Company Quick10K Filing
Quick10K
Synopsys
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$116.73 149 $17,380
10-Q 2019-01-31 Quarter: 2019-01-31
10-K 2018-10-31 Annual: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-K 2017-10-31 Annual: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-K 2016-10-31 Annual: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-K 2015-10-31 Annual: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-K 2014-10-31 Annual: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-04-08 Officers, Shareholder Vote, Exhibits
8-K 2019-02-20 Earnings, Exhibits
8-K 2018-12-05 Earnings, Exhibits
8-K 2018-08-22 Earnings, Exhibits
8-K 2018-07-03 Regulation FD, Exhibits
8-K 2018-05-31 Other Events, Exhibits
8-K 2018-05-23 Earnings, Exhibits
8-K 2018-04-05 Officers, Shareholder Vote, Exhibits
8-K 2018-02-21 Earnings, Exhibits
MPC Marathon Petroleum 40,370
WU Western Union 8,390
TEO Telecom Argentina 6,340
CFFN Capitol Federal Financial 1,930
LPI Life Partners Position Holder Trust 758
GVP GSE Systems 53
ADXS Advaxis 28
LITH US Lithium 0
EOCC Enel Generacion Chile 0
VSAR Versartis 0
SNPS 2019-01-31
Part I. Financial Information
Item 1. Financial Statements
Note 1. Description of Business
Note 2. Summary of Significant Accounting Policies
Note 3. Goodwill and Intangible Assets
Note 4. Financial Assets and Liabilities
Note 5. Fair Value Measures
Note 6. Liabilities and Restructuring Charges
Note 7. Credit Facility
Note 8. Accumulated Other Comprehensive Income (Loss)
Note 9. Stock Repurchase Program
Note 10. Stock Compensation
Note 11. Net Income (Loss) per Share
Note 12. Segment Disclosure
Note 13. Other Income (Expense), Net
Note 14. Taxes
Note 15. Contingencies
Note 16. Effect of New Accounting Pronouncements
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 ex311013119.htm
EX-31.2 ex312013119.htm
EX-31.3 ex313013119.htm
EX-32.1 ex321013119.htm

Synopsys Earnings 2019-01-31

SNPS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a013119snps10-q.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 JANUARY 31, 2019
OR
¨
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: 000-19807
 
 
 
synopsyslogoa07a01a16.jpg
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
DELAWARE
 
56-1546236
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
690 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices, including zip code)
(650) 584-5000
(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  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
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
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
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. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of February 22, 2019, there were 149,675,824 shares of the registrant’s common stock outstanding.





SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JANUARY 31, 2019
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.





PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
 
Financial Statements
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
 
January 31,
2019
 
 October 31,
2018*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
592,305

 
$
723,115

Accounts receivable, net
762,292

 
554,217

Inventories
137,559

 
122,407

Income taxes receivable and prepaid taxes
55,547

 
76,525

Prepaid and other current assets
249,927

 
67,533

Total current assets
1,797,630

 
1,543,797

Property and equipment, net
317,896

 
309,310

Goodwill
3,145,700

 
3,143,249

Intangible assets, net
332,187

 
360,404

Long-term prepaid taxes
54,722

 
138,312

Deferred income taxes
337,824

 
404,166

Other long-term assets
358,527

 
246,736

Total assets
$
6,344,486

 
$
6,145,974

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
335,341

 
$
578,326

Accrued income taxes
13,366

 
27,458

Deferred revenue
1,262,201

 
1,152,862

Short-term debt
414,730

 
343,769

Total current liabilities
2,025,638

 
2,102,415

Long-term accrued income taxes
47,932

 
50,590

Long-term deferred revenue
63,013

 
116,859

Long-term debt
127,140

 
125,535

Other long-term liabilities
296,098

 
265,560

Total liabilities
2,559,821

 
2,660,959

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding

 

Common stock, $0.01 par value: 400,000 shares authorized; 149,276 and 149,265 shares outstanding, respectively
1,493

 
1,493

Capital in excess of par value
1,654,363

 
1,644,830

Retained earnings
2,820,910

 
2,543,688

Treasury stock, at cost: 7,985 and 7,996 shares, respectively
(600,112
)
 
(597,682
)
Accumulated other comprehensive income (loss)
(97,852
)
 
(113,177
)
Total Synopsys stockholders’ equity
3,778,802

 
3,479,152

Non-controlling interest
5,863

 
5,863

Total stockholders’ equity
3,784,665

 
3,485,015

Total liabilities and stockholders’ equity
$
6,344,486

 
$
6,145,974

* Derived from audited financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.

