues
|
194,228
|
|
|
189,658
|
|
|
204,313
|
|
Gross profit
|
1,088,239
|
|
|
991,330
|
|
|
1,039,820
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
412,309
|
|
|
381,440
|
|
|
381,125
|
|
Marketing and selling
|
369,125
|
|
|
351,344
|
|
|
365,688
|
|
General and administration
|
85,361
|
|
|
73,853
|
|
|
79,193
|
|
Equity in earnings of Frontline
|
(3,434
|
)
|
|
(5,849
|
)
|
|
(5,653
|
)
|
Amortization of intangible assets
|
6,028
|
|
|
8,716
|
|
|
8,166
|
|
Special charges
|
15,769
|
|
|
45,081
|
|
|
23,490
|
|
Total operating expenses
|
885,158
|
|
|
854,585
|
|
|
852,009
|
|
Operating income:
|
203,081
|
|
|
136,745
|
|
|
187,811
|
|
Other income (expense), net
|
2,249
|
|
|
1,612
|
|
|
(777
|
)
|
Interest expense
|
(20,474
|
)
|
|
(19,428
|
)
|
|
(19,276
|
)
|
Income before income tax
|
184,856
|
|
|
118,929
|
|
|
167,758
|
|
Income tax expense
|
29,990
|
|
|
24,753
|
|
|
22,581
|
|
Net income
|
154,866
|
|
|
94,176
|
|
|
145,177
|
|
Less: Loss attributable to noncontrolling interest
|
—
|
|
|
(2,101
|
)
|
|
(1,962
|
)
|
Net income attributable to Mentor Graphics shareholders
|
$
|
154,866
|
|
|
$
|
96,277
|
|
|
$
|
147,139
|
|
Net income per share:
|
|
|
|
|
|
Basic
|
$
|
1.42
|
|
|
$
|
0.83
|
|
|
$
|
1.28
|
|
Diluted
|
$
|
1.37
|
|
|
$
|
0.81
|
|
|
$
|
1.26
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
Basic
|
108,795
|
|
|
116,701
|
|
|
114,635
|
|
Diluted
|
114,322
|
|
|
119,263
|
|
|
117,078
|
|
Cash dividends declared per common share
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
See accompanying notes to consolidated financial statements.
Mentor Graphics Corporation
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
In thousands
|
|
|
|
|
|
Net income
|
$
|
154,866
|
|
|
$
|
94,176
|
|
|
$
|
145,177
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
Change in accumulated translation adjustment
|
(4,448
|
)
|
|
(8,947
|
)
|
|
(30,360
|
)
|
Change in unrealized gain (loss) on derivative instruments
|
16
|
|
|
(78
|
)
|
|
—
|
|
Change in pension liability
|
(33
|
)
|
|
(166
|
)
|
|
(285
|
)
|
Other comprehensive loss
|
(4,465
|
)
|
|
(9,191
|
)
|
|
(30,645
|
)
|
Comprehensive income
|
150,401
|
|
|
84,985
|
|
|
114,532
|
|
Less amounts attributable to the noncontrolling interest:
|
|
|
|
|
|
Net loss
|
—
|
|
|
(2,101
|
)
|
|
(1,962
|
)
|
Change in accumulated translation adjustment
|
—
|
|
|
22
|
|
|
45
|
|
Comprehensive loss attributable to the noncontrolling interest
|
—
|
|
|
(2,079
|
)
|
|
(1,917
|
)
|
Comprehensive income attributable to Mentor Graphics shareholders
|
$
|
150,401
|
|
|
$
|
87,064
|
|
|
$
|
116,449
|
|
See accompanying notes to consolidated financial statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
In thousands
|
|
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
441,087
|
|
|
$
|
334,826
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $4,089 as of January 31, 2017 and $3,826 as of January 31, 2016
|
512,644
|
|
|
493,209
|
|
Other receivables
|
18,803
|
|
|
23,120
|
|
Inventory
|
18,575
|
|
|
24,762
|
|
Prepaid expenses and other
|
32,742
|
|
|
22,550
|
|
Total current assets
|
1,023,851
|
|
|
898,467
|
|
Property, plant, and equipment, net
|
210,680
|
|
|
182,092
|
|
Term receivables
|
303,686
|
|
|
268,657
|
|
Goodwill
|
611,536
|
|
|
606,842
|
|
Intangible assets, net
|
31,813
|
|
|
37,446
|
|
Other assets
|
79,619
|
|
|
70,860
|
|
Total assets
|
$
|
2,261,185
|
|
|
$
|
2,064,364
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Short-term borrowings
|
$
|
31,717
|
|
|
$
|
33,449
|
|
Current portion of notes payable (Note 7)
|
242,921
|
|
|
—
|
|
Accounts payable
|
16,454
|
|
|
16,740
|
|
Income taxes payable
|
10,150
|
|
|
3,966
|
|
Accrued payroll and related liabilities
|
116,521
|
|
|
73,371
|
|
Accrued and other liabilities
|
50,695
|
|
|
37,059
|
|
Deferred revenue
|
294,297
|
|
|
258,725
|
|
Total current liabilities
|
762,755
|
|
|
423,310
|
|
Notes payable (Note 7)
|
5,188
|
|
|
240,076
|
|
Deferred revenue
|
40,196
|
|
|
18,303
|
|
Income tax liability
|
23,518
|
|
|
25,116
|
|
Other long-term liabilities
|
43,809
|
|
|
37,130
|
|
Total liabilities
|
875,466
|
|
|
743,935
|
|
Commitments and contingencies (Note 9)
|
|
|
|
Convertible notes (Note 7)
|
10,036
|
|
|
—
|
|
Stockholders’ equity:
|
|
|
|
Common stock, no par value, 300,000 shares authorized as of January 31, 2017 and January 31, 2016; 110,383 shares issued and outstanding as of January 31, 2017 and 114,934 shares issued and outstanding as of January 31, 2016
|
737,164
|
|
|
818,683
|
|
Retained earnings
|
664,084
|
|
|
522,846
|
|
Accumulated other comprehensive loss
|
(25,565
|
)
|
|
(21,100
|
)
|
Total stockholders’ equity
|
1,375,683
|
|
|
1,320,429
|
|
Total liabilities and stockholders’ equity
|
$
|
2,261,185
|
|
|
$
|
2,064,364
|
|
See accompanying notes to consolidated financial statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
In thousands
|
|
|
|
|
|
Operating Cash Flows:
|
|
|
|
|
|
Net income
|
$
|
154,866
|
|
|
$
|
94,176
|
|
|
$
|
145,177
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation of property, plant, and equipment
|
39,867
|
|
|
36,449
|
|
|
34,336
|
|
Amortization of intangible assets, debt costs and other
|
21,980
|
|
|
24,973
|
|
|
23,710
|
|
Stock-based compensation
|
46,793
|
|
|
40,497
|
|
|
35,807
|
|
Deferred income taxes
|
12,332
|
|
|
5,055
|
|
|
9,265
|
|
Changes in other long-term liabilities
|
2,620
|
|
|
(804
|
)
|
|
876
|
|
Equity in income of unconsolidated entities, net of dividends received
|
1,267
|
|
|
(455
|
)
|
|
507
|
|
Other
|
98
|
|
|
(696
|
)
|
|
85
|
|
Changes in operating assets and liabilities, net of effect of acquired businesses:
|
|
|
|
|
|
Trade accounts receivable, net
|
(22,694
|
)
|
|
49,751
|
|
|
(90,404
|
)
|
Prepaid expenses and other
|
(8,028
|
)
|
|
(13,558
|
)
|
|
(16,348
|
)
|
Term receivables, long-term
|
(36,259
|
)
|
|
31,672
|
|
|
(34,808
|
)
|
Accounts payable and accrued liabilities
|
47,114
|
|
|
(37,519
|
)
|
|
4,832
|
|
Income taxes receivable and payable
|
3,320
|
|
|
3,984
|
|
|
1,722
|
|
Deferred revenue
|
58,535
|
|
|
(2,275
|
)
|
|
26,082
|
|
Net cash provided by operating activities
|
321,811
|
|
|
231,250
|
|
|
140,839
|
|
Investing Cash Flows:
|
|
|
|
|
|
Proceeds from the sales and maturities of short-term investments
|
—
|
|
|
—
|
|
|
4,124
|
|
Proceeds from sale of building
|
—
|
|
|
2,068
|
|
|
—
|
|
Purchases of property, plant, and equipment
|
(60,288
|
)
|
|
(43,336
|
)
|
|
(48,366
|
)
|
Acquisitions of businesses and equity interests, net
|
(11,759
|
)
|
|
(11,700
|
)
|
|
(84,596
|
)
|
Net cash used in investing activities
|
(72,047
|
)
|
|
(52,968
|
)
|
|
(128,838
|
)
|
Financing Cash Flows:
|
|
|
|
|
|
Proceeds from issuance of common stock
|
32,490
|
|
|
32,807
|
|
|
29,990
|
|
Repurchase of common stock
|
(146,050
|
)
|
|
(85,000
|
)
|
|
(70,053
|
)
|
Payments related to tax withholding on vesting of share based awards
|
(4,716
|
)
|
|
(2,437
|
)
|
|
(2,351
|
)
|
Dividends paid
|
(23,808
|
)
|
|
(25,590
|
)
|
|
(22,911
|
)
|
Net increase (decrease) in short-term borrowing, excluding revolving credit facility
|
3,236
|
|
|
1,190
|
|
|
(2,660
|
)
|
Proceeds from revolving credit facility
|
—
|
|
|
25,000
|
|
|
—
|
|
Repayments of revolving credit facility
|
(5,000
|
)
|
|
—
|
|
|
—
|
|
Repayments of other borrowings
|
(1,475
|
)
|
|
(7,268
|
)
|
|
(3,659
|
)
|
Purchase of remaining noncontrolling interest in majority owned subsidiaries
|
—
|
|
|
(11,270
|
)
|
|
—
|
|
Proceeds (payments) for the sale of subsidiary shares from (to) noncontrolling interest
|
—
|
|
|
7
|
|
|
(41
|
)
|
Net cash used in financing activities
|
(145,323
|
)
|
|
(72,561
|
)
|
|
(71,685
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
1,820
|
|
|
(1,176
|
)
|
|
(3,357
|
)
|
Net change in cash and cash equivalents
|
106,261
|
|
|
104,545
|
|
|
(63,041
|
)
|
Cash and cash equivalents at the beginning of the period
|
334,826
|
|
|
230,281
|
|
|
293,322
|
|
Cash and cash equivalents at the end of the period
|
$
|
441,087
|
|
|
$
|
334,826
|
|
|
$
|
230,281
|
|
See accompanying notes to consolidated financial statements.
