Company Quick10K Filing
Quick10K
Aspen Technology
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-01-31 Officers, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2018-12-07 Shareholder Vote
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-08-06 Officers, Exhibits
8-K 2018-07-26 Officers, Exhibits
8-K 2018-02-05 Other Events, Exhibits
ELRE Yinfu Gold 0
TBBK The Bancorp 0
IEHC Iehoration 0
BCAC Bison Capital Acquisition 0
SRT Startek 0
PXD Pioneer Natural Resources 0
FHLBT Federal Home Loan Bank of Topeka 0
FSM Foodarama Supermarkets 0
HUNT Hunter Maritime Acquisition 0
NSPM Northern States Power 0
AZPN 2018-12-31
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 azpn-20181231x10qxex311.htm
EX-31.2 azpn-20181231x10qxex312.htm
EX-32.1 azpn-20181231x10qxex321.htm

Aspen Technology Earnings 2018-12-31

AZPN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 azpn-20181231x10q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                      
 
Commission file number: 001-34630
 
ASPEN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
04-2739697
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
20 Crosby Drive
 
 
Bedford, Massachusetts
 
01730
(Address of principal executive offices)
 
(Zip Code)
(781) 221-6400
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
 
Accelerated filer       o
 
Non-accelerated filer  o 
 
Smaller reporting company      o
 
 
 
Emerging growth company      o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No ý
As of January 16, 2019, there were 69,645,841 shares of the registrant’s common stock (par value $0.10 per share) outstanding.
 
 
 
 
 



TABLE OF CONTENTS
 
 
aspenONE is one of our registered trademarks. All other trade names, trademarks and service marks appearing in this Form 10-Q are the property of their respective owners.
 
Our fiscal year ends on June 30th, and references to a specific fiscal year are to the twelve months ended June 30th of such year (for example, “fiscal 2019” refers to the year ending June 30, 2019).

3


PART I - FINANCIAL INFORMATION
 
Item 1.    Financial Statements.
 
Consolidated Financial Statements (unaudited)
 
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
As Adjusted
 
 
 
As Adjusted
 
(Dollars in Thousands, Except per Share Data)
Revenue:
 

 
 

 
 

 
 

License
$
93,368

 
$
56,975

 
$
157,123

 
$
135,865

Maintenance
41,038

 
40,729

 
84,077

 
80,993

Services and other
6,017

 
7,826

 
13,392

 
15,159

Total revenue
140,423

 
105,530

 
254,592

 
232,017

Cost of revenue:
 

 
 

 
 

 
 

License
1,819

 
1,233

 
3,484

 
2,464

Maintenance
5,286

 
4,250

 
9,279

 
8,802

Services and other
7,634

 
6,606

 
15,203

 
13,555

Total cost of revenue
14,739

 
12,089

 
27,966

 
24,821

Gross profit
125,684

 
93,441

 
226,626

 
207,196

Operating expenses:
 

 
 

 
 

 
 

Selling and marketing
26,310

 
23,928

 
53,122

 
47,444

Research and development
20,317

 
19,790

 
41,373

 
39,279

General and administrative
15,299

 
19,618

 
31,383

 
34,655

Total operating expenses
61,926

 
63,336

 
125,878

 
121,378

Income from operations
63,758

 
30,105

 
100,748

 
85,818

Interest income
7,485

 
6,239

 
14,554

 
12,545

Interest (expense)
(2,164
)
 
(1,261
)
 
(3,978
)
 
(2,467
)
Other (expense), net
(578
)
 
(238
)
 
(451
)
 
(854
)
Income before income taxes
68,501

 
34,845

 
110,873

 
95,042

Provision for (benefit from) income taxes
9,284

 
(97,187
)
 
13,591

 
(77,510
)
Net income
$
59,217

 
$
132,032

 
$
97,282

 
$
172,552

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.84

 
$
1.83

 
$
1.38

 
$
2.37

Diluted
$
0.83

 
$
1.81

 
$
1.36

 
$
2.35

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
70,428

 
72,342

 
70,708

 
72,683

Diluted
71,148

 
73,036

 
71,600

 
73,333

 
See accompanying Notes to these unaudited consolidated financial statements.

4


ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
As Adjusted
 
 
 
As Adjusted
 
(Dollars in Thousands)
Net income
$
59,217

 
$
132,032

 
$
97,282

 
$
172,552

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustments
(895
)
 
73

 
(1,317
)
 
1,474

Total other comprehensive income (loss)
(895
)
 
73

 
(1,317
)
 
1,474

Comprehensive income
$
58,322

 
$
132,105

 
$
95,965

 
$
174,026

 
See accompanying Notes to these unaudited consolidated financial statements.

5


ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
December 31,
2018
 
June 30,
2018
 
 
 
As Adjusted
 
(Dollars in Thousands, Except
Share Data)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
54,428

 
$
96,165

Accounts receivable, net
56,586

 
41,810

Current contract assets
321,135

 
304,378

Contract costs
23,046

 
20,500

Prepaid expenses and other current assets
10,330

 
10,509

Prepaid income taxes
921

 
2,601

Total current assets
466,446

 
475,963

Property, equipment and leasehold improvements, net
8,311

 
9,806

Computer software development costs, net
691

 
646

Goodwill
74,802

 
75,590

Intangible assets, net
32,889

 
35,310

Non-current contract assets
366,581

 
340,622

Non-current deferred tax assets
1,651

 
11,090

Other non-current assets
1,075

 
1,297

Total assets
$
952,446

 
$
950,324

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
5,249

 
$
4,230

Accrued expenses and other current liabilities
36,688

 
39,515

Income taxes payable
43,573

 
1,698

Borrowings under credit agreement
220,000

 
170,000

Current deferred revenue
23,145

 
15,150

Total current liabilities
328,655

 
230,593

Non-current deferred revenue
18,167

 
12,354

Deferred income taxes

157,238

 
214,125

Other non-current liabilities
16,192

 
17,068

Commitments and contingencies (Note 16)

 

Series D redeemable convertible preferred stock, $0.10 par value—
Authorized— 3,636 shares as of December 31, 2018 and June 30, 2018
Issued and outstanding— none as of December 31, 2018 and June 30, 2018

 

Stockholders’ equity:
 

 
 

Common stock, $0.10 par value— Authorized—210,000,000 shares
Issued— 103,395,683 shares at December 31, 2018 and 103,130,300 shares at June 30, 2018
Outstanding— 69,803,177 shares at December 31, 2018 and 71,186,701 shares at June 30, 2018
10,340

 
10,313

Additional paid-in capital
725,493

 
715,475

Retained earnings
1,162,790

 
1,065,507

Accumulated other comprehensive income
70

 
1,388

Treasury stock, at cost—33,592,506 shares of common stock at December 31, 2018 and 31,943,599 shares at June 30, 2018
(1,466,499
)
 
(1,316,499
)
Total stockholders’ equity
432,194

 
476,184

Total liabilities and stockholders’ equity
$
952,446

 
$
950,324

 

6


See accompanying Notes to these unaudited consolidated financial statements.