1



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended 
 January 31,
 
2019
 
2018
Revenue:
 
 
 
Time-based products
$
553,716

 
$
570,933

Upfront products
130,513

 
91,604

Maintenance and service
136,172

 
106,889

Total revenue
820,401

 
769,426

Cost of revenue:
 
 
 
Products
116,620

 
111,394

Maintenance and service
58,829

 
50,754

Amortization of intangible assets
17,443

 
19,008

Total cost of revenue
192,892

 
181,156

Gross margin
627,509

 
588,270

Operating expenses:
 
 
 
Research and development
271,326

 
264,411

Sales and marketing
155,959

 
150,512

General and administrative
42,061

 
56,372

Amortization of intangible assets
10,784

 
9,539

Restructuring
(35
)
 
(282
)
Total operating expenses
480,095

 
480,552

Operating income
147,414

 
107,718

Other income (expense), net
(359
)
 
12,385

Income before income taxes
147,055

 
120,103

Provision (benefit) for income taxes
(6,459
)
 
123,794

Net income (loss)
$
153,514

 
$
(3,691
)
Net income (loss) per share:
 
 
 
Basic
$
1.03

 
$
(0.02
)
Diluted
$
1.01

 
$
(0.02
)
Shares used in computing per share amounts:
 
 
 
Basic
149,288

 
149,441

Diluted
152,661

 
149,441

See accompanying notes to unaudited condensed consolidated financial statements.


2



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended 
 January 31,
 
2019
 
2018
Net income (loss)
$
153,514

 
$
(3,691
)
Other comprehensive income (loss):
 
 
 
Change in foreign currency translation adjustment
5,383

 
21,080

Cash flow hedges:
 
 
 
Deferred gains (losses), net of tax of $(1,591) and $(3,419), respectively
5,467

 
13,013

Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(1,236) and $1,325, respectively
4,475

 
(5,306
)
Other comprehensive income (loss), net of tax effects
15,325

 
28,787

Comprehensive income
$
168,839

 
$
25,096

See accompanying notes to unaudited condensed consolidated financial statements.


3



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

 
 
 
Capital in
Excess of
Par
Value
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total 
Synopsys
Stockholders’
Equity
 
Non-controlling
Interest
 
Stockholders'
Equity
 
Common Stock
 
 
Shares
 
Amount
 
Balance at October 31, 2018
149,265

 
$
1,493

 
$
1,644,830

 
$
2,543,688

 
$
(597,682
)
 
$
(113,177
)
 
$
3,479,152

 
$
5,863

 
$
3,485,015

Net income
 
 
 
 
 
 
153,514

 
 
 
 
 
153,514

 
 
 
153,514

Retained earnings adjustment due to adoption of accounting standards related to revenue(1)
 
 
 
 
 
 
257,594

 
 
 
 
 
257,594

 
 
 
257,594

Retained earnings adjustment due to adoption of an accounting standard related to income taxes(2)
 
 
 
 
 
 
(130,544
)
 
 
 
 
 
(130,544
)
 
 
 
(130,544
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
15,325

 
15,325

 
 
 
15,325

Purchases of treasury stock
(346
)
 
(3
)
 
3

 
 
 
(29,185
)
 
 
 
(29,185
)
 
 
 
(29,185
)
Common stock issued, net of shares withheld for employee taxes
357

 
3

 
(27,736
)
 
(3,342
)
 
26,755

 
 
 
(4,320
)
 
 
 
(4,320
)
Stock-based compensation
 
 
 
 
37,266

 
 
 
 
 
 
 
37,266

 
 
 
37,266

Balance at January 31, 2019
149,276

 
$
1,493

 
$
1,654,363

 
$
2,820,910

 
$
(600,112
)
 
$
(97,852
)
 
$
3,778,802

 
$
5,863

 
$
3,784,665

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital in
Excess of
Par
Value
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total 
Synopsys
Stockholders’
Equity
 
Non-controlling
Interest
 
Stockholders'
Equity
 
Common Stock
 
 
Shares
 
Amount
 
Balance at October 31, 2017
150,445

 
$
1,505

 
$
1,622,429

 
$
2,143,873

 
$
(426,208
)
 
$
(65,979
)
 
$
3,275,620

 
$
4,104

 
3,279,724

Net income (loss)
 
 
 
 
 
 
(3,691
)
 
 
 
 
 
(3,691
)
 
 
 
(3,691
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
28,787

 
28,787

 
 
 
28,787

Purchases of treasury stock
(1,987
)
 
(20
)
 
20

 
 
 
(180,000
)
 
 
 
(180,000
)
 
 
 
(180,000
)
Equity forward contract
 
 
 
 
(20,000
)
 
 
 
 
 
 
 
(20,000
)
 
 
 
(20,000
)
Common stock issued, net of shares withheld for employee taxes
495

 
5

 
(22,103
)
 
(6,328
)
 
32,126

 
 
 
3,700

 
 
 
3,700

Stock-based compensation
 
 
 
 
32,113

 
 
 
 
 
 
 
32,113

 
 
 
32,113

Balance at January 31, 2018
148,953

 
$
1,490

 
$
1,612,459

 
$
2,133,854

 
$
(574,082
)
 
$
(37,192
)
 
$
3,136,529

 
$
4,104

 
$
3,140,633


(1) See Note 2. Summary of Significant Accounting Policies for additional information on the retained earnings adjustment due to adoption of Accounting Standards Codification (ASC) 606 and ASC 340.
(2) See Note 14. Taxes for additional information on the retained earnings adjustment due to adoption of Accounting Standard Update (ASU) 2016-16.
See accompanying notes to unaudited condensed consolidated financial statements.