Mentor Graphics Corporation
Consolidated Statements of Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Retained Earnings
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Noncontrolling Interest
|
|
Total
Stockholders’
Equity
|
|
Noncontrolling
Interest with
Redemption
Feature
|
|
Shares
|
|
Amount
|
|
|
|
|
|
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2014
|
115,722
|
|
|
$
|
838,939
|
|
|
$
|
327,552
|
|
|
$
|
18,803
|
|
|
$
|
—
|
|
|
$
|
1,185,294
|
|
|
$
|
15,479
|
|
Net income (loss)
|
|
|
|
|
147,139
|
|
|
|
|
29
|
|
|
147,168
|
|
|
(1,991
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
(30,690
|
)
|
|
(1
|
)
|
|
(30,691
|
)
|
|
46
|
|
Recognition of noncontrolling interest
|
|
|
|
|
|
|
|
|
200
|
|
|
200
|
|
|
|
Adjustment of noncontrolling interest to redemption value
|
|
|
|
|
121
|
|
|
|
|
|
|
121
|
|
|
(121
|
)
|
Dividends
|
|
|
|
|
(22,911
|
)
|
|
|
|
|
|
(22,911
|
)
|
|
|
Stock issued under stock awards and stock purchase plans
|
3,349
|
|
|
29,990
|
|
|
|
|
|
|
|
|
29,990
|
|
|
331
|
|
Stock repurchased
|
(3,174
|
)
|
|
(70,053
|
)
|
|
|
|
|
|
|
|
(70,053
|
)
|
|
(372
|
)
|
Stock-based compensation expense
|
|
|
35,807
|
|
|
|
|
|
|
|
|
35,807
|
|
|
|
Share forfeitures for tax settlements
|
(107
|
)
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
Tax benefit associated with the exercise of stock options
|
|
|
280
|
|
|
|
|
|
|
|
|
280
|
|
|
|
Balance as of January 31, 2015
|
115,790
|
|
|
$
|
832,612
|
|
|
$
|
451,901
|
|
|
$
|
(11,887
|
)
|
|
$
|
228
|
|
|
$
|
1,272,854
|
|
|
$
|
13,372
|
|
Net income (loss)
|
|
|
|
|
96,277
|
|
|
|
|
(42
|
)
|
|
96,235
|
|
|
(2,059
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
(9,213
|
)
|
|
(4
|
)
|
|
(9,217
|
)
|
|
26
|
|
Adjustment of noncontrolling interest to redemption value
|
|
|
|
|
258
|
|
|
|
|
|
|
258
|
|
|
(258
|
)
|
Purchase of remaining noncontrolling interest in majority owned subsidiaries
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
(182
|
)
|
|
(11,088
|
)
|
Convertible debt feature
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
Dividends
|
|
|
|
|
(25,590
|
)
|
|
|
|
|
|
(25,590
|
)
|
|
|
Stock issued under stock awards and stock purchase plans
|
3,767
|
|
|
32,807
|
|
|
|
|
|
|
|
|
32,807
|
|
|
7
|
|
Stock repurchased
|
(4,526
|
)
|
|
(85,000
|
)
|
|
|
|
|
|
|
|
(85,000
|
)
|
|
|
Stock-based compensation expense
|
|
|
40,497
|
|
|
|
|
|
|
|
|
40,497
|
|
|
|
Share forfeitures for tax settlements
|
(97
|
)
|
|
(2,437
|
)
|
|
|
|
|
|
|
|
(2,437
|
)
|
|
|
Tax benefit associated with the exercise of stock options
|
|
|
217
|
|
|
|
|
|
|
|
|
217
|
|
|
|
Balance as of January 31, 2016
|
114,934
|
|
|
$
|
818,683
|
|
|
$
|
522,846
|
|
|
$
|
(21,100
|
)
|
|
$
|
—
|
|
|
$
|
1,320,429
|
|
|
$
|
—
|
|
Adoption of ASU 2016-09
|
|
|
|
|
10,180
|
|
|
|
|
|
|
10,180
|
|
|
|
Net income
|
|
|
|
|
154,866
|
|
|
|
|
|
|
154,866
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(4,465
|
)
|
|
|
|
(4,465
|
)
|
|
|
Convertible debt feature
|
|
|
(10,036
|
)
|
|
|
|
|
|
|
|
(10,036
|
)
|
|
|
Dividends
|
|
|
|
|
(23,808
|
)
|
|
|
|
|
|
(23,808
|
)
|
|
|
Stock issued under stock awards and stock purchase plans
|
3,700
|
|
|
32,490
|
|
|
|
|
|
|
|
|
32,490
|
|
|
|
Stock repurchased
|
(8,060
|
)
|
|
(146,050
|
)
|
|
|
|
|
|
|
|
(146,050
|
)
|
|
|
Stock-based compensation expense
|
|
|
46,793
|
|
|
|
|
|
|
|
|
46,793
|
|
|
|
Share forfeitures for tax settlements
|
(191
|
)
|
|
(4,716
|
)
|
|
|
|
|
|
|
|
(4,716
|
)
|
|
|
Balance as of January 31, 2017
|
110,383
|
|
|
$
|
737,164
|
|
|
$
|
664,084
|
|
|
$
|
(25,565
|
)
|
|
$
|
—
|
|
|
$
|
1,375,683
|
|
|
$
|
—
|
|
See accompanying notes to consolidated financial statements.
Mentor Graphics Corporation
Notes to Consolidated Financial Statements
All numerical dollar and share references are in thousands, except for per share data.
1
.
Nature of Operations
Description of Business
We are a supplier of electronic design automation systems — advanced computer software and emulation hardware systems used to automate the design, analysis, and testing of complex electro-mechanical systems, electronic hardware, and embedded systems software in electronic systems and components. We market our products and services worldwide, primarily to large companies in the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. We sell and license our products through our direct sales force and a channel of distributors and sales representatives. We were incorporated in Oregon in 1981 and our common stock is traded on the NASDAQ Global Select Market under the symbol “MENT.” In addition to our corporate offices in Wilsonville, Oregon, we have sales, support, software development, and professional service offices worldwide.
Merger
On November 12, 2016, we entered into a definitive agreement to be acquired by Siemens Industry, Inc. (Siemens) and Meadowlark Subsidiary Corporation, a wholly-owned subsidiary of Siemens. The transaction is valued at
$37.25
per share in cash, or approximately
$4.5 billion
, and has been approved by our Board of Directors. During a special meeting of the Mentor Graphics shareholders held on February 2, 2017, the transaction was approved by an affirmative vote of the holders of a majority of the outstanding shares of Mentor Graphics common stock. On December 22, 2016 Mentor Graphics received notice from the U.S. Federal Trade commission that it had granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The closing of the transaction is also subject to various customary conditions, receipt of clearance from the Committee on Foreign Investment in the U.S. and other specified regulatory approvals, and the accuracy of representations and warranties contained in the agreement. We are also subject to compliance with covenants and agreements contained in the agreement, including a restriction on the amount we can borrow of no more than
$10,000
in each fiscal quarter and a prohibition on the repurchase of common stock. The closing of the transaction is not subject to a financing condition and is expected to be completed by June 30, 2017.
2
.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include our financial statements and those of our wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
We do not have off-balance sheet arrangements, financings, or other similar relationships with unconsolidated entities or other persons, also known as special purpose entities. In the ordinary course of business, we lease certain real properties, primarily field sales offices, research and development facilities, and equipment, as described in
Note 9
.
“
Commitments and Contingencies
.”
Foreign Currency Translation
Local currencies are the functional currencies of our foreign subsidiaries except for certain subsidiaries in Ireland, Singapore, Egypt, and the Netherlands Antilles where the United States (U.S.) dollar is used as the functional currency. We translate assets and liabilities of foreign operations, excluding certain subsidiaries in Ireland, Singapore, Egypt, and the Netherlands Antilles to U.S. dollars at current rates of exchange and revenues and expenses using weighted average rates. We include foreign currency translation adjustments in stockholders’ equity as a component of accumulated other comprehensive loss. We maintain the accounting records for certain subsidiaries in Ireland, Singapore, Egypt, and the Netherlands Antilles in the U.S. dollar and accordingly no translation is necessary. We include foreign currency transaction gains and losses as a component of other income (expense), net.
Critical Accounting Estimates
U.S. generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We believe that accounting for revenue recognition, valuation of trade accounts receivable, income taxes, business combinations, goodwill, intangible assets and long-lived assets, special charges, and stock-based compensation are the critical accounting estimates and judgments used in the preparation of our consolidated financial
statements. These estimates and assumptions are based on our best judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust estimates and assumptions as facts and circumstances dictate. Actual results could differ from these estimates. Any changes in estimates will be reflected in the financial statements in future periods. A discussion of each critical accounting estimate is provided below.
Revenue Recognition
We report revenue in two categories based on how revenue is generated: (i) system and software and (ii) service and support.
System and software revenues
– We derive system and software revenues from the sale of licenses of software products and emulation and other hardware systems. We primarily license our products using two different license types:
1.
Term licenses – We use this license type primarily for software sales. This license type provides the customer with the right to use a fixed list of software products for a specified time period, typically three to four years, with payments spread over the license term, and does not provide the customer with the right to use the products after the end of the term. Term license arrangements may allow the customer to share products between multiple locations and remix product usage from the fixed list of products at regular intervals during the license term. We generally recognize product revenue from term license arrangements upon product delivery and start of the license term. In a term license agreement where we provide the customer with rights to unspecified or unreleased future products, we recognize revenue ratably over the license term.
2.
Perpetual licenses – We use this license type for software and emulation hardware system sales. This license type provides the customer with the right to use the product in perpetuity and typically does not provide for extended payment terms. We generally recognize product revenue from perpetual license arrangements upon product delivery assuming all other criteria for revenue recognition have been met.
We include finance fee revenues from the accretion of the discount on long-term installment receivables resulting from product sales in system and software revenues. Finance fees were approximately 2.0% of total revenues for fiscal years 2017, 2016, and 2015.
Service and support revenues
– We derive service and support revenues from software and hardware post-contract maintenance or support services and professional services, which includes consulting, training, and other services. We recognize support services revenue ratably over the service term. We record professional services revenue as services are provided to the customer.
We determine whether product revenue recognition is appropriate based upon the evaluation of whether the following four criteria have been met:
1.
Persuasive evidence of an arrangement exists – Generally, we use either a customer signed contract or qualified customer purchase order as evidence of an arrangement for both term and perpetual licenses. For professional service engagements, we generally use a signed professional services agreement and a statement of work to evidence an arrangement. Sales through our distributors are evidenced by an agreement governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.
2.
Delivery has occurred – We generally deliver software and the corresponding access keys to customers electronically. Electronic delivery occurs when we provide the customer access to the software. We may also deliver the software on a digital versatile disc (DVD). With respect to emulation hardware systems, we transfer title to the customer upon shipment. Our software license and emulation hardware system agreements generally do not contain conditions for acceptance.
3.
Fee is fixed or determinable – We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. We have an established history of collecting on an original contract with installment terms without providing concessions on payments, products, or services. Additionally, for installment contracts, we determine that the fee is fixed or determinable if the arrangement has a payment schedule that is within the term of the license and the payments are collected in equal or nearly equal installments, when evaluated on a cumulative basis. If the fee is not deemed to be fixed or determinable, we recognize revenue as payments become due and payable.
4.
Collectibility is probable – To recognize revenue, we must judge collectibility of the arrangement fees on a customer-by-customer basis pursuant to our credit review process. We typically sell to customers with whom there is a history of successful collection. We evaluate the financial position and a customer’s ability to pay whenever an existing customer purchases new products, renews an existing arrangement, or requests an increase in credit terms. For certain industries for which our products are not considered core to the industry or the industry is generally considered troubled, we impose higher credit standards. If we determine that collectibility is not probable based upon our credit review process or the customer’s payment history, we recognize revenue as payments are received.
Multiple element arrangements involving software licenses – For multiple element arrangements involving software and other software-related deliverables, vendor-specific objective evidence of fair value (VSOE) must exist to allocate the total fee among all delivered and non-essential undelivered elements of the arrangement. If undelivered elements of the arrangement are essential to the functionality of the product, we defer revenue until the essential elements are delivered. If VSOE does not exist for one or more non-essential undelivered elements, we defer revenue until such evidence exists for the undelivered elements, or until those elements are delivered, whichever is earlier. If VSOE of all non-essential undelivered elements exists but VSOE does not exist for one or more delivered elements, we recognize revenue using the residual method. Under the residual method, we defer revenue related to the undelivered elements based upon VSOE and we recognize the remaining portion of the arrangement fee as revenue for the delivered elements, assuming all other criteria for revenue recognition are met.
We base our VSOE for certain elements of an arrangement on pricing included in comparable transactions when the element is sold separately. We primarily base our VSOE for term and perpetual support services on customer renewal history where services are sold separately. We also base VSOE for professional services and installation services for emulation hardware systems on the price charged when the services are sold separately.
Multiple element arrangements involving hardware – For multiple element arrangements involving our emulation hardware systems, we allocate revenue to each element based on the relative selling price of each deliverable. In order to meet the separation criteria to allocate revenue to each element we must determine the standalone selling price of each element using a hierarchy of evidence.
The authoritative guidance requires that, in the absence of VSOE or third-party evidence, a company must develop an estimated selling price (ESP). ESP is defined as the price at which the vendor would transact if the deliverable was sold by the vendor regularly on a standalone basis. A company should consider market conditions as well as entity-specific factors when estimating a selling price. We base our ESP for certain elements in arrangements on either costs incurred to manufacture a product plus a reasonable profit margin or standalone sales to similar customers. In determining profit margins, we consider current market conditions, pricing strategies related to the class of customer, and the level of penetration we have at the customer. In other cases, we may have limited standalone sales to the same or similar customers and/or guaranteed pricing on future purchases of the same item.
Valuation of Trade Accounts Receivable
We maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectibility of our trade accounts receivable based on a combination of factors. When we become aware of a specific customer's inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer's operating results, financial position, or credit rating, we record a specific reserve for bad debt to reduce the related receivable to the amount believed to be collectible. We also record unspecified reserves for bad debt for all other customers based on a variety of factors including length of time the receivables are past due, the financial health of customers, the current business environment, and historical experience. If these factors change or circumstances related to specific customers change, we adjust the estimates of the recoverability of receivables resulting in either additional selling expense or a reduction in selling expense in the period the determination is made.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, we recognize deferred income taxes for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and tax balances of existing assets and liabilities. We calculate deferred tax assets and liabilities using enacted laws and tax rates that will be in effect when we expect the differences to reverse and be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and credit carryforwards if it is more likely than not that the tax benefits will be realized. Deferred tax assets are not recorded, however, to the extent they are attributed to uncertain tax positions.
For deferred tax assets that cannot be recognized under the more-likely-than-not-standard, we have established a valuation allowance. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. We have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we are able to realize our deferred tax assets in the future in excess of our net recorded amount, we would reverse the valuation allowance associated with the deferred tax assets in the period the determination was made, which may result in a tax benefit in the statement of income. Also, if we determine that we
are not able to realize all or part of our net deferred tax assets in the future, we would record a valuation allowance on the net deferred tax assets with a corresponding increase in expense in the period the determination was made.