7


ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Treasury Stock
 
Total Stockholders' Equity
 
Number of Shares
 
$0.10 Par Value
 
 
 
 
Number of Shares
 
Cost
 
 
(Dollars in Thousands, Except Share Data)
June 30, 2018, As Adjusted
103,130,300

 
$
10,313

 
$
715,475

 
$
1,065,507

 
$
1,388

 
31,943,599

 
$
(1,316,499
)
 
$
476,184

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
38,066

 

 

 

 
38,066

Other comprehensive income (loss)

 

 

 

 
(423
)
 
 
 
 
 
(423
)
Exercise of stock options
90,009

 
9

 
3,702

 

 

 

 
 
 
3,711

Issuance of restricted stock units
58,829

 
6

 
(3,290
)
 

 

 

 

 
(3,284
)
Repurchase of common stock

 

 

 

 

 
473,376

 
(50,000
)
 
(50,000
)
Stock-based compensation

 

 
8,865

 

 

 

 

 
8,865

September 30, 2018
103,279,138

 
$
10,328

 
$
724,752

 
$
1,103,573

 
$
965

 
32,416,975

 
$
(1,366,499
)
 
$
473,119

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
59,217

 

 

 

 
59,217

Other comprehensive income (loss)

 

 

 

 
(895
)
 
 
 
 
 
(895
)
Exercise of stock options
15,902

 
2

 
757

 

 

 

 
 
 
759

Issuance of restricted stock units
100,643

 
10

 
(6,351
)
 

 

 

 

 
(6,341
)
Repurchase of common stock

 

 

 

 

 
1,175,531

 
(100,000
)
 
(100,000
)
Stock-based compensation

 

 
6,335

 

 

 

 

 
6,335

December 31, 2018
103,395,683

 
$
10,340

 
$
725,493

 
$
1,162,790

 
$
70

 
33,592,506

 
$
(1,466,499
)
 
$
432,194



8


ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
December 31,
 
2018
 
2017
 
 
 
As Adjusted
 
(Dollars in Thousands)
Cash flows from operating activities:
 

 
 

Net income
$
97,282

 
$
172,552

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
4,049

 
3,358

Net foreign currency losses
318

 
990

Stock-based compensation
15,200

 
11,869

Deferred income taxes
(47,474
)
 
(90,781
)
Provision for (recovery from) bad debts
827

 
(28
)
Other non-cash operating activities
217

 
207

Changes in assets and liabilities:
 

 
 

Accounts receivable
(16,464
)
 
(333
)
Contract assets
(41,928
)
 
(40,927
)
Contract costs
(2,546
)
 
(59
)
Prepaid expenses, prepaid income taxes, and other assets
1,744

 
959

Accounts payable, accrued expenses, income taxes payable and other liabilities
37,718

 
(1,792
)
Deferred revenue
14,154

 
(1,253
)
Net cash provided by operating activities
63,097

 
54,762

Cash flows from investing activities:
 

 
 

Purchases of property, equipment and leasehold improvements
(180
)
 
(156
)
Payments for business acquisitions

 
(10,800
)
Payments for capitalized computer software costs
(189
)
 
(356
)
Net cash used in investing activities
(369
)
 
(11,312
)
Cash flows from financing activities:
 

 
 

Exercises of stock options
4,466

 
3,548

Repurchases of common stock
(147,423
)
 
(105,037
)
Payments of tax withholding obligations related to restricted stock
(9,654
)
 
(3,467
)
Deferred business acquisition payments
(1,200
)
 
(2,600
)
Proceeds from credit agreement
50,000

 
11,000

Payments of credit agreement issuance costs

 
(351
)
Net cash used in financing activities
(103,811
)
 
(96,907
)
Effect of exchange rate changes on cash and cash equivalents
(654
)
 
206

Decrease in cash and cash equivalents
(41,737
)
 
(53,251
)
Cash and cash equivalents, beginning of period
96,165

 
101,954

Cash and cash equivalents, end of period
$
54,428

 
$
48,703

Supplemental disclosure of cash flow information:
 

 
 

Income taxes paid, net
$
17,827

 
$
29,742

Interest paid
3,541

 
2,039

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Change in purchases of property, equipment and leasehold improvements included in accounts payable and accrued expenses
$
5

 
$
(44
)
Change in repurchases of common stock included in accounts payable and accrued expenses
2,577

 
(5,037
)
 
See accompanying Notes to these unaudited consolidated financial statements.

9


ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.  Interim Unaudited Consolidated Financial Statements
 
The accompanying interim unaudited consolidated financial statements of Aspen Technology, Inc. and its subsidiaries have been prepared on the same basis as our annual consolidated financial statements.  We have omitted certain information and footnote disclosures normally included in our annual consolidated financial statements.  Such interim unaudited consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP), as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 270, Interim Reporting, for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2018, which are contained in our Annual Report on Form 10-K, as previously filed with the U.S. Securities and Exchange Commission (SEC). In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair presentation of the financial position, results of operations, and cash flows at the dates and for the periods presented have been included and all intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of the results to be expected for the subsequent quarter or for the full fiscal year.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Unless the context requires otherwise, references to we, our and us refer to Aspen Technology, Inc. and its subsidiaries.
 
2.  Significant Accounting Policies
 
(a)         Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of Aspen Technology, Inc. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

(b)         Significant Accounting Policies 

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. We adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers ("Topic 606") and ASU No. 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business effective July 1, 2018. Refer to Note 2 (f), “New Accounting Pronouncements Adopted in Fiscal 2019,” for further information regarding the adoption of Topic 606 and ASU No. 2017-01. There were no other material changes to our significant accounting policies during the three and six months ended December 31, 2018.
 
(c)  Loss Contingencies
 
We accrue estimated liabilities for loss contingencies arising from claims, assessments, litigation and other sources when it is probable that a liability has been incurred and the amount of the claim, assessment or damages can be reasonably estimated. We believe that we have sufficient accruals to cover any obligations resulting from claims, assessments or litigation that have met these criteria.

(d)         Foreign Currency Transactions
 
Foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our subsidiaries are recognized in our results of operations as incurred as a component of other (expense), net. Net foreign currency exchange losses were $(0.6) million and $(0.5) million during the three and six months ended December 31, 2018, respectively, and $(0.2) million and $(0.9) million during the three and six months ended December 31, 2017, respectively.


10


(e)    Research and Development Expense
We charge research and development expenditures to expense as the costs are incurred. Research and development expenses consist primarily of personnel expenses related to the creation of new products, enhancements and engineering changes to existing products and costs of acquired technology prior to establishing technological feasibility.
We acquired no technology during the three and six months ended December 31, 2018 and 2017, respectively.
(f)          New Accounting Pronouncements Adopted in Fiscal 2019
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business. The amendment changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. We adopted ASU No. 2017-01 effective July 1, 2018. The adoption of ASU No. 2017-01 did not have a material effect on our consolidated financial statements or related disclosures.
In May 2014, the FASB issued Topic 606, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to evaluate revenue recognition through a five-step process.  In applying the principles of Topic 606, more judgment and estimates are required within the revenue recognition process than were required under previous U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.
We adopted Topic 606 effective July 1, 2018 using the full retrospective method, which required us to adjust the prior periods presented. The adoption of Topic 606 impacted the timing of the license portion of the revenue recognized from our term contracts.  Under the new standard, for arrangements that include term-based software licenses bundled with maintenance and support, we are now required to recognize as revenue a portion of the arrangement fee upon delivery of the software license. We recognize as revenue a portion of the arrangement fee related to maintenance and support, professional services, and training over time as the services are provided. Additionally, under the new standard, we capitalize certain direct and incremental commission costs to obtain a contract and amortize such costs over the expected period of benefit, rather than expensing them as incurred in the period that the commissions are earned. See Note 3, "Revenue from Contracts with Customers," to our Unaudited Consolidated Financial Statements for more information on our accounting policies as a result of the adoption of Topic 606.
(g)          Recently Issued Accounting Pronouncements
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the amendment, lessees will be required to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. We have concluded that we will not be subject to the transition tax associated with our accumulated, undistributed foreign earnings.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies, removes, and adds certain disclosure requirements on fair value measurements. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2018-13 on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that

11


is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendment. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We adopted ASU No. 2018-15 effective October 1, 2018. The adoption of ASU No. 2018-15 did not have a material effect on our consolidated financial statements or related disclosures.