4



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended 
 January 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
153,514

 
$
(3,691
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Amortization and depreciation
51,830

 
43,920

Amortization of capitalized costs to obtain revenue contracts
12,793

 

Stock compensation
38,460

 
32,323

Allowance for doubtful accounts
1,500

 
368

(Gain) loss on sale of property and investments

 
4

Deferred income taxes
(6,215
)
 
46,172

Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(209,049
)
 
(34,811
)
Inventories
(15,827
)
 
(15,811
)
Prepaid and other current assets
(10,027
)
 
(14,504
)
Other long-term assets
(49,403
)
 
(25,601
)
Accounts payable and accrued liabilities
(219,099
)
 
(139,864
)
Income taxes
(41,985
)
 
(18,017
)
Deferred revenue
149,489

 
70,458

Net cash used in operating activities
(144,019
)
 
(59,054
)
Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of short-term investments

 
12,449

Purchases of property and equipment
(29,007
)
 
(28,316
)
Cash paid for acquisitions and intangible assets, net of cash acquired

 
(608,344
)
Capitalization of software development costs
(737
)
 
(807
)
Net cash used in investing activities
(29,744
)
 
(625,018
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
185,080

 
450,000

Repayment of debt
(112,812
)
 
(21,875
)
Issuances of common stock
6,358

 
12,486

Payments for taxes related to net share settlement of equity awards
(10,593
)
 
(10,247
)
Purchase of equity forward contract

 
(20,000
)
Purchases of treasury stock
(29,185
)
 
(180,000
)
Other
(762
)
 

Net cash provided by financing activities
38,086

 
230,364

Effect of exchange rate changes on cash, cash equivalents and restricted cash
4,882

 
11,555

Net change in cash, cash equivalents and restricted cash
(130,795
)
 
(442,153
)
Cash, cash equivalents and restricted cash, beginning of period
725,001

 
1,050,075

Cash, cash equivalents and restricted cash, end of period
$
594,206

 
$
607,922

See accompanying notes to unaudited condensed consolidated financial statements.

5



SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) provides products and services used by designers across the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the security and quality of their code. The Company is a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. The Company also offers semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The Company provides software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, the Company provides technical services and support to help its customers develop advanced chips and electronic systems. These products and services are part of the Company’s Semiconductor & System Design segment.
The Company is also a leading provider of software tools and services that improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials. These tools and services are part of the Company’s Software Integrity segment.

Note 2. Summary of Significant Accounting Policies
The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its unaudited condensed consolidated balance sheets, results of operations, comprehensive income, stockholders' equity and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in Synopsys’ Annual Report on Form 10-K for the fiscal year ended October 31, 2018 as filed with the SEC on December 17, 2018.
Use of Estimates. To prepare financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position.
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated.
Fiscal Year End. The Company’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that every five or six years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2019 is a 52-week year and will end on November 2, 2019. Fiscal 2018 was a 53-week year and ended on November 3, 2018.
The results of operations for the first quarters of fiscal 2019 and 2018 included 13 weeks and 14 weeks, respectively, and ended on February 2, 2019 and February 3, 2018, respectively. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Segment Reporting. Effective in fiscal 2019, the Company realigned its business to evaluate the results of its Software Integrity business separately from Synopsys’ traditional electronic design automation (EDA) and semiconductor IP business. The Chief Operating Decision Makers (CODMs) now regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. Synopsys' CODMs are its two co-

6



Chief Executive Officers. Historical segment disclosures have been recast to retrospectively reflect the change from one to two reportable segments.
Goodwill. Effective in the first quarter of fiscal 2019, with the change in the Company’s reportable segments, the Company has determined there are now two reporting units, requiring goodwill to be allocated to the two reporting units using a relative fair value method. Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill at each reporting unit is tested for impairment annually as of October 31, or more frequently if facts and circumstances warrant a review. As a result of changes to the Company's segment reporting, the Company conducted a quantitative impairment test for each of its reporting units and concluded that there was no impairment. The Company performs either a qualitative or quantitative analysis when testing a reporting unit’s goodwill for impairment. A qualitative goodwill impairment test is performed when the fair value of a reporting unit historically has significantly exceeded the carrying value of its net assets and based on current operations is expected to continue to do so. Otherwise, the Company is required to conduct a quantitative impairment test for each reporting unit and estimates the fair value of each reporting unit using a combination of a discounted cash flow analysis and a market approach based on market multiples. The discount rate used in an income approach is based on the Company's weighted-average cost of capital and may be adjusted for the relevant risks pertaining to projecting future cash flows. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference. Refer to Note 3. Goodwill and Intangible Assets for a discussion of the change in reporting units as related to the realignment of the Company’s segments.
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC 606), "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” The new guidance creates a single, principle-based model for revenue recognition that is intended to expand and improve companies' revenue disclosures. For revenue recognition policies under ASC 605, refer to Note 2 - Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2018.
ASC 606 requires a company to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. ASC 606 also 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. The FASB has issued several amendments to ASC 606, including amendments that deferred the initially proposed adoption date and clarified accounting for licenses of intellectual property and identifying performance obligations.
The Company adopted ASC 606 at the beginning of fiscal 2019 using the modified retrospective transition method. Under this method, periods prior to the adoption date are not adjusted and continue to be reported under the revenue accounting literature in effect during those periods. The Company evaluated contracts that were in effect at the beginning of fiscal 2019 as if they had been accounted for under ASC 606 from the contract inception and summarized the most significant adoption impacts as follows:
Revenue for certain ongoing contracts that was previously deferred would have been recognized in the periods prior to adoption under ASC 606. Therefore, upon adoption, the Company recorded the following adjustments to the beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase to retained earnings of $265.1 million, a decrease to unbilled receivables of $27.4 million, an increase to contract assets of $126.9 million, and a decrease in deferred revenue of $165.6 million.
The Company capitalized $73.8 million of incremental costs for obtaining contracts with customers at the adoption date with a corresponding adjustment to retained earnings, and is amortizing these costs over the contract term.
The Company recorded an increase in its opening deferred tax liability of $81.4 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.