We are subject to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of business there are many transactions and calculations where the ultimate tax determination is uncertain. While we believe the positions we have taken are appropriate, we have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by the tax authorities. We record a benefit on a tax position when we determine that it is more likely than not that the position is sustainable upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions that are more likely than not to be sustained, we measure the tax position at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is effectively settled. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes.
Business Combinations
When we acquire businesses, we allocate the purchase price, including the fair value of contingent consideration, to acquired tangible assets and liabilities and acquired identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires us to make significant estimates in determining the fair value of contingent consideration as well as acquired assets and assumed liabilities, especially with respect to intangible assets and goodwill. These estimates are based on information obtained from management of the acquired companies, our assessment of this information, and historical experience. These estimates can include, but are not limited to, the cash flows that an acquired business is expected to generate in the future, the cash flows that specific assets acquired with that business are expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made to the acquired assets and liabilities. In addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such estimates, and if such events occur, we may be required to adjust the value allocated to acquired assets or assumed liabilities.
We also make significant judgments and estimates when we assign useful lives to the definite-lived intangible assets identified as part of our acquisitions. These estimates are inherently uncertain and if we used different estimates, the useful life over which we amortize intangible assets would be different. In addition, unanticipated events and circumstances may occur that may impact the useful life over which we amortize our intangible assets, which would impact our recognition of expense and our results of operations.
Goodwill, Intangible Assets and Long-Lived Assets
Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible assets and other intangible assets acquired in our business combinations. Goodwill is not amortized, but is tested for impairment annually and as necessary if changes in facts and circumstances indicate that the fair value of our reporting unit may be less than the carrying amount. We operate as a single reporting unit for purposes of goodwill evaluation. We completed our annual goodwill impairment test as of
January 31, 2017
,
2016
, and
2015
. For purposes of assessing the impairment of goodwill, we estimated the fair value of our reporting unit using its market capitalization as the best evidence of fair value and compared that fair value to the carrying value of our reporting unit. Our reporting unit passed this step of the goodwill analysis. There were no indicators of impairment to goodwill during fiscal years
2017
,
2016
, and
2015
and accordingly, no impairment charges were recognized during these fiscal periods.
Intangible assets, net primarily includes purchased technology, in-process research and development, backlog, tradenames, and customer relationships acquired in our business combinations. We review long-lived assets, including intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. We assess the recoverability of our long-lived assets by determining whether the carrying values of the asset groups are greater than the forecasted undiscounted net cash flows of the related asset group. If we determine the assets are impaired, we write down the assets to their estimated fair value. We determine fair value based on forecasted discounted net cash flows or appraised values, depending upon the nature of the assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. The estimates we have used are consistent the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges. In the event we determine our long-lived assets are impaired, we would make an adjustment resulting in a charge for
the write-down in the period that the determination was made. There were no indicators of impairment to long-lived assets during fiscal years
2017
,
2016
, and
2015
and accordingly, no impairment charges were recognized during these fiscal periods.
We amortize purchased technology over
three
to
five
years to system and software cost of revenues and other intangible asset costs generally over
two
to
six
years to operating expenses. We amortize capitalized in-process research and development (resulting from acquisitions) upon completion of projects to cost of revenues over the estimated useful life of the technology. Alternatively, if we abandon a project, in-process research and development costs are expensed to operating expense when that determination is made.
Total purchased technology and other intangible asset amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Purchased technology and other intangible asset amortization expense
|
$
|
13,356
|
|
|
$
|
16,019
|
|
|
$
|
15,265
|
|
As of
January 31, 2017
, the carrying value of goodwill and intangible assets was as follows:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Goodwill
|
$
|
611,536
|
|
|
$
|
606,842
|
|
|
|
|
|
Purchased technology and in-process research and development, gross
|
$
|
162,213
|
|
|
$
|
158,102
|
|
Less: accumulated amortization
|
(145,652
|
)
|
|
(138,375
|
)
|
Purchased technology and in-process research and development, net
|
$
|
16,561
|
|
|
$
|
19,727
|
|
|
|
|
|
Other intangible assets, gross
|
$
|
108,690
|
|
|
$
|
105,162
|
|
Less: accumulated amortization
|
(93,438
|
)
|
|
(87,443
|
)
|
Other intangible assets, net
|
$
|
15,252
|
|
|
$
|
17,719
|
|
The following table summarizes goodwill activity:
|
|
|
|
|
Balance as of January 31, 2015
|
$
|
599,929
|
|
Acquisitions
|
8,500
|
|
Foreign exchange
|
(1,587
|
)
|
Balance as of January 31, 2016
|
$
|
606,842
|
|
Acquisitions
|
6,111
|
|
Foreign exchange
|
(1,417
|
)
|
Balance as of January 31, 2017
|
$
|
611,536
|
|
We estimate the aggregate amortization expense related to purchased technology and other intangible assets will be as follows:
|
|
|
|
|
Fiscal years ending January 31,
|
|
2018
|
$
|
12,845
|
|
2019
|
11,192
|
|
2020
|
4,432
|
|
2021
|
1,842
|
|
2022
|
1,102
|
|
Thereafter
|
400
|
|
Aggregate amortization expense
|
$
|
31,813
|
|
Special Charges
We record restructuring charges in connection with our plans to better align our cost structure with projected operations in the future. We record restructuring charges in connection with employee rebalances based on estimates of the expected costs associated with severance benefits. If the actual cost incurred exceeds the estimated cost, additional expense is recognized. If the actual cost is less than the estimated cost, a benefit is recognized.
We also record within special charges, expenses incurred related to certain litigation costs that are unusual in nature due to the significance in variability of timing and amount. Special Charges may also include costs associated with mergers and acquisitions, excess facility costs and asset related charges. See additional discussion in
Note 14
. “
Special Charges
.”
Accounting for Stock-Based Compensation
We measure stock-based compensation cost at the grant date, based on the fair value of the award, and recognize the expense on a straight-line basis over the employee’s requisite service period. For options and stock awards that vest fully on any termination of service, there is no requisite service period and consequently we recognize the expense fully in the period in which the award is granted. We present the excess tax benefit or tax deficiency from the exercise of stock options or vesting of restricted stock units as an operating activity in the statement of cash flows when options are exercised or the restricted stock units vest.
We estimate the fair value of purchase rights under our employee stock purchase plans (ESPPs) using a Black-Scholes option-pricing model. The Black-Scholes option-pricing model incorporates several highly subjective assumptions including expected volatility, expected dividends, and interest rates. The input factors used in the Black-Scholes option-pricing model are based on subjective future expectations combined with management judgment. If we were to modify any awards, additional charges could occur. In reaching our determination of expected volatility for purchase rights under our ESPPs, we use the historical volatility of our shares of common stock.
See a further discussion of the fair value of purchase rights under our ESPPs in
Note 11
. “
Employee Stock and Savings Plans
.”
Property, Plant, and Equipment, Net
We state property, plant, and equipment at cost and capitalize expenditures for additions to property, plant, and equipment. We expense maintenance and repairs, which do not improve or extend the life of the respective asset, as incurred. We compute depreciation on a straight-line basis as follows:
|
|
|
|
|
|
Estimated Useful Lives (in years)
|
Buildings
|
|
40
|
|
Land improvements
|
|
20
|
|
Computer equipment and furniture
|
3
|
-
|
5
|
Leasehold improvements
(1)
|
3
|
-
|
10
|
|
|
(1)
|
Amortized over the shorter of the lease term or estimated life.
|
A summary of property, plant, and equipment, net is as follows:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Computer equipment and furniture
|
$
|
394,042
|
|
|
$
|
351,982
|
|
Buildings and building equipment
|
117,240
|
|
|
115,312
|
|
Land and improvements
|
24,610
|
|
|
21,489
|
|
Leasehold improvements
|
48,812
|
|
|
41,906
|
|
Property, plant, and equipment, gross
|
584,704
|
|
|
530,689
|
|
Less: accumulated depreciation and amortization
|
(374,024
|
)
|
|
(348,597
|
)
|
Property, plant, and equipment, net
|
$
|
210,680
|
|
|
$
|
182,092
|
|
Net Income Per Share
We compute basic net income per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of restricted stock units, common shares issuable upon exercise of employee stock options, purchase rights from ESPPs, and common shares issuable upon conversion of the convertible subordinated debentures using the treasury stock method, if dilutive. Net income used to compute basic and diluted net income per share is increased or reduced for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value. See additional discussion in
Note 12
. “
Net Income Per Share
.”
Investments
We classify investments with original maturities of 90 days or less as cash equivalents. Additional information regarding cash equivalents is provided in
Note 4
. “
Fair Value Measurement
.”
Short-term investments include certificates of deposit with original maturities in excess of 90 days but less than one year at the time of purchase. We determine the appropriate classification of our investments at the time of purchase.
Long-term investments, included in other assets on the accompanying consolidated balance sheets, include investments in equity securities. For investments in equity securities, we use the equity method of accounting when our investment gives us the ability to exercise significant influence over the operating and financial policies of the investee. Under the equity method, we record our share of earnings or losses equal to our proportionate share of the earnings or losses of the investee as a component of other income (expense), net, with the exception of our investment in Frontline P.C.B. Solutions Limited Partnership (Frontline) as discussed below. Investments in equity securities of private companies without a readily determinable fair value, where we do not exercise significant influence over the investee, are recorded using the cost method of accounting, carrying the investment at historical cost. We periodically evaluate the fair value of all investments to determine if an other-than-temporary decline in value has occurred.
Investment in Frontline
We have a
50%
interest in a joint venture Frontline, which is equally owned by us and Orbotech, Ltd. Frontline is a provider of engineering software solutions for the printed circuit board industry. We use the equity method of accounting for our Frontline investment, which results in reporting our investment as one line within other assets in the consolidated balance sheet and our share of earnings as one line in the consolidated statement of income. Frontline reports on a calendar year basis, therefore, we record our interest in the earnings of Frontline on a one-month lag.
Although we do not exert control, we actively participate in regular and periodic activities with respect to Frontline such as budgeting, business planning, marketing, and direction of research and development projects. Accordingly, we have included our interest in the earnings of Frontline as a component of operating income.
Derivative Financial Instruments
We are exposed to fluctuations in foreign currency exchange rates and have established a foreign currency hedging program to hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Our derivative instruments consist of foreign currency exchange contracts. By using derivative instruments, we subject ourselves to credit risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value of the derivative instrument. Generally, when the fair value of our derivative contracts is a net asset, the counterparty owes us, thus creating a receivable risk. We minimize counterparty credit risk by entering into derivative transactions with major financial institutions and, as such, we do not expect material losses as a result of default by our counterparties. We execute foreign currency transactions in exchange-traded or over-the-counter markets for which quoted prices exist. We do not hold or issue derivative financial instruments for speculative or trading purposes.
To manage the foreign currency volatility, we aggregate exposures on a consolidated basis to take advantage of natural offsets. Our primary exposures are the Japanese yen, where we are in a long position, and the euro, where we are in a short position. Most of our large European revenue contracts are denominated and paid in U.S. dollars while our European expenses, including substantial research and development operations, are paid in local currency causing a short position in the euro. In addition, we experience greater inflows than outflows of Japanese yen as almost all Japanese-based customers contract and pay us in Japanese yen. While these exposures are aggregated on a consolidated basis to take advantage of natural offsets, substantial exposures remain.
To partially offset the net exposures in the euro and the Japanese yen, we enter into foreign currency exchange contracts for a time period of less than one year which are designated as cash flow hedges. Any gain or loss on Japanese yen contracts is classified as product revenue when the hedged transaction occurs while any gain or loss on euro contracts is classified as operating expense when the hedged transaction occurs.
We use an income approach to determine the fair value of our foreign currency contracts and record them at fair value utilizing observable market inputs at the measurement date. We report in the consolidated balance sheet the fair value of derivatives in other receivables, if the balance is an asset, or accrued liabilities, if the balance is a liability. The accounting for changes in the fair value of a derivative depends upon whether it has been designated in a hedging relationship and on the type of hedging relationship. To qualify for designation in a hedging relationship, specific criteria must be met and the appropriate
documentation maintained. Hedging relationships, if designated, are established pursuant to our risk management policy and are initially and regularly evaluated to determine whether they are expected to be, and have been, highly effective hedges. We formally document all relationships between foreign currency exchange contracts and hedged items as well as our risk management objectives and strategies for undertaking various hedge transactions.
All hedges designated as cash flow hedges are linked to forecasted transactions and we assess, both at inception of the hedge and on an ongoing basis, the effectiveness of the foreign currency exchange contracts in offsetting changes in the cash flows of the hedged items. We report the effective portions of the net gains or losses of these foreign currency exchange contracts as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Accumulated other comprehensive income (loss) associated with hedges of forecasted transactions is reclassified to the consolidated statement of income in the same period the forecasted transaction occurs or the hedge is no longer effective. We expect substantially all of the hedge balance in accumulated other comprehensive loss to be reclassified to the consolidated statement of income within the next twelve months.