12


3.   Revenue from Contracts with Customers

In accordance with Topic 606, we account for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration to which we are entitled. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.

Nature of Products and Services

We generate revenue from the following sources: (1) License revenue; (2) Maintenance revenue; and (3) Services and other revenue. We sell our software products to end users primarily under fixed-term licenses. We license our software products primarily through a subscription offering which we refer to as our aspenONE licensing model, which includes software maintenance and support, known as our Premier Plus SMS offering, for the entire term. Our aspenONE products are organized into three suites: 1) engineering; 2) manufacturing and supply chain; and 3) asset performance management. The aspenONE licensing model provides customers with access to all of the products within the aspenONE suite(s) they license. We refer to these arrangements as token arrangements. Tokens are fixed units of measure. The amount of software usage is limited by the number of tokens purchased by the customer.

We also license our software through point product term arrangements, which include our Premier Plus SMS offering for the entire term.

We determine revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.

Term-based Arrangements: Term-based arrangements consist of on-premise term licenses as well as maintenance.

Term licenses

License revenue consists primarily of product and related revenue from our aspenONE licensing model and point product arrangements.

When a customer elects to license our products under our aspenONE licensing model, the customer receives, for the term of the arrangement, the right to all software products in the licensed aspenONE software suite. When a customer elects to license point products, the customer receives, for the term of the arrangement, the right to license specified products in the licensed aspenONE software suite. Revenue from initial product licenses is recognized upfront upon delivery.

Maintenance

When a customer elects to license our products under our aspenONE licensing model, our Premier Plus SMS offering is included for the entire term of the arrangement and the customer receives, for the term of the arrangement, the right to any updates that may be introduced into the licensed aspenONE software suite. When a customer elects to license point products, our Premier Plus SMS offering is included for the entire term of the arrangement and the customer receives, for the term of the arrangement, the right to any updates that may be introduced related to the specified products licensed. Maintenance represents a stand-ready obligation and, due to our obligation to provide unspecified future software updates on a when-and-if available basis as well as telephone support services, we are required to recognize revenue ratably over the term of the arrangement.



13


Services and Other Revenue

Professional Services Revenue

Professional services are provided to customers on a time-and-materials ("T&M") or fixed-price basis. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligation. For professional services, revenue is recognized by measuring progress toward the completion of our obligations. We recognize professional services fees for our T&M contracts based upon hours worked and contractually agreed-upon hourly rates. Revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs. The use of the proportional performance method is dependent upon our ability to reliably estimate the costs to complete a project. We use historical experience as a basis for future estimates to complete current projects. Additionally, we believe that costs are the best available measure of performance. Out-of-pocket expenses which are reimbursed by customers are recorded as revenue.

Training Revenue

We provide training services to our customers, including on-site, Internet-based, public and customized training. The obligation to provide training services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligation. Revenue is recognized in the period in which the services are performed.

Contracts with Multiple Performance Obligations

Our contracts generally contain more than one of the products and services listed above, each of which is separately accounted for as a distinct performance obligation.

Allocation of consideration: We allocate total contract consideration to each distinct performance obligation in an arrangement on a relative standalone selling price basis. The standalone selling price reflects the price we would charge for a specific product or service if it was sold separately in similar circumstances and to similar customers.

If the arrangement contains professional services and other products or services, we allocate to the professional service obligation a portion of the total contract consideration based on the standalone selling price of professional services that is observed from consistently priced standalone sales.

The standalone selling price for term licenses, which are always sold with maintenance, is the price for the combined license and maintenance bundle. The amount assigned to the license and maintenance bundle is separated into license and maintenance amounts using the respective standalone selling prices represented by the value relationship between the software license and maintenance.

When two or more contracts are entered into at or near the same time with the same customer, we evaluate the facts and circumstances associated with the negotiation of those contracts. Where the contracts are negotiated as a package, we will account for them as a single arrangement and allocate the consideration for the combined contracts among the performance obligations accordingly.

Standalone selling price: When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. Generally, directly observable data is not available for term licenses and maintenance. When term licenses are sold together with maintenance in a bundled arrangement, we estimate a standalone selling price for these distinct performance obligations using relevant information, including our overall pricing objectives and strategies and historical pricing data, and taking into consideration market conditions and other factors, such as customer type and geography.

Other policies and judgments

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment annually over the term of the license arrangement. Therefore, we generally receive payment from a customer after the performance obligation related to the license has been satisfied, and therefore, our contracts generally contain a significant financing component. The significant financing component is calculated utilizing an interest rate that derives the net present value of the performance obligations delivered on an upfront basis based on the allocation of consideration. We have instituted a customer portfolio approach in assigning interest rates. The rates are determined at contract inception and are based on the credit characteristics of the customers within each portfolio.

14



Contract modifications

We sometimes enter into agreements to modify previously executed contracts, which constitute contract modifications. We assess each of these contract modifications to determine (i) if the additional products and services are distinct from the products and services in the original arrangement; and (ii) if the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services, as adjusted for contract-specific circumstances. A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either (i) a prospective basis as a termination of the existing contract and the creation of a new contract; or (ii) a cumulative catch-up basis. Generally, our contract modifications meet both criteria and are accounted for as a separate contract, as adjusted for contract-specific circumstances.

Disaggregation of Revenue

We disaggregate our revenue by region, type of performance obligation, timing of revenue recognition, and segment as follows:

 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
As Adjusted
 
 
 
As Adjusted
 
(Dollars in Thousands)
Revenue by region:
 
 
 
 
 
 
 
United States
$
41,525

 
$
35,949

 
$
80,753

 
$
89,027

Europe
46,471

 
34,121

 
75,417

 
60,539

Other (1)
52,427

 
35,460

 
98,422

 
82,451

 
$
140,423

 
$
105,530

 
$
254,592

 
$
232,017

 
 
 
 
 
 
 
 
Revenue by type of performance obligation:
 
 
 
 
 
 
 
Term licenses
$
93,368

 
$
56,975

 
$
157,123

 
$
135,865

Maintenance
41,038

 
40,729

 
84,077

 
80,993

Professional services and other
6,017

 
7,826

 
13,392

 
15,159

 
$
140,423

 
$
105,530

 
$
254,592

 
$
232,017

 
 
 
 
 
 
 
 
Revenue by segment:
 
 
 
 
 
 
 
Subscription and software
$
134,406

 
$
97,704

 
$
241,200

 
$
216,858

Services and other
6,017

 
7,826

 
13,392

 
15,159

 
$
140,423

 
$
105,530

 
$
254,592

 
$
232,017

____________________________________________
(1)
Other consists primarily of Asia Pacific, Canada, Latin America and the Middle East.

Contract Balances

The difference in the opening and closing balances of our contract assets and deferred revenue primarily results from the timing difference between our performance and the customer’s payment. We fulfill our obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. We recognize a contract asset when we transfer products or services to a customer and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. We recognize deferred revenue when we have received consideration or an amount of consideration is due from the customer and we have a future obligation to transfer products or services.
  