7



The impacts of adopting ASC 606 on the Company's unaudited condensed consolidated financial statements for the quarter are summarized in the tables below.
Balance Sheet Accounts
The following table summarizes the effects of adopting ASC 606 on certain account balances of the unaudited condensed consolidated balance sheet that were impacted as of January 31, 2019:
 
As reported under ASC 606
 
Adjustments
 
Adjusted balance under ASC 605
 
(in thousands)
Receivables, net
$
762,292

 
$
73,234

 
$
835,526

Prepaid and other current assets
249,927

 
(167,729
)
 
82,198

Deferred income taxes
337,824

 
70,362

 
408,186

Other long-term assets
358,527

 
(95,715
)
 
262,812

Accounts payable and other accrued liabilities
335,341

 
(10,713
)
 
324,628

Deferred revenue
1,262,201

 
112,374

 
1,374,575

Long-term deferred revenue
63,013

 
80,614

 
143,627

Other long-term liabilities (1)
296,098

 
(16,671
)
 
279,427

Retained earnings
2,820,910

 
(285,452
)
 
2,535,458

(1) Includes long-term deferred tax liabilities.
Statements of Operations
The following table summarizes the effects of adopting ASC 606 on the unaudited condensed consolidated statements of operations for the three months ended January 31, 2019:

8



 
As reported under ASC 606
 
Adjustments
 
Adjusted under ASC 605
 
(in thousands, except per share amounts)
Revenue:
 
 
 
 
 
    Time-based products
$
553,716

 
$
15,856

 
$
569,572

    Upfront products
130,513

 
(16,786
)
 
113,727

    Maintenance and service
136,172

 
(21,414
)
 
114,758

Total revenue
820,401

 
(22,344
)
 
798,057

Cost of Revenue:
 
 
 
 


    Products
116,620

 

 
116,620

    Maintenance and service
58,829

 

 
58,829

Amortization of intangible assets
17,443

 

 
17,443

Total cost of revenue
192,892

 

 
192,892

Gross margin
627,509

 
(22,344
)
 
605,165

Operating expenses:
 
 
 
 


Research and development
271,326

 

 
271,326

    Sales and marketing
155,959

 
11,184

 
167,143

General and administrative
42,061

 

 
42,061

Amortization of intangible assets
10,784

 

 
10,784

Restructuring
(35
)
 

 
(35
)
Total operating expenses
480,095

 
11,184

 
491,279

Operating income
147,414

 
(33,528
)
 
113,886

Other income (expense), net
(359
)
 

 
(359
)
Income (loss) before provision for income taxes
147,055

 
(33,528
)
 
113,527

Provision (benefit) for income taxes
(6,459
)
 
(5,670
)
 
(12,129
)
Net income (loss)
$
153,514

 
$
(27,858
)
 
$
125,656

Net income (loss) per share:
 
 
 
 

    Basic
$
1.03

 
$
(0.19
)
 
$
0.84

    Diluted
$
1.01

 
$
(0.19
)
 
$
0.82

Shares used in computing per share amounts:
 
 
 
 

    Basic
149,288

 
 
 
149,288

    Diluted
152,661

 
 
 
152,661

Statements of Cash Flows

Adoption of ASC 606 had no impact to cash from or used in operating, financing, or investing activities on the unaudited condensed consolidated cash flows statements.
Revenue Policy
The core principle of ASC 606 is to recognize revenue for the transfer of services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or products. The principle is achieved through the following five-step approach:
Identification of the contract, or contracts, with the customer
Identification of the performance obligation in the contract
Determination of the transaction price 
Allocation of the transaction price to the performance obligations in the contract 
Recognition of revenue when, or as, the Company satisfies a performance obligation 
Nature of Products and Services
The Company generates revenue from the sale of products that include software licenses and, to a lesser extent,