We enter into foreign currency exchange contracts to offset the earnings impact relating to the variability in exchange rates on certain short-term monetary assets and liabilities denominated in non-functional currencies. We do not designate these foreign currency contracts as hedges. The change in fair value of these derivative instruments is reported each period in other income (expense), net, in our consolidated statement of income.
Software Development Costs
We capitalize software development costs beginning when a product’s technological feasibility has been established by either completion of a detail program design or completion of a working model of the product and ending when a product is available for general release to customers. The period between the achievement of technological feasibility and the general release of our products has historically been of short duration. As a result, those capitalizable software development costs are insignificant and have been charged to research and development expense in all periods in the accompanying consolidated statements of income.
We did not capitalize
any
acquired developed technology during fiscal years
2017
,
2016
, and
2015
.
Advertising Costs
We expense all advertising costs as incurred. Advertising expense is included in marketing and selling expense in the accompanying consolidated statement of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Advertising expense
|
$
|
3,435
|
|
|
$
|
3,683
|
|
|
$
|
2,985
|
|
Transfer of Financial Assets
We finance certain software license agreements with customers through the sale, assignment, and transfer of the future payments under those agreements to financing institutions on a non-recourse basis. We retain no interest in the transferred receivable. We record the transfers as sales of the related accounts receivable when we are considered to have surrendered control of the receivables. The gain or loss on the sale of receivables is included in general and administration in operating expenses in our consolidated statement of income. The gain or loss on the sale of receivables consists of two components: (i) the discount on sold receivables, which is the difference between the undiscounted balance of the receivables, and the net proceeds received from the financing institution and (ii) the unaccreted interest on the sold receivables. We impute interest on the receivables based on prevailing market rates and record this as a discount against the receivable. See additional details in
Note 5
. “
Term Receivables and Trade Accounts Receivable
.”
Noncontrolling Interest with Redemption Feature
In
September 2015
we exercised our call option to purchase the remaining noncontrolling interest of Calypto Design Systems, Inc. for
$11,088
. This transaction was reflected in cash used for investing activities in our statement of cash flows. After this transaction, we acquired
100%
of Calypto Design Systems, Inc. We had been party to an agreement that provided us a call option to acquire the noncontrolling interest, and provided the noncontrolling interest holders a put option to sell their interests to us, at prices based on formulas defined in the agreement.
Prior to our purchase, the noncontrolling interest was adjusted for the redemption feature based on the put option price formula and presented on the consolidated balance sheet under the caption “Noncontrolling interest with redemption feature.” Because the exercise of the put option was outside of our control, we presented this interest outside of stockholders’ equity.
The noncontrolling interest with redemption feature was recognized at the greater of:
i. The calculated redemption feature put value as of the balance sheet date; or
ii. The initial noncontrolling interest value adjusted for the noncontrolling interest holders' share of:
a. cumulative impact of net income (loss); and
b. other changes in accumulated other comprehensive income.
Increases (or decreases to the extent they offset previous increases) in the calculated redemption feature put value were recorded directly to retained earnings as if the balance sheet date were also the redemption date. Changes in the redemption feature put value also resulted in an adjustment to net income attributable to shareholders in the calculation of basic and diluted net income per share.
The results of the majority-owned subsidiary were presented in our consolidated results with an adjustment reflected on the face of our statement of income and the face of our statement of comprehensive income for the noncontrolling investors' interest in the results of the subsidiary.
3
.
Recent Accounting Pronouncements
Recently Adopted Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,
as part of their simplification initiative to improve the accounting for share-based payments to employees. The new standard affects several aspects of the accounting for share-based payments. It requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement when awards vest or are exercised. Cash flows associated with excess tax benefits are no longer classified as cash flows from financing activities but will be classified as operating activities, consistent with other income tax cash flows. The standard also allows for additional employee tax withholding on the exercise or release of awards, without triggering liability classification of the award. Additionally, when we withhold shares for tax-withholding purposes and in-turn pay cash for taxes on behalf of an employee, the cash payment is classified as a financing activity in our statement of cash flows. Finally, the standard allows an accounting policy election for the treatment of forfeitures of stock based awards. Companies can elect to continue to estimate forfeitures expected to occur, or account for forfeitures as they occur. This standard is effective for us in the first quarter of fiscal year 2018, with early adoption permitted.
We early adopted the new standard effective February 1, 2016. The primary impact to our financial statements was the recognition of
$48,605
in deferred tax assets associated with excess tax benefits offset by a valuation allowance of
$38,425
and a cumulative-effect adjustment of
$10,180
to retained earnings as of January 31, 2016. We elected to continue to estimate forfeitures expected to occur when estimating the amount of compensation expense recorded in each accounting period.
We retrospectively applied to all periods presented in our statements of cash flows, the presentation of excess tax benefits and cash paid for employee taxes where shares were withheld. As a result of this election excess tax benefits were reclassified from financing activities to operating activities and cash paid for shares withheld were reclassified from operating activities to financing activities. The net impact on previously reported results is as follows:
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31, 2016
|
As originally reported
|
|
As Adjusted
|
Net cash provided by operations
|
$
|
228,596
|
|
|
$
|
231,250
|
|
Net cash used in financing activities
|
$
|
(69,907
|
)
|
|
$
|
(72,561
|
)
|
|
|
|
|
Fiscal year ended January 31, 2015
|
As originally reported
|
|
As Adjusted
|
Net cash provided by operations
|
$
|
138,208
|
|
|
$
|
140,839
|
|
Net cash used in financing activities
|
$
|
(69,054
|
)
|
|
$
|
(71,685
|
)
|
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments.
This standard eliminates the requirement for an acquirer to retrospectively account for adjustments made to provisional amounts recognized in a business combination. The standard requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are identified. Changes in depreciation, amortization, and any other income effects resulting from adjustments to
provisional amounts, should be computed as of the acquisition date. The standard requires that an entity present separately, by line item, the amounts included in current-period earnings that would have been recorded in previous reporting periods, if the adjustments to provisional amounts had been recognized on the acquisition date. We adopted this standard beginning February 1, 2016. Adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-05,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40),
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.
This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer accounts for fees related to the software license element consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer accounts for the arrangement as a service contract. An arrangement would contain a software license element if both: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. We adopted this standard beginning February 1, 2016 on a prospective basis. Adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In September 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.
This ASU provides guidance on management's responsibility in evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide related disclosures if required. Evaluation is required every reporting period, including interim periods. We adopted this standard effective January 31, 2017. Adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
Issued Pronouncements not yet Adopted
Revenue Recognition
In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients.
This ASU amends narrow aspects of Topic 606 in ASU 2014-09,
Revenue from Contracts with Customers
, related to the assessment of collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. Practical expedients are provided in the ASU to simplify the transition to the new standard.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing.
This ASU clarifies guidance in ASU 2014-09,
Revenue from Contracts with Customers
related to identifying performance obligations and licensing implementation
.
This ASU is expected to: (i) reduce the cost and complexity of applying the guidance on identifying promised goods or services; (ii) improve guidance on criteria in assessing whether promises to transfer goods and services are separately identifiable; and (iii) improve the operability and understandability of the licensing implementation guidance.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers
(Topic 606), Principal versus Agent Considerations.
This ASU amends the principal versus agent guidance in ASU 2014-09,
Revenue from Contracts with Customers
, and clarifies that the analysis must determine whether an entity controls the specified goods or services before they are transferred to the customer.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This ASU is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to be entitled to in exchange for the transfer of goods and services to customers. This ASU requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU also requires qualitative and quantitative disclosure about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard permits one of two methods for adoption: (i) retrospectively to each prior reporting period presented, with the ability to utilize certain practical expedients; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, including additional disclosures. We have not yet selected a transition method.
We have not completed our evaluation of the effect that each of these ASUs will have on our consolidated financial statements and related disclosures. We will be required to implement this guidance in the first quarter of fiscal year 2019 with early adoption permitted beginning in the first quarter of fiscal year 2018. We will adopt the new accounting standard on February 1,
2018, which is the start of the first quarter of fiscal year 2019. We do not yet know, nor can we reasonably estimate the effect that the adoption of this standard will have on our consolidated financial statements.
Other
In October 2016, the FASB issued ASU 2016-16,
Income Taxes
(Topic 740), Intra-Entity Transfers of Assets Other Than Inventory
. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. Examples of assets included in the scope of this ASU are intellectual property (IP) and property, plant, and equipment. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. We are evaluating the effect that ASU 2016-16 will have on our consolidated financial statements and related disclosures. We do not yet know, nor can we reasonably estimate the effect that the adoption of this standard will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Clarification of Certain Cash Receipts and Cash Payments
. This ASU adds and clarifies guidance on the presentation and classification of eight specific cash flow items related to cash receipts and cash payments in the Statement of Cash Flows, with the intent of reducing diversity in practice. The amendments in this ASU should be applied retrospectively for each period presented. For those issues where it is impractical to apply these amendments retrospectively, the amendments should be applied prospectively as of the earliest date practicable. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted. This ASU is not expected to have a material impact on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
This ASU changes how companies measure and recognize credit losses for various financial assets. This ASU will require companies to use an
expected
credit loss model to recognize estimated credit losses expected to occur over the remaining life of the financial assets rather than the current
incurred
credit loss model methodology. This revised guidance is applicable to our trade and term receivables. We will be required to implement this guidance in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures. We do not yet know, nor can we reasonably estimate the effect that the adoption of this standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842).
This ASU requires a lessee to recognize in the statement of financial position a liability to make lease payments, and a right-of-use asset representing its right to use the underlying asset for the lease term. We will be required to implement this guidance in the first quarter of fiscal year 2020. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures. We do not yet know, nor can we reasonably estimate the effect that the adoption of this standard will have on our consolidated financial statements.
4
.
Fair Value Measurement
The following table presents information about financial assets and liabilities measured at fair value on a recurring basis as of
January 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
286,000
|
|
|
$
|
286,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank time deposits
|
71,339
|
|
|
—
|
|
|
71,339
|
|
|
—
|
|
Total cash equivalents
|
357,339
|
|
|
286,000
|
|
|
71,339
|
|
|
—
|
|
Contingent consideration
|
(2,385
|
)
|
|
—
|
|
|
—
|
|
|
(2,385
|
)
|
Total
|
$
|
354,954
|
|
|
$
|
286,000
|
|
|
$
|
71,339
|
|
|
$
|
(2,385
|
)
|
The following table presents information about financial assets and liabilities measured at fair value on a recurring basis as of
January 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
205,000
|
|
|
$
|
205,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank time deposits
|
55,056
|
|
|
—
|
|
|
55,056
|
|
|
—
|
|
Total cash equivalents
|
260,056
|
|
|
205,000
|
|
|
55,056
|
|
|
—
|
|
Contingent consideration
|
(3,749
|
)
|
|
—
|
|
|
—
|
|
|
(3,749
|
)
|
Total
|
$
|
256,307
|
|
|
$
|
205,000
|
|
|
$
|
55,056
|
|
|
$
|
(3,749
|
)
|
The FASB's authoritative guidance for the hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. The fair value hierarchy consists of the following three levels:
|
|
•
|
Level 1—Quoted prices for identical instruments in active markets;
|
|
|
•
|
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and
|
|
|
•
|
Level 3—One or more significant inputs to the valuation model are unobservable.
|
We base the fair value of money market funds included in cash equivalents on directly observable prices in markets that are active (Level 1).
We base the fair value of bank time deposits included in cash equivalents on quoted market prices for similar instruments in markets that are not active (Level 2).
In connection with certain acquisitions, payment of a portion of the purchase price is contingent typically upon the acquired business’ achievement of certain revenue goals. The short-term portion of the total recorded contingent consideration is included in accrued and other liabilities and the long-term portion of the total recorded contingent consideration is included in other long-term liabilities on our consolidated balance sheet. The following table summarizes the total recorded contingent consideration:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Contingent consideration, short-term
|
$
|
836
|
|
|
$
|
1,460
|
|
Contingent consideration, long-term
|
1,549
|
|
|
2,289
|
|
Total contingent consideration
|
$
|
2,385
|
|
|
$
|
3,749
|
|
We have estimated the fair value of our contingent consideration as the present value of the expected payments over the term of the arrangements. The fair value measurement of our contingent consideration as of
January 31, 2017
encompasses the following significant unobservable inputs:
|
|
|
|
|
|
Unobservable Inputs
|
|
Range
|
Total estimated contingent consideration
|
|
$836
|
-
|
$2,935
|
Discount rate
|
|
9.5%
|
-
|
15.0%
|
Timing of cash flows (in years)
|
|
0
|
-
|
2
|
Changes in the fair value of our contingent consideration are primarily driven by changes in the estimated amount and timing of payments, resulting from changes in the forecasted revenues of the acquired businesses. Significant changes in any of the inputs in isolation could result in a fluctuation in the fair value measurement of contingent consideration. Changes in fair value are recognized in special charges in our consolidated statement of income in the period in which the change is identified.