Our contract assets (liabilities) were as follows as of December 31, 2018 and June 30, 2018:

15


 
December 31, 2018
 
June 30, 2018
 
 
 
As Adjusted
 
(Dollars in Thousands)
Contract assets
$
687,716

 
$
645,000

Deferred revenue
(41,312
)
 
(27,504
)
 
$
646,404

 
$
617,496


Contract assets and deferred revenue are presented net at the contract level for each reporting period.

The change in deferred revenue in the six months ended December 31, 2018, excluding the impact of the netting of contract assets and deferred revenue, was primarily due to an increase in new billings in advance of revenue recognition, partially offset by $7.2 million of revenue recognized that was included in deferred revenue at June 30, 2018.

Contract Costs

We pay commissions for new product sales as well as for renewals of existing contracts. Commissions paid to obtain renewal contracts are not commensurate with the commissions paid for new product sales and therefore, a portion of the commissions paid for new contracts relate to future renewals.

We account for new product sales commissions using a portfolio approach and allocate the cost of commissions in proportion to the allocation of transaction price of license and maintenance performance obligations, including assumed renewals. Commissions allocated to the license and license renewal components are expensed at the time the license revenue is recognized. Commissions allocated to maintenance are capitalized and amortized on a straight-line basis over a period of four to eight years for new contracts, reflecting our estimate of the expected period that we will benefit from those commissions.

Amortization of capitalized contract costs is included in sales and marketing expenses in our Condensed Consolidated Statement of Operations.

Transaction Price Allocated to Remaining Performance Obligations

The following table includes the aggregate amount of the transaction price allocated as of December 31, 2018 to the performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:
 
Year Ended June 30,
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
(Dollars in Thousands)
License
$
30,126

 
$
32,680

 
$
27,050

 
$
9,425

 
$
2,423

 
$
1,585

Maintenance
82,016

 
139,991

 
103,811

 
68,173

 
40,263

 
20,891

Services and other
37,763

 
7,082

 
1,408

 
941

 
598

 
196


Impact to Prior Period Information

The following table presents the effect of the adoption of Topic 606 on select consolidated statements of operations line items for the three and six months ended December 31, 2017:


16


 
Three Months Ended December 31, 2017
 
As Previously Reported
 
Adjustments
 
As Adjusted
 
(Dollars in Thousands, Except per Share Data)
Consolidated Statements of Operations:
 
 
 
 
 
License revenue
$

 
$
56,975

 
$
56,975

Maintenance revenue

 
40,729

 
40,729

Subscription and software revenue
117,658

 
(117,658
)
 

Services and other revenue
7,244

 
582

 
7,826

Gross profit
112,813

 
(19,372
)
 
93,441

Selling and marketing expense
24,380

 
(452
)
 
23,928

General and administrative expense
14,178

 
5,440

 
19,618

Income from operations
54,465

 
(24,360
)
 
30,105

Interest income
40

 
6,199

 
6,239

Provision for (benefit from) income taxes
14,928

 
(112,115
)
 
(97,187
)
Net income
$
38,078

 
$
93,954

 
$
132,032

Net income per common share:

 
 
 
 
 
Basic
$
0.53

 
 
 
$
1.83

Diluted
$
0.52

 
 
 
$
1.81

Weighted average shares outstanding:
 
 
 
 
 
Basic
72,342

 
 
 
72,342

Diluted
73,036

 
 
 
73,036


 
Six Months Ended December 31, 2017
 
As Previously Reported
 
Adjustments
 
As Adjusted
 
(Dollars in Thousands, Except per Share Data)
Consolidated Statements of Operations:
 
 
 
 
 
License revenue
$

 
$
135,865

 
$
135,865

Maintenance revenue

 
80,993

 
80,993

Subscription and software revenue
233,414

 
(233,414
)
 

Services and other revenue
14,269

 
890

 
15,159

Gross profit
222,862

 
(15,666
)
 
207,196

Selling and marketing expense
47,951

 
(507
)
 
47,444

General and administrative expense
27,854

 
6,801

 
34,655

Income from operations
107,778

 
(21,960
)
 
85,818

Interest income
181

 
12,364

 
12,545

Provision for (benefit from) income taxes
31,805

 
(109,315
)
 
(77,510
)
Net income
$
72,833

 
$
99,719

 
$
172,552

Net income per common share:

 
 
 
 
 
Basic
$
1.00

 
 
 
$
2.37

Diluted
$
0.99

 
 
 
$
2.35

Weighted average shares outstanding:
 
 
 
 
 
Basic
72,683

 
 
 
72,683

Diluted
73,333

 
 
 
73,333




17


The following table presents the effect of the adoption of Topic 606 on select consolidated balance sheet line items as of June 30, 2018:
 
June 30, 2018
 
As Previously Reported
 
Adjustments
 
As Adjusted
 
(Dollars in Thousands)
Consolidated Balance Sheets:
 
 
 
 
 
ASSETS
 
 
 
 
 
Current contract assets
$

 
$
304,378

 
$
304,378

Contract costs

 
20,500

 
20,500

Accounts receivable, net
21,910

 
19,900

 
41,810

Non-current contract assets

 
340,622

 
340,622

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current deferred revenue
286,845

 
(271,695
)
 
15,150

Non-current deferred revenue
28,259

 
(15,905
)
 
12,354

Deferred income taxes

 
214,125

 
214,125

Other non-current liabilities
18,492

 
(1,424
)
 
17,068

Retained earnings
$
305,208

 
$
760,299

 
$
1,065,507


The adoption of Topic 606 had no impact on our total cash flows or net cash provided by operating activities. The impacts of adoption resulted in offsetting shifts in cash flows throughout the components of net income and various changes in working capital balances. The following table presents the effect of the adoption of Topic 606 on select consolidated statement of cash flows line items for the six months ended December 31, 2017:

 
Six Months Ended December 31, 2017
 
As Previously Reported
 
Adjustments
 
As Adjusted
 
(Dollars in Thousands)
Consolidated Statements of Cash Flows:
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net income
$
72,833

 
$
99,719

 
$
172,552

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Deferred income taxes
4,296

 
(95,077
)
 
(90,781
)
Changes in assets and liabilities:
 
 
 
 
 
Contract assets

 
(40,927
)
 
(40,927
)
Contract costs

 
(59
)
 
(59
)
Accounts receivable
3,656

 
(3,989
)
 
(333
)
Deferred revenue
(41,586
)
 
40,333

 
(1,253
)
Net cash provided by operating activities
$
54,762

 
$

 
$
54,762




18


4.   Fair Value
 
We determine fair value by utilizing a fair value hierarchy that ranks the quality and reliability of the information used in its determination. Fair values determined using “Level 1 inputs” utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Fair values determined using “Level 2 inputs” utilize data points that are observable, such as quoted prices, interest rates and yield curves for similar assets and liabilities.
 
Cash equivalents of $1.0 million and $5.0 million as of December 31, 2018 and June 30, 2018, respectively, were reported at fair value utilizing quoted market prices in identical markets, or “Level 1 inputs.” Our cash equivalents consist of short-term money market instruments.
 
Financial instruments not measured or recorded at fair value in the accompanying unaudited consolidated financial statements consist of accounts receivable, accounts payable and accrued liabilities. The estimated fair value of these financial instruments approximates their carrying value. The estimated fair value of the borrowings under the Credit Agreement (described below in Note 11, "Credit Agreement") approximates its carrying value due to the floating interest rate.