9



hardware products, maintenance and services. The various types are set forth below.
Electronic Design Automation
Software license revenue consists of fees associated with the licensing of the Company's software primarily through Technology Subscription License (TSL) contracts. TSLs are time-based licenses for a finite term and generally provide the customer with limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. The majority of the Company's arrangements are TSLs due to the nature of its business and customer requirements. In addition to the licenses, the arrangements also include: post-contract customer support, which includes providing frequent updates and upgrades to maintain the utility of the software due to rapid changes in technology; other intertwined services such as multiple copies of the tools; assisting the Company's customers in applying the Company's technology in the customers' development environment; and rights to remix licenses for other licenses. Payments are generally received in equal or near equal installments over the term of the arrangement. Under ASC 605, these arrangements were qualified to be recognized ratably over the contract terms. Under ASC 606, the Company has concluded that its software licenses in TSL contracts are not distinct from its obligation to provide unspecified software updates to the licensed software throughout the license term. Such updates represent inputs to a single, combined performance obligation, commencing upon the later of the arrangement effective date or transfer of the software license. Remix rights are not an additional promised good or service in the contract, and where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same pattern of transfer to the customer over the duration of the subscription term. 
IP & System Integration
The Company generally licenses IP under nonexclusive license agreements that provide usage rights for specific applications. Additionally, for certain IP license agreements, royalties are collected as customers sell their own products that incorporate the Company’s IP. Under ASC 605, the Company recognized revenue either upfront if certain criteria in ASC 605 were met, or over the contractual period for IP licensing and support arrangements if such arrangements were combined with other TSL arrangements. Under ASC 606, these arrangements generally have two distinct performance obligations that consist of transferring the licensed IP and the support service. Support services consist of a stand-ready obligation to provide technical support and software updates over the support term. Revenue allocated to the IP license is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term. Royalties are recognized as revenue is earned, generally when the customer sells its products that incorporate the Company’s IP. 
Software Integrity Products
Software Integrity product arrangements provide customers the right to software licenses, software updates and technical support. Under the term of these arrangements, the customer expects to receive integral updates to the software licenses that protect the customer’s software from potential security vulnerabilities. The licenses and software updates together serve to fulfill the Company’s commitment to the customer, as they represent inputs to a single, combined performance obligation that commences upon the later of the arrangement effective date or transfer of the software license. Software updates are part of the contract with the customer, and such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer.
Hardware
The Company generally has two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product, which includes embedded software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, including rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at a point in time when the hardware is delivered to the customer. The Company has concluded that control generally transfers upon delivery because the customer has title to the hardware, physical possession of the hardware, and a present obligation to pay for the hardware. The portion of the transaction price allocated to maintenance is recognized as revenue that is ratable over the maintenance term. The adoption of ASC 606 did not change the timing of revenue recognition for hardware products and related services.

10



Professional Services
Our arrangements often include service elements (other than maintenance and support services). These services include training, design assistance, and consulting. Services performed on a time and materials basis are recognized over time, as the customer simultaneously receives and consumes the benefit provided. Certain arrangements also include the customization or modification of licensed IP. Revenue from these contracts is recognized over time as the services are performed, when the development is specific to the customer’s needs and Synopsys has enforceable rights to payment for performance completed. Performance is generally measured using costs incurred or hours expended to measure progress. The Company has a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances, specification and testing requirement changes, and changes in customer delivery priorities. Payments for services are generally due upon milestones in the contract or upon consumption of the hourly resources.
Flexible Spending Accounts
Some customers enter into a non-cancelable Flexible Spending Account arrangement (FSA) whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of Synopsys products or services. These arrangements do not meet the definition of a revenue contract until the customer executes a separate order to identify the required products and services that they are purchasing. The combination of the FSA arrangement and the subsequent order creates enforceable rights and obligations, thus meeting the definition of a revenue contract. Each separate order under the agreement is treated as an individual contract under the new standard and accounted for based on the respective performance obligations included within the FSA arrangements.
Disaggregated Revenue
The following table shows the percentage of revenue by product groups:
 
Three Months Ended 
 January 31,
 
2019
 
2018
EDA
61
%
 
63
%
IP & System Integration
29
%
 
28
%
Software Integrity Products & Services
10
%
 
8
%
Other
%
 
1
%
Total
100
%
 
100
%
Judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together require significant judgment. The Company has concluded that (1) its EDA software licenses in TSL contracts are not distinct from its obligation to provide unspecified software updates to the licensed software throughout the license term, because those promises represent inputs to a single, combined performance obligation, and (2) where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support, because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer. In reaching this conclusion, the Company considered the nature of the obligation to customers which is to provide an ongoing right to use the most up to date and relevant software. As EDA customers operate in a rapidly changing and competitive environment, satisfying the obligation requires providing critical updates to the existing software products, including ongoing iterative interaction with customers to make the software relevant to customers’ ability to meet the time to go to market with advanced products.
Similarly, the Company also concluded that in its Software Integrity business, the licenses and maintenance updates serve together to fulfill the Company’s commitment to the customer as both work together to provide the functionality to the customer and represent a combined performance obligation because the updates are essential to the software’s central utility, which is to identify security vulnerabilities and other threats.