The following table summarizes contingent consideration activity:
|
|
|
|
|
Balance as of January 31, 2015
|
$
|
4,563
|
|
Payments
|
(1,525
|
)
|
Changes in fair value
|
586
|
|
Interest accretion
|
125
|
|
Balance as of January 31, 2016
|
$
|
3,749
|
|
Payments
|
(1,475
|
)
|
Interest accretion
|
111
|
|
Balance as of January 31, 2017
|
$
|
2,385
|
|
The following table summarizes the fair value and carrying value of our 4.00% Convertible Subordinated Debentures (4.00% Debentures):
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Fair value of 4.00% Debentures
|
$
|
470,965
|
|
|
$
|
255,487
|
|
Carrying value of 4.00% Debentures
|
$
|
242,921
|
|
|
$
|
234,888
|
|
We based the fair value of our 4.00% Debentures on the quoted market price at the balance sheet date. Our notes are not actively traded and the quoted market price is derived from observable inputs including our stock price, stock volatility, and interest rate (Level 2). We believe the carrying value of other notes payable of
$5,188
at
January 31, 2017
and
January 31, 2016
approximated fair value. Of the total carrying value of notes payable,
$242,921
was classified as current on our consolidated balance sheet as of
January 31, 2017
and
none
was classified as current on our consolidated balance sheet as of
January 31, 2016
. See additional discussion of notes payable in
Note 7
. “
Notes Payable
.”
The carrying amounts of cash equivalents, trade accounts receivable, net, term receivables, short-term borrowings, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments or because amounts have been appropriately discounted.
During the quarter ended July 31, 2016, we acquired a non-marketable equity security which was accounted for using the cost method of accounting. Our cost method investments are reported at cost net of impairment losses. The carrying amount of the non-marketable equity security was
$3,000
at
January 31, 2017
. Investments accounted for under the cost method of accounting are measured and recorded at fair value when identified events or changes in circumstances have a significant adverse effect on the fair value of the investments. When these events or changes in circumstances occur, these investments are classified within Level 3 as they are valued using significant unobservable inputs. We periodically review our cost method investments for these types of events or changes in circumstances.
5
.
Term Receivables and Trade Accounts Receivable
We have long-term installment receivables that are attributable to multi-year, multi-element term license sales agreements. Balances for term agreements that are due within one year of the balance sheet date are included in trade accounts receivable, net and balances that are due more than one year from the balance sheet date are included in term receivables, long-term. We discount the total product portion of the agreements to reflect the interest component of the transaction. We amortize the interest component of the transaction to system and software revenues over the period in which payments are made and balances are outstanding, using the effective interest method. We determine the discount rate at the outset of the arrangement based upon the current credit rating of the customer. We reset the discount rate periodically considering changes in prevailing interest rates but do not adjust previously discounted balances.
Trade accounts receivable and term receivable balances were as follows:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Trade accounts receivable
|
$
|
214,651
|
|
|
$
|
176,021
|
|
Term receivables, short-term
|
$
|
297,993
|
|
|
$
|
317,188
|
|
Term receivables, long-term
|
$
|
303,686
|
|
|
$
|
268,657
|
|
Trade accounts receivable include billed amounts whereas term receivables, short-term are comprised of unbilled amounts. Term receivables, short term represent the portion of long-term installment agreements that are due within one year of the balance sheet date. Billings for term agreements typically occur
thirty
days prior to the contractual due date, in accordance with
individual contract installment terms. Term receivables, long-term represent unbilled amounts which are scheduled to be billed beyond one year from the balance sheet date.
We perform a credit risk assessment of all customers using the Standard & Poor’s (S&P) credit rating as our primary credit-quality indicator. The S&P credit ratings are based on the most recent S&P score available at the time of assessment. For customers that do not have an S&P credit rating, we base our credit risk assessment on results provided in the customer's most recent financial statements at the time of assessment. We determine whether or not to extend credit to these customers based on the results of our internal credit assessment, thus mitigating our risk of loss.
The credit risk assessment for our long-term receivables was as follows:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
S&P credit rating:
|
|
|
|
AAA+ through BBB-
|
$
|
143,315
|
|
|
$
|
195,764
|
|
BB+ and lower
|
54,639
|
|
|
22,520
|
|
|
197,954
|
|
|
218,284
|
|
Internal credit assessment
|
105,732
|
|
|
50,373
|
|
Total long-term term receivables
|
$
|
303,686
|
|
|
$
|
268,657
|
|
As discussed in
Note 2
. “
Summary of Significant Accounting Policies
”, we maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments.
We reduced our allowance for doubtful accounts during the fiscal year ended January 31, 2015 by
$(1,691)
, to reflect a change in estimate of our unspecified reserves resulting from sustained low write-off experience and strong collections. The adjustment was recorded in marketing and selling expense in our statement of income.
The following shows the change in allowance for doubtful accounts for the fiscal years ended
January 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
Beginning balance
|
|
Expense adjustment
|
|
Other deductions
(
1)
|
|
Ending
balance
|
Fiscal year ended January 31, 2017
|
$
|
3,826
|
|
|
$
|
(58
|
)
|
|
$
|
321
|
|
|
$
|
4,089
|
|
Fiscal year ended January 31, 2016
|
$
|
4,217
|
|
|
$
|
(349
|
)
|
|
$
|
(42
|
)
|
|
$
|
3,826
|
|
Fiscal year ended January 31, 2015
|
$
|
5,469
|
|
|
$
|
(988
|
)
|
|
$
|
(264
|
)
|
|
$
|
4,217
|
|
|
|
(1)
|
Specific account write-offs and foreign exchange.
|
We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. Amounts collected from customers on accounts receivable previously sold on a non-recourse basis to financial institutions are included in short-term borrowings on the balance sheet. These amounts are remitted to the financial institutions in the month following quarter-end.
We sold the following receivables to financing institutions on a non-recourse basis and recognized the following gain on the sale of those receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Net proceeds
|
$
|
45,658
|
|
|
$
|
42,661
|
|
|
$
|
22,572
|
|
|
|
|
|
|
|
Trade receivables, short-term
|
$
|
26,920
|
|
|
$
|
16,344
|
|
|
$
|
12,715
|
|
Term receivables, long-term
|
20,064
|
|
|
27,770
|
|
|
10,461
|
|
Total receivables sold
|
$
|
46,984
|
|
|
$
|
44,114
|
|
|
$
|
23,176
|
|
|
|
|
|
|
|
Discount on sold receivables
|
$
|
(1,326
|
)
|
|
$
|
(1,453
|
)
|
|
$
|
(604
|
)
|
Unaccreted interest on sold receivables
|
1,897
|
|
|
2,723
|
|
|
922
|
|
Gain on sale of receivables
|
$
|
571
|
|
|
$
|
1,270
|
|
|
$
|
318
|
|
6
.
Short-Term Borrowings
Short-term borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Senior revolving credit facility
|
$
|
20,000
|
|
|
$
|
25,000
|
|
Collections of previously sold accounts receivable
|
10,803
|
|
|
7,568
|
|
Other borrowings
|
914
|
|
|
881
|
|
Short-term borrowings
|
$
|
31,717
|
|
|
$
|
33,449
|
|
We have a syndicated, senior, unsecured, revolving credit facility, which expires on
January 9, 2020
.
The revolving credit facility has a maximum borrowing capacity of
$125,000
. As stated in the revolving credit facility, we have the option to pay interest based on:
|
|
(i)
|
London Interbank Offered Rate (LIBOR) with varying maturities commensurate with the borrowing period we select, plus a spread of between
2.00%
and
2.50%
based on a pricing grid tied to a financial covenant, or
|
|
|
(ii)
|
A base rate plus a spread of between
1.00%
and
1.50%
, based on a pricing grid tied to a financial covenant.
|
As a result of these interest rate options, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates.
Commitment fees are payable on the unused portion of the revolving credit facility at rates between
0.30%
and
0.40%
based on a pricing grid tied to a financial covenant.
The revolving credit facility contains certain financial and other covenants, including the following:
|
|
•
|
Our adjusted quick ratio (ratio of the sum of cash and cash equivalents, short-term investments, and net current receivables to total current liabilities) shall not be less than
1.00
;
|
|
|
•
|
Our tangible net worth (stockholders' equity less goodwill and other intangible assets) must exceed the calculated required tangible net worth as defined in the credit agreement;
|
|
|
•
|
Our leverage ratio (ratio of total liabilities less subordinated debt to the sum of subordinated debt and tangible net worth) shall be less than
2.00
;
|
|
|
•
|
Our senior leverage ratio (ratio of total debt less subordinated debt to the sum of subordinated debt and tangible net worth) shall not be greater than
0.90
; and
|
|
|
•
|
Our minimum cash and accounts receivable ratio (ratio of the sum of cash and cash equivalents, short-term investments, and
42.0%
of net current accounts receivable, to outstanding credit agreement borrowings) shall not be less than
1.25
.
|
The revolving credit facility limits the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility to
$200,000
plus
70%
of our cumulative net income (loss) for periods after February 1, 2016.
We were in compliance with all financial covenants as of
January 31, 2017
. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.
7
.
Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
4.00% Debentures
|
$
|
242,921
|
|
|
$
|
234,888
|
|
Other
|
5,188
|
|
|
5,188
|
|
Notes payable
|
248,109
|
|
|
240,076
|
|
4.00% Debentures, current portion
|
(242,921
|
)
|
|
—
|
|
Notes payable, long-term
|
$
|
5,188
|
|
|
$
|
240,076
|
|
Our 4.00% Debentures are due in
2031
, but we may be required to repay them earlier under the conversion and redemption provisions described below.
Annual maturities of our notes payable are scheduled as follows:
|
|
|
|
|
Fiscal years ending January 31,
|
|
2019
|
$
|
2,000
|
|
2020
|
3,188
|
|
Thereafter
(1)
|
252,957
|
|
Total
|
$
|
258,145
|
|
(1)
The 4.00% Debentures are currently convertible at the option of the holders and would be due in fiscal year
2018
if converted.
4.00% Debentures
In
April 2011
, we issued
$253,000
of
4.00%
Debentures in a private placement pursuant to the Securities and Exchange Commission Rule 144A under the Securities Act of 1933. Interest on the 4.00% Debentures is payable semi-annually in April and October. The 4.00% Debentures are unsecured obligations.
Each
one thousand
dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into
50.4551
shares of our common stock (equivalent to a conversion price of
$19.82
per share). The initial conversion rate for the 4.00% Debentures was
48.6902
shares of our common stock for each
one thousand
dollars in principal amount (equivalent to a conversion price of
$20.54
per share). The conversion rate is adjusted because we declare and pay quarterly cash dividends.
The 4.00% Debentures are convertible, under certain circumstances, into shares of our common stock at the conversion rate noted above. The circumstances for conversion include:
|
|
•
|
The market price of our common stock exceeding
120%
of the conversion price, or
$23.78
per share as of
January 31, 2017
, for at least
20
of the last
30
trading days in the previous fiscal quarter;
|
|
|
•
|
A call for redemption of the 4.00% Debentures;
|
|
|
•
|
Specified distributions to holders of our common stock;
|
|
|
•
|
If a fundamental change, such as a change of control, occurs;
|
|
|
•
|
During the two months prior to, but not on, the maturity date; or
|
|
|
•
|
The market price of the 4.00% Debentures declining to less than
98%
of the value of the common stock into which the 4.00% Debentures are convertible.
|
Upon conversion of any 4.00% Debentures, a holder will receive:
|
|
(i)
|
Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and
|
|
|
(ii)
|
Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.
|
As of
January 31, 2017
, the if-converted value of the 4.00% Debentures to the note holders exceeded the principal amount by
$218,124
.
During the fiscal quarter ended
January 31, 2017
, the market price of our common stock exceeded 120% of the conversion price for at least
20
of the last
30
trading days of the period. Accordingly, the 4.00% Debentures are convertible at the option of the holders through
April 30, 2017
. Therefore, the carrying value of the 4.00% Debentures is classified as a current liability. Additionally, the excess of the principal amount over the carrying amount of the 4.00% Debentures is reclassified from permanent equity to temporary equity in our consolidated balance sheet. The determination of whether or not the 4.00% Debentures are convertible is performed at each balance sheet date and may change from quarter to quarter. If this threshold is not met next quarter, the 4.00% Debentures will be reclassified as a long-term liability and the temporary equity will be reclassified to permanent equity in our consolidated balance sheet.
If a holder elects to convert their 4.00% Debentures through
April 30, 2017
, we would be required to pay cash for at least the principal amount of the converted 4.00% Debentures.
If the proposed acquisition of the Company by Siemens is completed at a price of
$37.25
per share and the 4.00% Debentures are converted, an estimated cash payment of
$477,000
to the debenture holders would be required, including the impact of the dividend declared on March 2, 2017.