5.  Accounts Receivable, Net
 
Our accounts receivable, net of the related allowance for doubtful accounts, were as follows as of December 31, 2018 and June 30, 2018:
 
 
December 31,
2018
 
June 30,
2018
 
 
 
As Adjusted
 
(Dollars in Thousands)
Accounts receivable, gross
$
60,116

 
$
44,513

Allowance for doubtful accounts
(3,530
)
 
(2,703
)
Accounts receivable, net
$
56,586

 
$
41,810


As of December 31, 2018, we had no customer receivable balances that individually represented 10% or more of our net accounts receivable.

6.  Property and Equipment

Property, equipment and leasehold improvements consisted of the following as of December 31, 2018 and June 30, 2018:
 
 
December 31,
2018
 
June 30,
2018
 
(Dollars in Thousands)
Property, equipment and leasehold improvements, at cost:
 

 
 

Computer equipment
$
8,322

 
$
8,344

Purchased software
24,269

 
24,225

Furniture & fixtures
6,836

 
6,850

Leasehold improvements
12,026

 
12,023

Property, equipment and leasehold improvements, at cost
51,453

 
51,442

Accumulated depreciation
(43,142
)
 
(41,636
)
Property, equipment and leasehold improvements, net
$
8,311

 
$
9,806


During the three months ended December 31, 2018, we wrote off fully depreciated property, equipment and leasehold improvements that were no longer in use with gross book values of less than $0.1 million.

7. Acquisitions 

Apex Optimisation

19


On February 5, 2018, we completed the acquisition of all the outstanding shares of Apex Optimisation and affiliates (“Apex”), a provider of software which aligns Advanced Process Control with Planning and Scheduling to unify production optimization, for a total cash consideration of $23.0 million. The purchase price consisted of $18.4 million of cash paid at closing and an additional $4.6 million to be held back until February 2020 as security for certain representations, warranties, and obligations of the sellers. The holdback is recorded in other non-current liabilities in our consolidated balance sheet.
A preliminary allocation of the purchase price is as follows. The valuation of the net assets acquired and the deferred tax liabilities are considered preliminary as of December 31, 2018:
 
Amount
 
(Dollars in Thousands)
Liabilities assumed, net
$
(1,164
)
Identifiable intangible assets:
 
Technology-related
4,500

Customer relationships
3,800

Goodwill
17,483

Deferred tax liabilities
(1,619
)
Total assets acquired, net
$
23,000

We used the relief from royalty and income approaches to derive the fair value of the technology-related and customer relationship intangible assets, respectively. The weighted-average discount rate (or rate of return) used to determine the value of the Apex intangible assets was 28% and the effective tax rate used was 21%.  The technology-related and customer relationship intangible assets are each being amortized on a straight-line basis over their estimated useful lives of seven years.
The goodwill, which is not deductible for tax purposes, reflects the value of the assembled workforce and the company-specific synergies we expect to realize by selling Apex products and services to our existing customers.  The results of operations of Apex have been included prospectively in our results of operations since the date of acquisition.

8. Intangible Assets 
We include in our amortizable intangible assets those intangible assets acquired in our business and asset acquisitions. We amortize acquired intangible assets with finite lives over their estimated economic lives, generally using the straight-line method. Each period, we evaluate the estimated remaining useful lives of acquired intangible assets to determine whether events or changes in circumstances warrant a revision to the remaining period of amortization. Acquired intangibles are removed from the accounts when fully amortized and no longer in use.
Intangible assets consisted of the following as of December 31, 2018 and June 30, 2018:
 
Gross Carrying Amount
 
Accumulated Amortization
 
Effect of Currency Translation
 
Net Carrying Amount
 
(Dollars in Thousands)
December 31, 2018:
 
 
 
 
 
 
 
Technology and patents
$
35,644

 
$
(7,002
)
 
$
(108
)
 
$
28,534

Customer relationships
4,979

 
(688
)
 
(90
)
 
4,201

Non-compete agreements
553

 
(399
)
 

 
154

Total
$
41,176

 
$
(8,089
)
 
$
(198
)
 
$
32,889

June 30, 2018:
 
 
 
 
 
 
 
Technology and patents
$
35,898

 
$
(5,182
)
 
$
(254
)
 
$
30,462

Customer relationships
5,181

 
(377
)
 
(202
)
 
4,602

Non-compete agreements
553

 
(307
)
 

 
246

Total
$
41,632

 
$
(5,866
)
 
$
(456
)
 
$
35,310


20


Total amortization expense related to intangible assets is included in cost of license revenue and operating expenses and amounted to approximately $1.2 million and $2.2 million for the three and six months ended December 31, 2018, respectively, and approximately $0.5 million and $1.1 million for the three and six months ended December 31, 2017, respectively.
Future amortization expense as of December 31, 2018 is expected to be as follows:
Year Ended June 30,
Amortization Expense
 
(Dollars in Thousands)
2019
$
2,309

2020
4,688

2021
4,733

2022
4,672

2023
4,587

Thereafter
11,900

Total
$
32,889


9. Goodwill
 
The changes in the carrying amount of goodwill for our subscription and software reporting segment during the six months ended December 31, 2018 were as follows:

 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Effect of Currency Translation
 
Net Carrying Amount
 
(Dollars in Thousands)
June 30, 2018:

$
142,316

 
$
(65,569
)
 
$
(1,157
)
 
$
75,590

Foreign currency translation

 

 
(788
)
 
(788
)
December 31, 2018:
$
142,316

 
$
(65,569
)
 
$
(1,945
)
 
$
74,802

 
We test goodwill for impairment annually (or more often if impairment indicators arise), at the reporting unit level. We first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine based on this assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform the goodwill impairment test. The first step requires us to determine the fair value of the reporting unit and compare it to the carrying amount, including goodwill, of such reporting unit. If the fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds its fair value, the goodwill of the unit is impaired.

Fair value of a reporting unit is determined using a combined weighted average of a market-based approach (utilizing fair value multiples of comparable publicly traded companies) and an income-based approach (utilizing discounted projected cash flows). In applying the income-based approach, we would be required to make assumptions about the amount and timing of future expected cash flows, growth rates and appropriate discount rates. The amount and timing of future cash flows would be based on our most recent long-term financial projections. The discount rate we would utilize would be determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflect the risks associated with achieving future cash flows.

We have elected December 31st as the annual impairment assessment date and perform additional impairment tests if triggering events occur. We performed our annual impairment test for the subscription and software reporting unit as of December 31, 2018 and, based upon the results of our qualitative assessment, determined that it was not likely that its fair value was less than its carrying amount. As such, we did not recognize impairment losses as a result of our analysis. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests.


21


10. Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2018 and June 30, 2018:
 
 
December 31,
2018
 
June 30,
2018
 
(Dollars in Thousands)
Payroll and payroll-related
$
17,710

 
$
21,796

Royalties and outside commissions
3,837

 
3,333

Professional fees
2,021

 
1,695

Deferred acquisition payments
500

 
1,700

Other
12,620

 
10,991

Total accrued expenses and other current liabilities
$
36,688

 
$
39,515


Other non-current liabilities consisted of the following as of December 31, 2018 and June 30, 2018:
 
 
December 31,
2018
 
June 30,
2018
 
 
 
As Adjusted
 
(Dollars in Thousands)
Deferred rent
$
5,804

 
$
6,442

Uncertain tax positions
4,059

 
4,510

Deferred acquisition payments

4,600

 
4,294

Other
1,729

 
1,822

Total other non-current liabilities
$
16,192

 
$
17,068


11.  Credit Agreement
 
On February 26, 2016, we entered into a $250.0 million Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, Silicon Valley Bank, as syndication agent, and the lenders and other parties named therein (the “Lenders”). On August 9, 2017, we entered into an Amendment to increase the Credit Agreement to $350.0 million. The indebtedness evidenced by the Credit Agreement matures on February 26, 2021. Prior to the maturity of the Credit Agreement, any amounts borrowed may be repaid and, subject to the terms and conditions of the Credit Agreement, borrowed again in whole or in part without penalty. We had $220.0 million and $170.0 million in outstanding borrowings under the Credit Agreement as of December 31, 2018 and June 30, 2018, respectively.
 