11



Judgment is also required to determine the standalone selling price (SSP) for each distinct performance obligation. For non-software performance obligations (IP, Hardware, and services), SSP is established based on observable prices of products and services sold separately. SSP for license (and related updates and support) in a contract with multiple performance obligations is determined by applying a residual approach whereby all other non-software performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSP, using observable prices, with any residual amount of the transaction price allocated to the license because the Company does not sell the license separately, and the pricing is highly variable.
Contract Balances  
The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables (billed or unbilled), contract assets, or contract liabilities (deferred revenue) on the Company’s unaudited condensed consolidated balance sheet. The Company records a contract asset when revenue is recognized prior to the right to invoice, or deferred revenue when revenue is recognized subsequent to invoicing. For time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers prefer to be invoiced in single or annual amounts. The Company records an unbilled receivable when revenue is recognized and it has an unconditional right to invoice and receive payment.
The contract assets indicated below are presented as prepaid and other current assets in the unaudited condensed consolidated balance sheet. The contract assets are transferred to receivables when the rights to invoice and receive payment become unconditional.
Contract balances are as follows:
 
As of January 31, 2019
 
As of October 31, 2018
 
 
 
as adjusted
 
(in thousands)
Contract assets
$
167,729

 
$
126,897

Unbilled receivables
36,922

 
36,699

Deferred revenue
1,325,214

 
1,104,110

During the three months ended January 31, 2019, the Company recognized $487.1 million of revenue that was included in the deferred revenue balance at the beginning of the period, as adjusted for the adoption of ASC 606.
Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $4.3 billion as of January 31, 2019, which includes $432.5 million in non-cancellable FSA commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date. The Company has elected to exclude future sales-based royalty payments from the remaining performance obligations. The contracted unsatisfied performance obligations, excluding non-cancellable FSA, expected to be recognized over the next 12 months is approximately 50%, with the remainder recognized thereafter.
Costs of Obtaining a Contract with Customer
The incremental costs of obtaining a contract with a customer, which consist primarily of direct sales commissions earned upon execution of the contract, are required to be capitalized under ASC 340-40 and amortized over the estimated period over which the benefit is expected to be received. As direct sales commissions paid for renewals are commensurate with the amounts paid for initial contracts, the deferred incremental costs will be recognized over the contract term. Total capitalized direct commission costs as of January 31, 2019 were $95.7 million and are included in other assets in the Company’s unaudited condensed consolidated balance sheet. Amortization of these assets was $12.8 million during the three months ended January 31, 2019 and is included in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations.
Note 3. Goodwill and Intangible Assets
Following the realignment of the Company’s operating segments during the first quarter of fiscal 2019, as described in Note 12. Segment Disclosure, the Company has two reporting units and has assigned assets and liabilities to each of the reporting units based on each unit's operating activities. Previously, the Company operated as a single reporting segment and reporting unit. Goodwill was reallocated to the reporting units using a relative fair value method and assessed for impairment. No impairment of goodwill was identified for any periods presented.

12




Intangible assets as of January 31, 2019 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
773,147

 
$
615,315

 
$
157,832

Customer relationships
358,644

 
214,037

 
144,607

Contract rights intangible
184,260

 
178,614

 
5,646

Trademarks and trade names
42,928

 
23,116

 
19,812

In-process research and development (IPR&D)(1)
1,200

 

 
1,200

Capitalized software development costs
36,556

 
33,466

 
3,090

Total
$
1,396,735

 
$
1,064,548

 
$
332,187

(1)
IPR&D is reclassified to core/developed technology upon completion or is written off upon abandonment.

Intangible assets as of October 31, 2018 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
773,147

 
$
598,956

 
$
174,191

Customer relationships
358,524

 
204,382

 
154,142

Contract rights intangible
183,953

 
177,191

 
6,762

Trademarks and trade names
42,929

 
21,944

 
20,985

In-process research and development (IPR&D)(1)
1,200

 

 
1,200

Capitalized software development costs
35,818

 
32,694

 
3,124

Total
$
1,395,571

 
$
1,035,167

 
$
360,404



13



Amortization expense related to intangible assets consisted of the following:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Core/developed technology
$
16,359

 
$
18,068

Customer relationships
9,580

 
8,563

Contract rights intangible
1,116

 
890

Trademarks and trade names
1,172

 
1,026

Capitalized software development costs(2)
772

 
920

Total
$
28,999

 
$
29,467

(2)
Amortization of capitalized software development costs is included in cost of products revenue in the unaudited condensed consolidated statements of operations.
The following table presents the estimated future amortization of the existing intangible assets as of January 31, 2019:
Fiscal Year
(in thousands)
Remainder of fiscal 2019
$
73,894

2020
78,456

2021
55,954

2022
44,017

2023
29,219

2024 and thereafter
49,447

IPR&D(3)
1,200

Total
$
332,187

(3)
IPR&D assets are amortized over their useful lives upon completion or are written off upon abandonment.

Note 4. Financial Assets and Liabilities
Cash equivalents. The Company classifies time deposits and other investments with original maturities less than three months as cash equivalents.
As of January 31, 2019, the balances of the Company's cash equivalents are:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
122,397

 
$

 
$

 
$

 
$
122,397

Total:
$
122,397

 
$

 
$

 
$

 
$
122,397

(1)
See Note 5. Fair Value Measures for further discussion on fair values of cash equivalents.