Effective
April 5, 2016
, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices, expressed as a percentage of principal plus any accrued and unpaid interest:
|
|
|
|
Period
|
Redemption Price
|
Beginning on April 5, 2016 and ending on March 31, 2017
|
101.143
|
%
|
Beginning on April 1, 2017 and ending on March 31, 2018
|
100.571
|
%
|
On April 1, 2018 and thereafter
|
100.000
|
%
|
The holders, at their option, may redeem the 4.00% Debentures for cash on
April 1, 2018
,
April 1, 2021
, and
April 1, 2026
, and in the event of a fundamental change in the Company. In each case, our repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.
The 4.00% Debentures contain a conversion feature allowing for settlement of the debt in cash upon conversion, therefore we separately account for the implied liability and equity components of the 4.00% Debentures. The principal amount, unamortized debt discount, unamortized debt issuance costs, net carrying amount of the liability component, and carrying amount of the equity component of the 4.00% Debentures are as follows:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Principal amount
|
$
|
252,957
|
|
|
$
|
252,957
|
|
Unamortized debt discount
|
(8,926
|
)
|
|
(16,007
|
)
|
Unamortized debt issuance costs
|
(1,110
|
)
|
|
(2,062
|
)
|
Net carrying amount of the liability component
|
$
|
242,921
|
|
|
$
|
234,888
|
|
Equity component, net of debt issuance costs
|
$
|
42,518
|
|
|
$
|
42,518
|
|
The unamortized debt discount and debt issuance costs amortize to interest expense using the effective interest method through March 2018. The effective interest rate on the 4.00% Debentures was 7.25% for fiscal years
2017
,
2016
, and
2015
.
We recognized the following amounts in interest expense in the consolidated statement of income related to the 4.00% Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Interest expense at the contractual interest rate
|
$
|
10,118
|
|
|
$
|
10,117
|
|
|
$
|
10,120
|
|
Amortization of debt discount
|
$
|
7,081
|
|
|
$
|
6,593
|
|
|
$
|
6,139
|
|
Amortization of debt issuance costs
|
$
|
952
|
|
|
$
|
952
|
|
|
$
|
952
|
|
Other Notes Payable
In
February 2015
, we issued a subordinated note payable as part of a business combination. The principal amount of
$3,188
was outstanding as of
January 31, 2017
. The note bears interest at a rate of
4.0%
and is due in full on
February 25, 2019
.
In
September 2015
, we issued a subordinated note payable as part of a business combination. The principal amount of
$2,000
was outstanding as of
January 31, 2017
. The note bears interest at a rate of
4.0%
and is due in full on
September 8, 2018
.
8
.
Income Taxes
Domestic and foreign pre-tax income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Domestic
|
$
|
(31,914
|
)
|
|
$
|
(25,971
|
)
|
|
$
|
(2,991
|
)
|
Foreign
|
216,770
|
|
|
144,900
|
|
|
170,749
|
|
Total pre-tax income
|
$
|
184,856
|
|
|
$
|
118,929
|
|
|
$
|
167,758
|
|
The provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(427
|
)
|
|
$
|
734
|
|
|
$
|
(223
|
)
|
State
|
226
|
|
|
199
|
|
|
444
|
|
Foreign
|
19,720
|
|
|
17,994
|
|
|
13,677
|
|
Total current
|
19,519
|
|
|
18,927
|
|
|
13,898
|
|
Deferred:
|
|
|
|
|
|
Federal and state
|
10,679
|
|
|
4,402
|
|
|
7,687
|
|
Foreign
|
(208
|
)
|
|
1,424
|
|
|
996
|
|
Total deferred
|
10,471
|
|
|
5,826
|
|
|
8,683
|
|
Total provision for income taxes
|
$
|
29,990
|
|
|
$
|
24,753
|
|
|
$
|
22,581
|
|
Actual income tax expense is different from that which would have been computed by applying the statutory U.S. federal income tax rate to our income before income tax. A reconciliation of income tax expense as computed at the U.S. federal statutory income tax rate to the provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Federal tax, at statutory rate
|
$
|
64,700
|
|
|
$
|
41,626
|
|
|
$
|
58,725
|
|
State tax, net of federal benefit
|
684
|
|
|
(60
|
)
|
|
900
|
|
Impact of international operations including withholding taxes and other reserves
|
(48,268
|
)
|
|
7,143
|
|
|
(27,042
|
)
|
Repatriation of foreign subsidiary earnings
|
55,812
|
|
|
354
|
|
|
21,969
|
|
Foreign tax credits
|
(10,739
|
)
|
|
(2,382
|
)
|
|
(5,143
|
)
|
Tax credits (excluding foreign tax credits)
|
(12,180
|
)
|
|
(11,539
|
)
|
|
(8,089
|
)
|
Change in valuation allowance
|
(25,531
|
)
|
|
(21,055
|
)
|
|
(26,443
|
)
|
Amortization of deferred charge
|
415
|
|
|
(167
|
)
|
|
1,168
|
|
Stock-based compensation expense
|
489
|
|
|
3,402
|
|
|
2,929
|
|
Non-deductible meals and entertainment
|
1,247
|
|
|
1,177
|
|
|
1,238
|
|
Other, net
|
3,361
|
|
|
6,254
|
|
|
2,369
|
|
Provision for income taxes
|
$
|
29,990
|
|
|
$
|
24,753
|
|
|
$
|
22,581
|
|
The tax effects of temporary differences and carryforwards, which gave rise to significant portions of deferred tax assets and liabilities, were as follows:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Reserves and allowances
|
$
|
10,346
|
|
|
$
|
12,954
|
|
Accrued expenses not currently deductible
|
23,299
|
|
|
12,446
|
|
Stock-based compensation expense
|
8,403
|
|
|
8,259
|
|
Net operating loss carryforwards
|
14,743
|
|
|
24,138
|
|
Tax credit carryforwards
|
104,965
|
|
|
87,443
|
|
Purchased technology and other intangible assets
|
4,201
|
|
|
4,219
|
|
Deferred revenue
|
4,641
|
|
|
4,541
|
|
Other, net
|
8,845
|
|
|
8,394
|
|
Total gross deferred tax assets
|
179,443
|
|
|
162,394
|
|
Less valuation allowance
|
(74,041
|
)
|
|
(63,554
|
)
|
Deferred tax assets
|
105,402
|
|
|
98,840
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
(14,002
|
)
|
|
(13,163
|
)
|
Undistributed foreign earnings
|
(97,696
|
)
|
|
(87,390
|
)
|
Convertible debt
|
(3,523
|
)
|
|
(6,322
|
)
|
Depreciation of property, plant, and equipment
|
(2,169
|
)
|
|
(1,715
|
)
|
Deferred tax liabilities
|
(117,390
|
)
|
|
(108,590
|
)
|
Net deferred tax liabilities
|
$
|
(11,988
|
)
|
|
$
|
(9,750
|
)
|
All deferred tax assets and liabilities are presented in our balance sheet in other assets and other long-term liabilities respectively.
The
increase
in the valuation allowance largely resulted from the early adoption of ASU 2016-09 offset by accrual of a U.S. deferred tax liability on fiscal year 2017 foreign earnings that are not permanently reinvested and may be repatriated in the future.
As of
January 31, 2017
, we had the following foreign and U.S. Federal and state carryforwards for income tax return purposes:
|
|
|
|
|
|
|
Credit or carryforward
|
As of January 31,
2017
|
|
Expiration
|
Federal credits and carryforwards:
|
|
|
|
Research and experimentation credit carryforward
|
$
|
99,194
|
|
|
Fiscal years 2019 - 2037
|
Net operating loss carryforward
|
$
|
13,863
|
|
|
Fiscal years 2020 - 2037
|
Foreign tax credits
|
$
|
12,297
|
|
|
Fiscal years 2020 - 2027
|
Alternative minimum tax credits
|
$
|
2,682
|
|
|
No expiration
|
Childcare credits
|
$
|
1,939
|
|
|
Fiscal years 2023 - 2037
|
State income tax credits and carryforwards:
|
|
|
|
Net operating loss carryforward
|
$
|
175,233
|
|
|
Fiscal years 2018 - 2037
|
Research and experimentation
|
$
|
22,629
|
|
|
Fiscal years 2018 - 2032
|
Miscellaneous
|
$
|
699
|
|
|
Various
|
Foreign net operating loss carryforwards
|
$
|
19,472
|
|
|
Generally indefinite
|
We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. In addition, we record deferred tax assets for net operating loss carryforwards and tax credit carryforwards. We calculate the deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized. We have determined that it is uncertain whether our U.S. entity will generate sufficient taxable income to fully utilize tax credit carryforwards and certain net operating losses. Accordingly, we recorded a valuation allowance against those deferred tax assets for which realization does not meet the more likely than not standard. We have
established valuation allowances related to certain foreign deferred tax assets based on limitations on the utilization of such deferred tax assets in certain jurisdictions. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.
We have not provided for U.S. income taxes on the undistributed earnings of our foreign subsidiaries to the extent they are considered permanently re-invested outside the U.S. As of
January 31, 2017
, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately
$478,660
. Determination of the amount of unrecognized deferred U.S. income tax liability on permanently re-invested earnings is not practicable. Where the earnings of our foreign subsidiaries are not treated as permanently reinvested, we have accrued for U.S. income taxes on those earnings in our tax provision.
We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. In some cases it may be extended or be unlimited. Furthermore, net operating loss and tax credit carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such net operating losses and tax credits originated. Our larger jurisdictions generally provide for a statute of limitation from three to five years. For U.S. federal income tax purposes, the tax years which remain open for examination are fiscal years
2014
and forward, although net operating loss and credit carryforwards from all years are subject to examination and adjustment for three years following the year in which utilized. We are currently under examination in various jurisdictions. The examinations are in different stages and timing of their resolution is difficult to predict. The statute of limitations remains open for years on and after fiscal year
2013
in Ireland, fiscal year
2014
in France, fiscal year
2012
in Japan, fiscal year
2009
in India and fiscal year
2012
in Israel.
We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by the tax authorities even though we believe the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective tax rate. It is reasonably possible that existing unrecognized tax benefits may decrease from
$0
to
$2,000
due to settlements or expiration of the statute of limitations within the next twelve months. To the extent that uncertain tax positions resolve in our favor, it could have a positive impact on our effective tax rate. A portion of our reserves, which could settle or expire within the next twelve months, may result in deferred tax assets subject to a valuation allowance for which no benefit would be recognized. Income tax-related interest and penalties were
$950
for the fiscal year ended
January 31, 2017
,
$1,717
for the fiscal year ended
January 31, 2016
and
$884
for the fiscal year ended
January 31, 2015
.
The below schedule shows the gross changes in unrecognized tax benefits associated with uncertain tax positions for the fiscal years ending
January 31, 2017
and
2016
:
|
|
|
|
|
Unrecognized tax benefits as of January 31, 2015
|
$
|
39,771
|
|
Gross increases—tax positions in prior period
|
6,548
|
|
Gross decreases—tax positions in prior period
|
(1,702
|
)
|
Gross increases—tax positions in current period
|
6,509
|
|
Settlements
|
—
|
|
Lapse of statute of limitations
|
(1,125
|
)
|
Cumulative translation adjustment
|
(1,327
|
)
|
Unrecognized tax benefits as of January 31, 2016
|
$
|
48,674
|
|
Gross increases—tax positions in prior period
|
3,211
|
|
Gross decreases—tax positions in prior period
|
(2,520
|
)
|
Gross increases—tax positions in current period
|
7,513
|
|
Settlements
|
(378
|
)
|
Lapse of statute of limitations
|
(1,335
|
)
|
Cumulative translation adjustment
|
1,964
|
|
Unrecognized tax benefits as of January 31, 2017
|
$
|
57,129
|
|
The ending balances of unrecognized tax benefits represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as the federal deduction that
could be realized if an unrecognized state deduction was not sustained. The ending gross balances exclude accrued interest and penalties related to such positions of
$10,160
as of
January 31, 2017
and
$9,817
as of
January 31, 2016
. We expect that
$28,939
of our unrecognized tax benefits, if recognized, would favorably affect our effective tax rate.
9
.
Commitments and Contingencies
Leases
We lease a majority of our field sales offices and research and development facilities under non-cancelable operating leases. In addition, we lease certain equipment used in our research and development and marketing and selling activities.
Rent expense under operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Rent expense
|
$
|
27,727
|
|
|
$
|
27,040
|
|
|
$
|
28,114
|
|
Future minimum lease payments under non-cancelable operating leases are approximately as follows:
|
|
|
|
|
Fiscal years ending January 31,
|
Lease
Payments
|
2018
|
$
|
22,153
|
|
2019
|
20,937
|
|
2020
|
17,307
|
|
2021
|
14,554
|
|
2022
|
9,932
|
|
Thereafter
|
13,853
|
|
Total
|
$
|
98,736
|
|
Indemnifications
Our license and services agreements generally include a limited indemnification provision for claims from third parties relating to our IP. The indemnification is generally limited to the amount paid by the customer, a multiple of the amount paid by the customer, or a set cap. As of
January 31, 2017
, we were not aware of any material liabilities arising from these indemnification obligations.