Borrowings under the Credit Agreement bear interest at a rate equal to either, at our option, the sum of (a) the highest of (1) the rate of interest publicly announced by JPMorgan Chase Bank, N.A. as its prime rate in effect, (2) the Federal Funds Effective Rate plus 0.5%, and (3) the one-month Adjusted LIBO Rate plus 1.0%, plus (b) a margin initially of 0.5% for the first full fiscal quarter ending after the date of the Credit Agreement and thereafter based on our Leverage Ratio; or the Adjusted LIBO Rate plus a margin initially of 1.5% for the first full fiscal quarter ending after the date of the Credit Agreement and thereafter based on our Leverage Ratio.  We must also pay, on a quarterly basis, an unused commitment fee at a rate of between 0.2% and 0.3% per annum, based on our Leverage Ratio. The interest rates as of December 31, 2018 were 3.81% on $159.0 million of our outstanding borrowings, 3.88% on $50.0 million of our outstanding borrowings, and 3.85% on the remaining $11.0 million of our outstanding borrowings.
 
All borrowings under the Credit Agreement are secured by liens on substantially all of our assets. The Credit Agreement contains affirmative and negative covenants customary for facilities of this type, including restrictions on: incurrence of additional debt; liens; fundamental changes; asset sales; restricted payments; and transactions with affiliates. The Credit Agreement contains financial covenants regarding maintenance as of the end of each fiscal quarter, commencing with the quarter ending June 30, 2016, of a maximum Leverage Ratio of 3.0 to 1.0 and a minimum Interest Coverage Ratio of 3.0 to 1.0. As of December 31, 2018 we were in compliance with these covenants.
 

22


12.  Stock-Based Compensation
 
The weighted average estimated fair value of option awards granted was $26.80 and $31.54 during the three and six months ended December 31, 2018, respectively, and $16.65 and $16.86 during the three and six months ended December 31, 2017, respectively.
 
We utilized the Black-Scholes option valuation model with the following weighted average assumptions:
 
 
Six Months Ended
December 31,
 
2018
 
2017
Risk-free interest rate
2.8
%
 
1.7
%
Expected dividend yield
0.0
%
 
0.0
%
Expected life (in years)
4.6

 
4.6

Expected volatility factor
26.6
%
 
28.1
%
 
The stock-based compensation expense under all equity plans and its classification in the unaudited consolidated statements of operations for the three and six months ended December 31, 2018 and 2017 are as follows:
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in Thousands)
Recorded as expenses:
 

 
 

 
 

 
 

Cost of maintenance
$
391

 
$

 
$
537

 
$

Cost of services and other
288

 
324

 
606

 
774

Selling and marketing
1,194

 
1,006

 
2,526

 
1,891

Research and development
1,637

 
1,891

 
3,932

 
3,788

General and administrative
2,825

 
2,234

 
7,599

 
5,416

Total stock-based compensation
$
6,335

 
$
5,455

 
$
15,200

 
$
11,869


A summary of stock option and restricted stock unit ("RSU") activity under all equity plans for the six months ended December 31, 2018 is as follows:
 
 
Stock Options
 
Restricted Stock Units
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic Value
(in 000’s)
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at June 30, 2018
1,369,442

 
$
45.93

 
7.23
 
$
64,103

 
621,700

 
$
53.64

Granted
271,749

 
114.72

 
 
 
 

 
630,528

 
114.94

Settled (RSUs)

 
 

 
 
 
 

 
(260,604
)
 
59.12

Exercised
(105,911
)
 
42.20

 
 
 
 

 

 
 

Cancelled / Forfeited
(67,659
)
 
67.00

 
 
 
 

 
(58,694
)
 
66.11

Outstanding at December 31, 2018
1,467,621

 
$
57.97

 
7.22
 
$
43,905

 
932,930

 
$
92.76

Vested and exercisable at December 31, 2018
841,676

 
$
43.97

 
6.10
 
$
33,458

 

 
 

Vested and expected to vest as of December 31, 2018
1,400,561

 
$
57.17

 
7.15
 
$
42,752

 
876,747

 
$
93.82

 
The weighted average grant-date fair value of RSUs granted was $105.71 and $114.94 during the three and six months ended December 31, 2018, respectively, and $66.52 and $63.24 during the three and six months ended December 31, 2017, respectively.  The total fair value of shares vested from RSU grants was $15.1 million and $25.0 million during the three and

23


six months ended December 31, 2018, respectively, and $4.9 million and $10.2 million during the three and six months ended December 31, 2017, respectively.
 
At December 31, 2018, the total future unrecognized compensation cost related to stock options was $11.3 million and is expected to be recorded over a weighted average period of 2.8 years.  At December 31, 2018, the total future unrecognized compensation cost related to RSUs was $35.7 million and is expected to be recorded over a weighted average period of 2.8 years.
 
The total intrinsic value of options exercised was $0.7 million and $6.8 million during the three and six months ended December 31, 2018, respectively, and $1.3 million and $2.9 million during the three and six months ended December 31, 2017, respectively. We received cash proceeds from option exercises of $0.4 million and $4.5 million during the three and six months ended December 31, 2018, respectively, and $1.1 million and $3.5 million during the three and six months ended December 31, 2017, respectively. We withheld withholding taxes on vested RSUs of $6.3 million and $9.6 million during the three and six months ended December 31, 2018, respectively, and $1.8 million and $3.4 million during the three and six months ended December 31, 2017, respectively.
 
At December 31, 2018, common stock reserved for future issuance or settlement under equity compensation plans was 9.9 million shares.

During the six months ended December 31, 2018, we granted performance-based long-term incentive awards (“performance awards”) to certain of our executives, including our named executive officers. The performance period for each performance award is either of the following two-year periods: (i) fiscal year 2019 - fiscal year 2020, or (ii) fiscal year 2020 - fiscal year 2021.  Participants receive RSUs on the grant date associated with achievement of all performance targets. The performance targets for the performance awards are based on meeting annual spend growth, defined as an estimate of the annualized value of our portfolio of term license arrangements, as of a specific date, and the performance goals set out in the executive bonus plan for each fiscal year, such as free cash flow. If the performance targets are met during one of the two performance periods and the participant remains actively employed by us, the RSUs convert to time-based vesting wherein fifty percent of the awards immediately vest, and the remaining fifty percent are subject to additional service vesting over a three-year period.  In general, if the performance targets are not met, or if the participant is no longer actively employed by us prior to the performance targets being met, the participant forfeits all of the RSUs.

During the six months ended December 31, 2018, we granted 382,373 RSUs in connection with the performance awards.  As of December 31, 2018, all of the RSUs issued in connection with the performance awards are unvested and outstanding.