14



As of October 31, 2018, the balances of the Company's cash equivalents are:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
165,296

 
$

 
$

 
$

 
$
165,296

Total:
$
165,296

 
$

 
$

 
$

 
$
165,296

(1)
See Note 5. Fair Value Measures for further discussion on fair values of cash equivalents.
Restricted Cash. In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The Company adopted the standard in the first quarter of fiscal 2019 and applied it retrospectively for the periods presented. As required by ASU 2016-18, the Company included amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. All restricted cash is primarily associated with office leases and has no material impact on the Company’s unaudited condensed consolidated statement of cash flows.
The following table provides a reconciliation of cash, cash equivalents and restricted cash included in the unaudited condensed consolidated balance sheets:
 
As of January 31, 2019
 
As of October 31, 2018
 
(in thousands)
Cash and cash equivalents
$
592,305

 
$
723,115

Restricted cash included in Prepaid expenses and other current assets
1,169

 
1,164

Restricted cash included in Other long-term assets
732

 
722

Total cash, cash equivalents and restricted cash
$
594,206

 
$
725,001

Non-marketable equity securities. The Company’s strategic investment portfolio consists of non-marketable equity securities in privately-held companies. The securities accounted for under cost method investments are reported at cost net of impairment losses. Securities accounted for under equity method investments are recorded at cost plus the proportional share of the issuers’ income or loss, which is recorded in the Company’s other income (expense), net. The cost basis of securities sold is based on the specific identification method. Refer to Note 5. Fair Value Measures.
Derivatives. The Company recognizes derivative instruments as either assets or liabilities in the unaudited condensed consolidated balance sheets at fair value and provides qualitative and quantitative disclosures about such derivatives. The Company operates internationally and is exposed to potentially adverse movements in foreign currency exchange rates. The Company enters into hedges in the form of foreign currency forward contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately one month, (3) future billings and revenue on previously shipped orders, and (4) certain future intercompany invoices denominated in foreign currencies.
The duration of forward contracts ranges from approximately one month to 22 months, the majority of which are short-term. The Company does not use foreign currency forward contracts for speculative or trading purposes. The Company enters into foreign exchange forward contracts with high credit quality financial institutions that are rated ‘A’ or above and to date has not experienced nonperformance by counterparties. Further, the Company anticipates continued performance by all counterparties to such agreements.
The assets or liabilities associated with the forward contracts are recorded at fair value in other current assets or accrued liabilities in the unaudited condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the foreign currency forward contract and whether it is designated and qualifies for hedge accounting.

15



Cash Flow Hedging Activities
Certain foreign exchange forward contracts are designated and qualify as cash flow hedges. These contracts have durations of approximately 22 months or less. Certain forward contracts are rolled over periodically to capture the full length of exposure to the Company’s foreign currency risk, which can be up to three years. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on the hedged transactions. The effective portion of gains or losses resulting from changes in fair value of these hedges is initially reported, net of tax, as a component of other comprehensive income (OCI) in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the hedged transactions affect earnings. The Company expects a majority of the hedge balance in OCI to be reclassified to the statements of operations within the next 12 months.
Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in other income (expense), net. The premium/discount component of the forward contracts is recorded to other income (expense), net, and is not included in evaluating hedging effectiveness.
Non-designated Hedging Activities
The Company’s foreign exchange forward contracts that are used to hedge non-functional currency denominated balance sheet assets and liabilities are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying assets and liabilities, which are also recorded in other income (expense), net. The duration of the forward contracts for hedging the Company’s balance sheet exposure is approximately one month.

The Company also has certain foreign exchange forward contracts for hedging certain international revenues and expenses that are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the foreign currency in operating income. The duration of these forward contracts is usually less than one year. The overall goal of the Company’s hedging program is to minimize the impact of currency fluctuations on its net income over its fiscal year.
The effect of the changes in the fair values of non-designated forward contracts is summarized as follows:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Gain (loss) recorded in other income (expense), net
$
(1,900
)
 
$
(1,571
)
The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:
 
As of January 31, 2019
 
As of October 31, 2018
 
(in thousands)
Total gross notional amount
$
1,010,001

 
$
1,135,549

Net fair value
$
(8,244
)
 
$
(18,120
)
The notional amounts for derivative instruments do not represent the amount of the Company’s exposure to market gain or loss. The Company’s exposure to market gain or loss will vary over time as a function of currency exchange rates. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

16



The following table represents the unaudited condensed consolidated balance sheet location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments:
 
Fair values of
derivative instruments
designated as hedging
instruments
 
Fair values of
derivative instruments
not designated as
hedging instruments
 
(in thousands)
As of January 31, 2019
 
 
 
Other current assets
$
5,117

 
$
46

Accrued liabilities
$
13,059

 
$
348

As of October 31, 2018
 
 
 
Other current assets
$
4,771

 
$
131

Accrued liabilities
$
22,890

 
$
132

The following table represents the unaudited condensed consolidated statement of operations location and amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax:
 
Location of gain (loss)
recognized in OCI on
derivatives
 
Amount of gain (loss)
recognized in OCI on
derivatives
(effective portion)
 
Location of
gain (loss)
reclassified from OCI
 
Amount of
gain (loss)
reclassified from
OCI
(effective portion)
 
(in thousands)
Three months ended 
 January 31, 2019
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
(1,208
)
 
Revenue
 
$
164

Foreign exchange contracts
Operating expenses
 
6,675

 
Operating expenses
 
(4,639
)
Total
 
 
$
5,467

 
 