Legal Proceedings
From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to IP rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.
In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in the U.S. District Court for the Northern District of California, alleging that our Veloce
®
family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent and Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys appealed the decisions by both the
district court and the U.S. Patent and Trademark Office. The Court of Appeals for the Federal Circuit has unanimously confirmed the invalidity of all four Synopsys patents.
In June 2013, Synopsys also filed a claim against us in the U.S District Court for the District of Oregon, similarly alleging that our Veloce family of products infringed two additional Synopsys U.S. patents.
We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 in the U.S. District Court for the District of Oregon against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012. We alleged in our lawsuits that EVE (and later Synopsys) infringed five Mentor Graphics' patents.
Both of Synopsys' patents and four of our patents were removed from the Oregon case on summary judgment, and we proceeded to trial on our one remaining patent - U.S. Patent No. 6,240,376 (the '376 Patent). On October 10, 2014, a jury found that EVE and Synopsys infringed the '376 Patent. As part of the verdict, the jury awarded us damages of approximately
$36,000
. As of
January 31, 2017
, nothing has been included in our financial results for this award. On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing the infringing technology.
Synopsys filed an appeal, and sought to have the infringed claims invalidated by the U.S. Patent and Trademark Office.
On December 15, 2016, the U.S. Patent and Trademark Office dismissed Synopsys' challenge to the validity of claims 1 and 28 of the '376 Patent based on a prior proceeding. Synopsys' challenge to claims 24, 26, and 27 of the '376 Patent remains pending.
On March 16, 2017, the Federal Circuit issued its order on Synopsys' appeal, affirming the jury's finding of infringement and the
$36,000
damages award in our favor. The Court also found that the litigation could continue with three of our patents, and one Synopsys patent, that had been removed from the case on summary judgment. The Court further found that we could proceed with a claim of willful infringement, which can result in a trebled damages award. The Federal Circuit's decision enables us to proceed to trial on these claims in the U.S. District Court for the District of Oregon.
We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus
no
liability has been established nor has a range of loss been disclosed.
10
.
Stockholders' Equity
Dividends
The following table summarizes dividends declared since the beginning of fiscal year 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Per Share Amount
|
|
Total Amount
|
Fiscal Year 2018
|
|
|
|
|
|
|
3/2/2017
|
|
3/14/2017
|
|
3/30/2017
|
|
$
|
0.055
|
|
|
|
Fiscal Year 2017
|
|
|
|
|
|
|
11/22/2016
|
|
12/8/2016
|
|
1/3/2017
|
|
$
|
0.055
|
|
|
$
|
6,026
|
|
8/18/2016
|
|
9/19/2016
|
|
9/30/2016
|
|
$
|
0.055
|
|
|
$
|
6,016
|
|
5/19/2016
|
|
6/10/2016
|
|
6/30/2016
|
|
$
|
0.055
|
|
|
$
|
5,886
|
|
3/3/2016
|
|
3/10/2016
|
|
3/31/2016
|
|
$
|
0.055
|
|
|
$
|
5,880
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
11/19/2015
|
|
12/15/2015
|
|
1/4/2016
|
|
$
|
0.055
|
|
|
$
|
6,326
|
|
8/20/2015
|
|
9/10/2015
|
|
9/30/2015
|
|
$
|
0.055
|
|
|
$
|
6,491
|
|
5/22/2015
|
|
6/10/2015
|
|
6/30/2015
|
|
$
|
0.055
|
|
|
$
|
6,389
|
|
2/26/2015
|
|
3/10/2015
|
|
3/31/2015
|
|
$
|
0.055
|
|
|
$
|
6,383
|
|
Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.
11
.
Employee Stock and Savings Plans
Stock Option Plans and Stock Plans
Our 2010 Omnibus Incentive Plan (Incentive Plan) is administered by the Compensation Committee of our Board of Directors and permits accelerated vesting of outstanding options, restricted stock units, restricted stock awards, and other equity incentives upon the occurrence of certain changes in control of our company. Stock options and time-based restricted stock units under the Incentive Plan are generally expected to vest over
four
years. Stock options have an expiration date of
ten
years from the date of grant and an exercise price no less than the fair market value of the shares on the date of grant. Performance-based restricted stock units vest after
three
years and include goals for operating income margin. The source of shares issued under the Incentive Plan is new shares. We estimate forfeitures based on our historical forfeiture rates. We have not issued any options since fiscal year 2013. Our current equity strategy is to grant restricted stock units rather than options to ensure that we deliver value to our employees when there is volatility in the market.
As of
January 31, 2017
, a total of
4,980
shares of common stock were available for future grant under the Incentive Plan.
The following table summarizes restricted stock unit activity (including the target number of shares awarded for performance-based restricted stock units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted
Average Grant
Date Fair Value
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Nonvested as of January 31, 2016
|
4,117
|
|
|
$
|
22.35
|
|
|
|
|
|
Granted
|
2,008
|
|
|
$
|
23.82
|
|
|
|
|
|
Vested
|
(1,639
|
)
|
|
$
|
21.52
|
|
|
|
|
|
Forfeited
|
(143
|
)
|
|
$
|
22.15
|
|
|
|
|
|
Nonvested as of January 31, 2017
|
4,343
|
|
|
$
|
23.34
|
|
|
1.63
|
|
$
|
160,304
|
|
The following table summarizes the fair value of restricted stock units vested:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Total fair value of restricted stock units vested
|
$
|
35,264
|
|
|
$
|
27,527
|
|
|
$
|
22,874
|
|
Stock options outstanding, the weighted average exercise price, and transactions involving stock options are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Terms (Years)
|
|
Aggregate
Intrinsic
Value
|
Balance as of January 31, 2016
|
2,471
|
|
|
$
|
9.66
|
|
|
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
(294
|
)
|
|
$
|
10.10
|
|
|
|
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired
|
(16
|
)
|
|
$
|
12.69
|
|
|
|
|
|
Balance as of January 31, 2017
|
2,161
|
|
|
$
|
9.57
|
|
|
3.21
|
|
$
|
59,069
|
|
Options exercisable as of January 31, 2017
|
2,161
|
|
|
$
|
9.57
|
|
|
3.21
|
|
$
|
59,069
|
|
The total intrinsic value of options exercised and cash received from options exercised was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Intrinsic value
|
$
|
4,408
|
|
|
$
|
9,440
|
|
|
$
|
4,601
|
|
Cash received
|
$
|
2,964
|
|
|
$
|
6,260
|
|
|
$
|
4,636
|
|
Employee Stock Purchase Plans
We have an ESPP for U.S. employees and an ESPP for certain foreign subsidiary employees. The ESPPs provide for six month offerings commencing on January 1 and July 1 of each year with purchases on June 30 and December 31 of each year. Each
eligible employee may purchase up to
six thousand
shares of stock on each purchase date at prices no less than
85%
of the lesser of the fair market value of the shares on the offering date or on the purchase date. As of
January 31, 2017
,
5,848
shares remain available for future purchase under the ESPPs. The ESPPs were suspended subsequent to the purchase on December 31, 2016 as result of the merger agreement executed with Siemens.
The following table summarizes shares issued under the ESPPs and other associated information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Shares issued under the ESPPs
|
1,772
|
|
|
1,538
|
|
|
1,389
|
|
Cash received for the purchase of shares under the ESPPs
|
$
|
29,546
|
|
|
$
|
26,511
|
|
|
$
|
25,642
|
|
Weighted average purchase price per share
|
$
|
16.67
|
|
|
$
|
17.24
|
|
|
$
|
18.47
|
|
Stock-Based Compensation Expense
The fair value of restricted stock units is the market value as of the grant date reduced by the value of expected dividends payable on our common stock prior to vesting.
The fair value of the purchase rights under our ESPPs is determined using a Black-Scholes option-pricing model. The Black-Scholes option-pricing model incorporates several highly subjective assumptions including expected volatility, expected dividends, and interest rates. The expected volatility for the purchase rights for our ESPPs is based on the historical volatility of our shares of common stock. The risk-free interest rate for periods within the contractual life of the purchase rights under our ESPPs is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term for the purchase rights for our ESPPs is the six month offering period.
The weighted average grant date fair values are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Restricted stock units granted
|
$
|
23.82
|
|
|
$
|
24.10
|
|
|
$
|
21.52
|
|
ESPP purchase rights
|
$
|
5.22
|
|
|
$
|
5.08
|
|
|
$
|
4.81
|
|
The fair value calculations for ESPPs used the following assumptions:
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
0.31% - 0.40%
|
|
|
0.08% - 0.31%
|
|
|
0.05% - 0.09%
|
|
Dividend yield (range)
|
1.0% - 1.2%
|
|
|
0.8% - 1.2%
|
|
|
0.8% - 0.9%
|
|
Dividend yield (weighted average)
|
1.1
|
%
|
|
0.9
|
%
|
|
0.8
|
%
|
Expected life (in years)
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Volatility (range)
|
36% - 48%
|
|
|
23% - 36%
|
|
|
22% - 23%
|
|
Volatility (weighted average)
|
41
|
%
|
|
25
|
%
|
|
22
|
%
|
The following table summarizes stock-based compensation expense included in the results of operations and the tax benefit associated with the exercise of stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Cost of revenues:
|
|
|
|
|
|
Service and support
|
$
|
3,085
|
|
|
$
|
2,607
|
|
|
$
|
2,304
|
|
Operating expense:
|
|
|
|
|
|
Research and development
|
18,205
|
|
|
16,207
|
|
|
14,027
|
|
Marketing and selling
|
12,274
|
|
|
9,623
|
|
|
9,103
|
|
General and administration
|
13,229
|
|
|
12,060
|
|
|
10,373
|
|
Equity plan-related compensation expense
|
$
|
46,793
|
|
|
$
|
40,497
|
|
|
$
|
35,807
|
|
Tax effect of the exercise of stock options
|
$
|
114
|
|
|
$
|
217
|
|
|
$
|
280
|
|
As of
January 31, 2017
, we had
$81,853
in unrecognized compensation cost related to nonvested restricted stock units which is expected to be recognized over a weighted average period of
1.4
years.
Employee Savings Plan
We have an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. We currently match
50%
of eligible employee’s contributions, up to a maximum of
6%
of the employee’s earnings. Employer matching contributions vest over
five years
,
20%
for each year of service completed. Our matching contributions to the Savings Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Employer matching contribution
|
$
|
9,212
|
|
|
$
|
8,930
|
|
|
$
|
8,190
|
|
12
.
Net Income Per Share
We compute basic net
income
per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares, using the treasury stock method, consist of common shares issuable upon vesting of restricted stock units, exercise of stock options and ESPP purchase rights, and conversion of the 4.00% Debentures.
The following provides the computation of basic and diluted net
income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Net income attributable to Mentor Graphics shareholders
|
$
|
154,866
|
|
|
$
|
96,277
|
|
|
$
|
147,139
|
|
Adjustment to redemption value of noncontrolling interest with redemption feature
|
—
|
|
|
258
|
|
|
121
|
|
Adjusted net income attributable to Mentor Graphics shareholders, basic
|
154,866
|
|
|
96,535
|
|
|
147,260
|
|
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures
|
2,074
|
|
|
—
|
|
|
—
|
|
Adjusted net income attributable to Mentor Graphics shareholders, diluted
|
$
|
156,940
|
|
|
$
|
96,535
|
|
|
$
|
147,260
|
|
|
|
|
|
|
|
Weighted average common shares used to calculate basic net income per share
|
108,795
|
|
|
116,701
|
|
|
114,635
|
|
Potentially dilutive common shares
|
5,527
|
|
|
2,562
|
|
|
2,443
|
|
Weighted average common and potentially dilutive common shares used to calculate diluted net income per share
|
114,322
|
|
|
119,263
|
|
|
117,078
|
|
|
|
|
|
|
|
Net income per share attributable to Mentor Graphics shareholders:
|
|
|
|
|
|
Basic net income per share
|
$
|
1.42
|
|
|
$
|
0.83
|
|
|
$
|
1.28
|
|
Diluted net income per share
|
$
|
1.37
|
|
|
$
|
0.81
|
|
|
$
|
1.26
|
|
The effect of the conversion of the 4.00% Debentures was dilutive for the
twelve months ended January 31, 2017
. We assume that the excess of the value of the converted shares over the principal amount of the 4.00% Debentures will be settled in common stock for the purposes of calculating the dilutive effect of net income per share. We have adjusted the numerator of our diluted earnings per share calculation for the forfeited interest, net of tax, resulting from the assumed conversion. We have adjusted the numerator of our basic and diluted net income per share calculation for the
twelve months ended January 31, 2016
and January 31, 2015 for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings.
The effect of the conversion of the 4.00% Debentures was anti-dilutive for the
twelve
months ended
January 31, 2016
and
January 31, 2015
and therefore excluded from the computation of diluted net
income
per share. The conversion feature of the 4.00% Debentures, which allows for settlement in cash or a combination of cash and common stock, is further described in
Note 7
. “
Notes Payable
.”