We record compensation expense for the performance awards based on the fair value of the awards, in an amount proportionate to the service time rendered by the participant, when it is probable that the achievement of the goals will be met. The fair value of the performance awards granted during the six months ended December 31, 2018 was estimated using the closing price on the date of grant as well as the estimated probable achievement levels of the performance metrics.  If the performance-based conditions are not met, no compensation cost is recognized and any recognized compensation cost is reversed.  As of December 31, 2018, we concluded that the performance metrics related to the performance awards were not probable of achievement; therefore, no compensation expense was recognized during the six months ended December 31, 2018

On July 26, 2018, our Board of Directors approved the Aspen Technology, Inc. 2018 Employee Stock Purchase Plan (the "ESPP"). The ESPP is intended to be a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, or the IRC.  The ESPP was approved at our Annual Meeting of Stockholders on December 7, 2018.  The ESPP currently provides for a purchase price equal to 85% of the lower of (a) the fair market value of the common stock on the first trading day of each ESPP offering period and (b) the fair market value of the common stock on the last day of the offering period. Our initial offering period is for January 1, 2019 through June 30, 2019. 
 
13.  Stockholders’ Equity
 
Stock Repurchases

On January 22, 2015, our Board of Directors approved a share repurchase program (the "Share Repurchase Program") for up to $450.0 million worth of our common stock. On April 26, 2016, June 8, 2017, April 18, 2018, and December 6, 2018, the Board of Directors approved a $400.0 million, $200.0 million, $200.0 million, and $100.0 million increase in the Share Repurchase Program, respectively. The timing and amount of any shares repurchased are based on market conditions and other factors. All shares of our common stock repurchased have been recorded as treasury stock under the cost method.

24



During the three and six months ended December 31, 2018, we repurchased 1,175,531 and 1,648,907 shares of our common stock in the open market for $100.0 million and $150.0 million, respectively. As of December 31, 2018, the total remaining value under the Share Repurchase Program was approximately $296.3 million.

Accumulated Other Comprehensive Income
 
As of December 31, 2018 and June 30, 2018, accumulated other comprehensive income was comprised of foreign currency translation adjustments of less than $0.1 million and $1.4 million, respectively.
 
14.  Net Income Per Share
 
Basic income per share is determined by dividing net income by the weighted average common shares outstanding during the period. Diluted income per share is determined by dividing net income by diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares. To the extent their effect is dilutive, employee equity awards and other commitments to be settled in common stock are included in the calculation of diluted net income per share based on the treasury stock method.
 
The calculations of basic and diluted net income per share and basic and dilutive weighted average shares outstanding for the three and six months ended December 31, 2018 and 2017 are as follows:
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
As Adjusted
 
 
 
As Adjusted
 
(Dollars and Shares in Thousands, Except per Share Data)
Net income
$
59,217

 
$
132,032

 
$
97,282

 
$
172,552

 
 
 
 
 
 
 
 
Weighted average shares outstanding
70,428

 
72,342

 
70,708

 
72,683

 
 
 
 
 
 
 
 
Dilutive impact from:
 

 
 

 
 

 
 

Employee equity awards

720

 
694

 
892

 
650

Dilutive weighted average shares outstanding
71,148

 
73,036

 
71,600

 
73,333

 
 
 
 
 
 
 
 
Income per share
 

 
 

 
 

 
 

Basic
$
0.84

 
$
1.83

 
$
1.38

 
$
2.37

Dilutive
$
0.83

 
$
1.81

 
$
1.36

 
$
2.35

 
For the three and six months ended December 31, 2018 and 2017, certain employee equity awards were anti-dilutive based on the treasury stock method. The following employee equity awards were excluded from the calculation of dilutive weighted average shares outstanding because their effect would be anti-dilutive as of December 31, 2018 and 2017:
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
(Shares in Thousands)
Employee equity awards
867

 
388

 
812

 
664


Included in the table above are options to purchase 255,390 and 254,354 shares of our common stock during the three and six months ended December 31, 2018, respectively, which were not included in the computation of dilutive weighted average shares outstanding, because their exercise prices ranged from $93.59 per share to $116.00 per share and were greater than the average market price of our common stock during the period then ended. These options were outstanding as of December 31, 2018 and expire at various dates through October 23, 2028.

 

25


15.   Income Taxes
 
The effective tax rate for the periods presented was primarily the result of income earned in the U.S., taxed at U.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.
 
On December 22, 2017, the President of the United States signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), following its passage by the United States Congress. The Tax Act made significant changes to U.S. federal income tax laws, including reduction of the corporate tax rate from 35.0% to 21.0%, and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of our foreign subsidiaries. The Tax Act also contains additional provisions that are effective for us in fiscal year 2019, including a new deduction for Foreign-Derived Intangible Income (“FDII”), the repeal of the domestic production activity deduction, a new tax on Global Intangible Low-Taxed Income (“GILTI”), and increased limitations on the deductibility of certain executive compensation.

Our effective tax rate was 13.4% and 12.3% during the three and six months ended December 31, 2018, respectively, and (279.0)% and (81.5)% during the three and six months ended December 31, 2017, respectively. Our effective tax rate increased for the three and six months ended December 31, 2018 compared to the same period in 2017 due to the tax benefit recorded for the three and six months ended December 31, 2017 for the revaluation of our deferred tax liabilities resulting from the adoption of Topic 606. We adopted Topic 606 effective July 1, 2018 using the full retrospective method, which coincided with the reduction of federal income tax rates due to the enactment of the Tax Act. The reduction in the corporate tax rate from 35.0% to the blended tax rate of 21.0% reduced our deferred tax liabilities established under Topic 606, which resulted in an income tax benefit for the three and six months ended December 31, 2017.

The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. We have concluded that we will not be subject to the transition tax associated with our accumulated, undistributed foreign earnings. We do not provide deferred taxes on unremitted earnings of our foreign subsidiaries as we intend to indefinitely reinvest those earnings.

The Tax Act also included a new provision designed to tax global intangible low-taxed income (“GILTI”). Under U.S. GAAP, we are allowed to make an accounting policy choice to either (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or (ii) factor in such amounts into the measurement of our deferred taxes (the "deferred method"). Our selection of an accounting policy related to the GILTI tax provisions depends, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. While our future global operations depend on a number of different factors, we do expect to have future U.S. inclusions in taxable income related to GILTI. Further, we have made a policy decision to record GILTI tax as a current-period expense when incurred.

Deferred income taxes are recognized based on temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the statutory tax rates and laws expected to apply to taxable income in the years in which the temporary differences are expected to reverse. Valuation allowances are provided against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the timing of the temporary differences becoming deductible.  Management considers, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations of availability of net operating loss carryforwards, and other matters in making this assessment.

 
16. Commitments and Contingencies
 
Operating Leases
 
We lease certain facilities under non-cancellable operating leases with terms in excess of one year. Rental expense on leased facilities under operating leases was approximately $2.1 million and $4.1 million during the three and six months ended December 31, 2018, respectively, and approximately $2.0 million and $4.1 million during the three and six months ended December 31, 2017, respectively.
 
Standby letters of credit for $3.9 million and $3.5 million secure our performance on professional services contracts, certain facility leases and potential liabilities as of December 31, 2018 and June 30, 2018, respectively. The letters of credit expire at various dates through fiscal 2025.

26



17.  Segment Information
 
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and to assess performance. Our chief operating decision maker is our President and Chief Executive Officer.
 
The subscription and software segment is engaged in the licensing of process optimization and asset performance management software solutions and associated support services, and includes our license and maintenance revenue. The services and other segment includes professional services and training, and includes our services and other revenue. We do not track assets or capital expenditures by operating segments. Consequently, it is not practical to present assets, capital expenditures, depreciation or amortization by operating segments.
 