The following details adjustments to net income excluded from the computation of diluted net
income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures
|
$
|
—
|
|
|
$
|
2,074
|
|
|
$
|
2,075
|
|
The following details shares excluded from the computation of diluted net
income
:
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Shares of common stock for restricted stock units
|
12
|
|
|
—
|
|
|
18
|
|
Shares of common stock for stock options
|
—
|
|
|
—
|
|
|
14
|
|
Shares of common stock for ESPP purchase rights
|
—
|
|
|
—
|
|
|
887
|
|
Shares of common stock for convertible debt
|
—
|
|
|
2,046
|
|
|
612
|
|
Total anti-dilutive shares excluded
|
12
|
|
|
2,046
|
|
|
1,531
|
|
These restricted stock units, stock options, ESPPs, and convertible debt were determined to be anti-dilutive
as a result of applying the treasury stock method.
13
.
Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss, net of tax effects:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Foreign currency translation adjustment
|
$
|
(25,461
|
)
|
|
$
|
(21,013
|
)
|
Unrealized loss on derivatives
|
(20
|
)
|
|
(36
|
)
|
Pension liability
|
(84
|
)
|
|
(51
|
)
|
Total accumulated other comprehensive loss
|
$
|
(25,565
|
)
|
|
$
|
(21,100
|
)
|
During the fiscal years of
2017
,
2016
, and
2015
, there were no significant amounts reclassified to net income from accumulated other comprehensive loss related to foreign currency translation adjustments, cash flow hedges or pension plans.
14
.
Special Charges
The following is a summary of the components of the special charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Employee severance and related costs
|
$
|
6,791
|
|
|
$
|
13,496
|
|
|
$
|
3,535
|
|
Merger costs
|
5,553
|
|
|
—
|
|
|
—
|
|
Litigation costs
|
1,465
|
|
|
4,118
|
|
|
18,408
|
|
Other costs, net
|
1,960
|
|
|
2,235
|
|
|
1,547
|
|
Voluntary early retirement program
|
—
|
|
|
25,232
|
|
|
—
|
|
Total special charges
|
$
|
15,769
|
|
|
$
|
45,081
|
|
|
$
|
23,490
|
|
Special charges generally include expenses incurred related to employee severance, certain litigation costs, mergers and acquisitions, excess facility costs, and asset related charges.
Employee severance and related costs include severance benefits and notice pay. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.
Approximately
42%
of the employee severance and related costs for fiscal year
2017
were paid during fiscal year
2017
. We expect to pay the remainder during fiscal year
2018
. Approximately
86%
of the employee severance and related costs for fiscal year
2016
were paid during fiscal year
2016
. Costs remaining as of
January 31, 2016
were paid in fiscal year
2017
. Approximately
90%
of the employee severance and related costs for fiscal year
2015
were paid during fiscal year
2015
. Costs
remaining as of
January 31, 2015
were paid in fiscal year
2016
. There have been no significant modifications to the amount of these charges.
Merger costs for fiscal year 2017 primarily consisted of costs incurred related to advisory fees and legal costs associated with the potential merger with Siemens and Meadowlark Subsidiary Corporation, a wholly-owned subsidiary of Siemens.
Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, EVE, and Synopsys regarding emulation technology.
We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 in which 110 employees elected to participate. The costs presented here are for severance benefits. All of these costs were paid during the fiscal year ending January 31, 2016.
Accrued special charges are included in accrued and other liabilities and other long-term liabilities in the consolidated balance sheet. The following table shows changes in accrued special charges during the fiscal year ended
January 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued special
charges as of
|
|
Charges during
the fiscal year ended
|
|
Payments during
the fiscal year ended
|
|
Accrued special
charges as of
|
|
|
January 31, 2016
|
|
January 31, 2017
|
|
January 31, 2017
|
|
January 31, 2017
|
(1)
|
Employee severance and related costs
|
$
|
1,935
|
|
|
$
|
6,791
|
|
|
$
|
(4,587
|
)
|
|
$
|
4,139
|
|
|
Merger costs
|
—
|
|
|
5,553
|
|
|
(4,168
|
)
|
|
1,385
|
|
|
Litigation costs
|
311
|
|
|
1,465
|
|
|
(1,381
|
)
|
|
395
|
|
|
Other costs, net
|
760
|
|
|
1,960
|
|
|
(2,232
|
)
|
|
488
|
|
|
Accrued special charges
|
$
|
3,006
|
|
|
$
|
15,769
|
|
|
$
|
(12,368
|
)
|
|
$
|
6,407
|
|
|
|
|
(1)
|
The balance of
$6,407
represents short-term accrued special charges.
|
The following table shows changes in accrued special charges during the fiscal year ended
January 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued special
charges as of
|
|
Charges during
the fiscal year ended
|
|
Payments during
the fiscal year ended
|
|
Accrued special
charges as of
|
|
|
January 31, 2015
|
|
January 31, 2016
|
|
January 31, 2016
|
|
January 31, 2016
|
(1)
|
Employee severance and related costs
|
$
|
370
|
|
|
$
|
13,496
|
|
|
$
|
(11,931
|
)
|
|
$
|
1,935
|
|
|
Litigation costs
|
3,406
|
|
|
4,118
|
|
|
(7,213
|
)
|
|
311
|
|
|
Other costs, net
|
741
|
|
|
2,235
|
|
|
(2,216
|
)
|
|
760
|
|
|
Voluntary early retirement program
|
—
|
|
|
25,232
|
|
|
(25,232
|
)
|
|
—
|
|
|
Accrued special charges
|
$
|
4,517
|
|
|
$
|
45,081
|
|
|
$
|
(46,592
|
)
|
|
$
|
3,006
|
|
|
|
|
(1)
|
The balance of
$3,006
represents short-term accrued special charges.
|
The following table shows changes in accrued special charges during the fiscal year ended
January 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued special
charges as of
|
|
Charges during
the fiscal year ended
|
|
Payments during
the fiscal year ended
|
|
Accrued special
charges as of
|
|
|
January 31, 2014
|
|
January 31, 2015
|
|
January 31, 2015
|
|
January 31, 2015
|
(1)
|
Employee severance and related costs
|
$
|
1,004
|
|
|
$
|
3,535
|
|
|
$
|
(4,169
|
)
|
|
$
|
370
|
|
|
Litigation costs
|
4,855
|
|
|
18,408
|
|
|
(19,857
|
)
|
|
3,406
|
|
|
Other costs, net
|
1,987
|
|
|
1,547
|
|
|
(2,793
|
)
|
|
741
|
|
|
Accrued special charges
|
$
|
7,846
|
|
|
$
|
23,490
|
|
|
$
|
(26,819
|
)
|
|
$
|
4,517
|
|
|
|
|
(1)
|
Of the
$4,517
total accrued special charges as of
January 31, 2015
,
$252
represents the long-term portion, which primarily includes accrued lease termination fees and other facility costs, net of sublease income. The remaining balance of
$4,265
represents the short-term portion of accrued special charges.
|
15
.
Other Income (Expense), Net
Other income (expense), net was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Interest income
|
$
|
2,777
|
|
|
$
|
1,870
|
|
|
$
|
1,723
|
|
Foreign currency exchange gain (loss)
|
729
|
|
|
199
|
|
|
(1,152
|
)
|
Other, net
|
(1,257
|
)
|
|
(457
|
)
|
|
(1,348
|
)
|
Other income (expense), net
|
$
|
2,249
|
|
|
$
|
1,612
|
|
|
$
|
(777
|
)
|
16
.
Supplemental Cash Flow Information
The following provides information concerning supplemental disclosures of cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Cash paid for:
|
|
|
|
|
|
Interest
|
$
|
13,458
|
|
|
$
|
12,094
|
|
|
$
|
11,937
|
|
Income taxes
|
$
|
17,358
|
|
|
$
|
15,103
|
|
|
$
|
11,427
|
|
17
.
Segment Reporting
Our Chief Operating Decision Maker (CODM), consisting of the Chief Executive Officer and the President, reviews our consolidated results within
one
operating segment. In making operating decisions, our CODM primarily considers consolidated financial information accompanied by disaggregated revenue information by geographic region.
We eliminate all intercompany revenues in computing revenues by geographic regions. Revenues related to operations in the geographic areas were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 31,
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
United States
|
$
|
477,520
|
|
|
$
|
488,148
|
|
|
$
|
542,229
|
|
Europe
|
287,371
|
|
|
254,827
|
|
|
255,943
|
|
Japan
|
119,756
|
|
|
87,119
|
|
|
87,725
|
|
Pacific Rim
|
385,189
|
|
|
335,833
|
|
|
341,474
|
|
Other
|
12,631
|
|
|
15,061
|
|
|
16,762
|
|
Total revenues
|
$
|
1,282,467
|
|
|
$
|
1,180,988
|
|
|
$
|
1,244,133
|
|
For the fiscal year ended
January 31, 2017
, revenues from China were
$188,641
, or
14.7%
of total revenues. For the fiscal year ended January 31, 2015, revenues from Korea were
$135,696
, or
10.9%
of total revenues. These revenues are included in the Pacific Rim region in the table above.
For the fiscal years ended
January 31, 2017
,
2016
and
2015
,
no
single customer accounted for
10%
of our total revenues.
Property, plant and equipment, net, related to operations in the geographic areas were:
|
|
|
|
|
|
|
|
|
As of January 31,
|
2017
|
|
2016
|
Property, plant, and equipment, net:
|
|
|
|
United States
|
$
|
140,756
|
|
|
$
|
133,432
|
|
Europe
|
40,147
|
|
|
33,070
|
|
Japan
|
1,959
|
|
|
2,220
|
|
Pacific Rim
|
26,984
|
|
|
13,191
|
|
Other
|
834
|
|
|
179
|
|
Total property, plant and equipment, net
|
$
|
210,680
|
|
|
$
|
182,092
|
|
18
.
Quarterly Financial Information – Unaudited
A summary of quarterly financial information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
April 30
|
|
July 31
|
|
October 31
|
|
January 31
|
Fiscal Year 2017
|
|
|
|
|
|
|
|
Total revenues
|
$
|
227,639
|
|
|
$
|
254,344
|
|
|
$
|
322,516
|
|
|
$
|
477,968
|
|
Gross profit
|
$
|
184,774
|
|
|
$
|
204,714
|
|
|
$
|
271,326
|
|
|
$
|
427,425
|
|
Operating income (loss)
|
$
|
(12,065
|
)
|
|
$
|
6,250
|
|
|
$
|
56,314
|
|
|
$
|
152,582
|
|
Net income (loss) attributable to Mentor Graphics shareholders
|
$
|
(13,436
|
)
|
|
$
|
3,437
|
|
|
$
|
41,762
|
|
|
$
|
123,103
|
|
Net income (loss) per share, basic
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
$
|
0.38
|
|
|
$
|
1.12
|
|
Net income (loss) per share, diluted
|
$
|
(0.12
|
)
|
|
$
|
0.03
|
|
|
$
|
0.37
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
Total revenues
|
$
|
272,143
|
|
|
$
|
281,062
|
|
|
$
|
290,516
|
|
|
$
|
337,267
|
|
Gross profit
|
$
|
223,092
|
|
|
$
|
234,799
|
|
|
$
|
243,627
|
|
|
$
|
289,812
|
|
Operating income (loss)
|
$
|
(7,663
|
)
|
|
$
|
39,266
|
|
|
$
|
25,688
|
|
|
$
|
79,454
|
|
Net income (loss) attributable to Mentor Graphics shareholders
|
$
|
(9,885
|
)
|
|
$
|
31,212
|
|
|
$
|
14,679
|
|
|
$
|
60,271
|
|
Net income (loss) per share, basic
(1)
|
$
|
(0.08
|
)
|
|
$
|
0.27
|
|
|
$
|
0.13
|
|
|
$
|
0.52
|
|
Net income (loss) per share, diluted
(1)
|
$
|
(0.08
|
)
|
|
$
|
0.26
|
|
|
$
|
0.12
|
|
|
$
|
0.51
|
|
(1)
We have adjusted the numerator of our basic and diluted earnings per share calculation for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
April 30
|
|
July 31
|
|
October 31
|
|
January 31
|
Fiscal Year 2016
|
$
|
269
|
|
|
$
|
(144
|
)
|
|
$
|
133
|
|
|
$
|
—
|
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mentor Graphics Corporation:
We have audited the accompanying consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of
January 31, 2017
and
2016
, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
January 31, 2017
. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mentor Graphics Corporation and subsidiaries as of
January 31, 2017
and
2016
, and the results of their operations and their cash flows for each of the years in the three-year period ended
January 31, 2017
, in conformity with U.S. generally accepted accounting principles.
As discussed in Note
3
to the consolidated financial statements, the Company changed its method of accounting for share-based payments due to the adoption of FASB Accounting Standards Update (ASU) 2016-09,
Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mentor Graphics Corporation’s internal control over financial reporting as of
January 31, 2017
, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 17, 2017
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
(signed) KPMG LLP
Portland, Oregon
March 17, 2017