The following table presents a summary of our reportable segments’ profits:
 
 
Subscription and Software
 
Services and Other
 
Total
 
(Dollars in Thousands)
Three Months Ended December 31, 2018
 

 
 

 
 

Segment revenue
$
134,406

 
$
6,017

 
$
140,423

Segment expenses (1)
(53,732
)
 
(7,634
)
 
(61,366
)
Segment profit
$
80,674

 
$
(1,617
)
 
$
79,057

Three Months Ended December 31, 2017, As Adjusted
 

 
 

 
 

Segment revenue
$
97,704

 
$
7,826

 
$
105,530

Segment expenses (1)
(49,201
)
 
(6,606
)
 
(55,807
)
Segment profit
$
48,503

 
$
1,220

 
$
49,723

 
 
 
 
 
 
Six Months Ended December 31, 2018
 

 
 

 
 

Segment revenue
$
241,200

 
$
13,392

 
$
254,592

Segment expenses (1)
(107,258
)
 
(15,203
)
 
(122,461
)
Segment profit
$
133,942

 
$
(1,811
)
 
$
132,131

 
 
 
 
 
 
Six Months Ended December 31, 2017, As Adjusted
 

 
 

 
 

Segment revenue
$
216,858

 
$
15,159

 
$
232,017

Segment expenses (1)
(97,989
)
 
(13,555
)
 
(111,544
)
Segment profit
$
118,869

 
$
1,604

 
$
120,473


(1)         Our reportable segments’ operating expenses include expenses directly attributable to the segments. Segment expenses include selling and marketing and research and development expenses. Segment expenses do not include allocations of general and administrative; interest income, net; and other (expense), net.


27


Reconciliation to Income before Income Taxes
 
The following table presents a reconciliation of total segment profit to income before income taxes for the three and six months ended December 31, 2018 and 2017:
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
As Adjusted
 
 
 
As Adjusted
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
Total segment profit for reportable segments
$
79,057

 
$
49,723

 
$
132,131

 
$
120,473

General and administrative expense
(15,299
)
 
(19,618
)
 
(31,383
)
 
(34,655
)
Interest income, net
5,321

 
4,978

 
10,576

 
10,078

Other (expense), net
(578
)
 
(238
)
 
(451
)
 
(854
)
Income before income taxes
$
68,501

 
$
34,845

 
$
110,873

 
$
95,042





28


Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion in conjunction with our unaudited consolidated financial statements and related notes thereto contained in this report.  In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties.  You should read “Item 1A. Risk Factors” of Part II for a discussion of important factors that could cause our actual results to differ materially from our expectations.
 
Our fiscal year ends on June 30th, and references in this Quarterly Report to a specific fiscal year are to the twelve months ended June 30th of such year (for example, “fiscal 2019” refers to the year ending on June 30, 2019).

Business Overview 
We are a leading global supplier of asset optimization solutions that optimize asset design, operations and maintenance in complex, industrial environments. We combine decades of process modeling and operations expertise with big data machine-learning and analytics. Our purpose-built software solutions improve the competitiveness and profitability of our customers by increasing throughput, energy efficiency, and production, reducing unplanned downtime, enhancing capital efficiency, and decreasing working capital requirements over the entire asset lifecycle to support operational excellence.
Our software incorporates our proprietary mathematical and empirical models of manufacturing and planning processes and reflects the deep domain expertise we have amassed from focusing on solutions for the process and other capital-intensive industries for over 35 years. We have developed our applications to design and optimize processes across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. We are a recognized market and technology leader in providing process optimization and asset performance management software solutions for each of these business areas.
We have established sustainable competitive advantages based on the following strengths:
Innovative products that can enhance our customers' profitability and productivity;
Long-term customer relationships;
Large installed base of users of our software; and
Long-term license contracts.
We have approximately 2,200 customers globally. Our customers consist of companies engaged in the process and other capital-intensive industries such as energy, chemicals, engineering and construction, as well as pharmaceuticals, transportation, power, metals and mining, pulp and paper, and consumer packaged goods.
Business Segments
We have two operating and reportable segments: i) subscription and software and ii) services and other. The subscription and software segment is engaged in the licensing of process optimization and asset performance management software solutions and associated support services, and includes our license and maintenance revenue. The services and other segment includes professional services and training, and includes our services and other revenue.
Key Components of Operations
Revenue
We generate revenue primarily from the following sources: 
License Revenue. We sell our software products to end users, primarily under fixed-term licenses, through a subscription offering which we refer to as our aspenONE licensing model. The aspenONE licensing model includes software maintenance and support, known as our Premier Plus SMS offering, for the entire term. Our aspenONE products are organized into three suites: 1) engineering; 2) manufacturing and supply chain; and 3) asset performance management. The aspenONE licensing model provides customers with access to all of the products within the aspenONE suite(s) they license. Customers can change or alternate the use of multiple products in a licensed suite through the use of exchangeable units of measurement, called tokens, licensed in quantities determined by the customer. This licensing system enables customers to use products as needed and to experiment with different products to best solve whatever critical business challenges they face. Customers can increase their usage of our software by purchasing additional tokens as business needs evolve. 

29


We also license our software through point product arrangements with our Premier Plus SMS offering included for the contract term, as well as perpetual license arrangements.
Maintenance Revenue. We provide customers technical support, access to software fixes and updates and the right to any new unspecified future software products and updates that may be introduced into the licensed aspenONE software suite. Our technical support services are provided from our customer support centers throughout the world, as well as via email and through our support website.
Services and Other Revenue. We provide training and professional services to our customers. Our professional services are focused on implementing our technology in order to improve customers' plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis. We provide training services to our customers, including on-site, Internet-based and customized training.
Our services and other revenue consists primarily of revenue related to professional services and training. The amount and timing of this revenue depend on a number of factors, including:
whether the professional services arrangement was sold as a single arrangement with, or in contemplation of, a new aspenONE licensing arrangement;
the number, value and rate per hour of service transactions booked during the current and preceding periods;
the number and availability of service resources actively engaged on billable projects;
the timing of milestone acceptance for engagements contractually requiring customer sign-off;
the timing of collection of cash payments when collectability is uncertain; and
the size of the installed base of license contracts.
 Cost of Revenue
Cost of License. Our cost of license revenue consists of (i) royalties, (ii) amortization of capitalized software and intangibles, and (iii) distribution fees.
Cost of Maintenance. Our cost of maintenance revenue consists of costs of providing Premier Plus SMS bundled with our aspenONE licensing and point product arrangements.
Cost of Services and Other. Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing customers professional services and training.
Operating Expenses
Selling and Marketing Expenses. Selling expenses consist primarily of the personnel and travel expenses related to the effort expended to license our products and services to current and potential customers, as well as for overall management of customer relationships. Marketing expenses include expenses needed to promote our company and our products and to conduct market research to help us better understand our customers and their business needs.
Research and Development Expenses. Research and development expenses consist primarily of personnel expenses related to the creation of new software products, enhancements and engineering changes to existing products.
General and Administrative Expenses. General and administrative expenses include the costs of corporate and support functions, such as executive leadership and administration groups, finance, legal, human resources and corporate communications, and other costs, such as outside professional and consultant fees and provision for bad debts. 
Other Income and Expenses
Interest Income. Interest income is recorded for financing components under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). When a contract includes a significant financing component because we generally receive payments in arrears, we are in the position of providing financing to the customer. As a result, we decrease the amount of revenue recognized and increase interest income by a corresponding amount. Interest income also includes the accretion of interest on investments in short-term money market instruments.
Interest (Expense). Interest (expense) is primarily related to our Credit Agreement.

30


Other (Expense), Net. Other (expense), net is comprised primarily of foreign currency exchange gains (losses) generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units.