 
$
(4,475
)
Three months ended 
 January 31, 2018
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
(2,626
)
 
Revenue
 
$
1,667

Foreign exchange contracts
Operating expenses
 
15,639

 
Operating expenses
 
3,639

Total
 
 
$
13,013

 
 
 
$
5,306

The following table represents the ineffective portions and portions excluded from effectiveness testing of the hedge gains (losses) for derivative instruments designated as hedging instruments, which are recorded in other income (expense), net:
Foreign exchange contracts
Amount of
gain (loss) recognized
in statement of operations
on derivatives
(ineffective
portion)(1)
 
Amount of gain (loss)
recognized in
statement of operations on
derivatives
(excluded from
effectiveness testing)(2)
 
(in thousands)
For the three months ended January 31, 2019
$
(104
)
 
$
(13
)
For the three months ended January 31, 2018
$
214

 
$
1,100

(1)
The ineffective portion includes forecast inaccuracies.
(2)
The portion excluded from effectiveness testing includes the discount earned or premium paid for the contracts.
Note 5. Fair Value Measures
Accounting standards require an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Accounting standards also establish a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical instruments in active markets;

17



Level 2—Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
On a recurring basis, the Company measures the fair value of certain of its assets and liabilities, which include cash equivalents, non-qualified deferred compensation plan assets, and foreign currency derivative contracts.
The Company’s cash equivalents are classified within Level 1 or Level 2 because they are valued using quoted market prices in an active market or alternative independent pricing sources and models utilizing market observable inputs.
The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets and are therefore classified within Level 1.
The Company’s foreign currency derivative contracts are classified within Level 2 because these contracts are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments.
The Company’s borrowings under its credit and term loan facilities are classified within Level 2 because these borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. Refer to Note 7. Credit Facility for more information on these borrowings.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below as of January 31, 2019:
 
 
 
Fair Value Measurement Using
Description
Total
 
Quoted Prices in 
Active
Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
122,397

 
$
122,397

 
$

 
$

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
5,163

 


 
5,163

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
229,274

 
229,274

 

 

Total assets
$
356,834

 
$
351,671

 
$
5,163

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
13,407

 
$

 
$
13,407

 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
229,274

 
229,274

 

 

Total liabilities
$
242,681

 
$
229,274

 
$
13,407

 
$


18



Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2018:
 
 
 
Fair Value Measurement Using
Description
Total
 
Quoted Prices in 
Active
Markets for  Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
165,296

 
$
165,296

 
$

 
$

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
4,902

 

 
4,902

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
212,165

 
212,165

 

 

Total assets
$
382,363

 
$
377,461

 
$
4,902

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
23,022

 
$

 
$
23,022

 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
212,165

 
212,165

 

 

Total liabilities
$
235,187

 
$
212,165

 
$
23,022

 
$


Assets/Liabilities Measured at Fair Value on a Non-Recurring Basis
Non-Marketable Equity Securities
Equity investments in privately-held companies, also called non-marketable equity securities, are accounted for using either the cost or equity method of accounting.
The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred. In such events, these equity investments would be classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity. The Company monitors these investments and generally uses the income approach to assess impairments based primarily on the financial conditions of these companies.
The Company did not recognize any impairment during the three months ended January 31, 2019 and January 31, 2018.
Note 6. Liabilities and Restructuring Charges
In fiscal 2018, the Company recorded $12.9 million of restructuring charges for severance and benefits due to involuntary employee termination actions. The restructuring actions were undertaken to position the Company for future growth, reallocate resources to priority areas and, to a lesser extent, eliminate operational redundancy. These charges consisted primarily of severance benefits. During the three months ended January 31, 2019, the Company made payments of $6.8 million related to the 2018 employee termination actions. The outstanding balance as of January 31, 2019 was $1.3 million, which is recorded in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets. Payments under the 2018 restructuring plans are anticipated to be completed in fiscal 2019. As of October 31, 2018, there was an $8.1 million outstanding balance remaining in accounts payable and accrued liabilities in the consolidated balance sheets.

19



Accounts payable and accrued liabilities consist of:
 
As of January 31, 2019
 
As of October 31, 2018
 
(in thousands)
Payroll and related benefits
$
241,897

 
$
413,307

Other accrued liabilities
67,425

 
79,973

Accounts payable
26,019

 
85,046

Total
$
335,341

 
$
578,326

Other long-term liabilities consist of:
 
As of January 31, 2019
 
As of October 31, 2018
 
(in thousands)
Deferred compensation liability
$
229,274

 
$
212,165

Other long-term liabilities
66,824

 
53,395

Total
$
296,098

 
$
265,560

Note 7. Credit Facility
In July 2018, the Company entered into a 220.0 million RMB (approximately $33.0 million) credit agreement with a lender in China to support its facilities expansion. Borrowings bear interest at a floating rate based on the Chinese Central Bank rate plus 10% of such rate. As of January 31, 2019, the Company had $10.8 million outstanding under the agreement.
On November 28, 2016, the Company entered into an amended and restated credit agreement with several lenders (the Credit Agreement) providing for (i) a $650.0 million senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0 million senior unsecured term loan facility (the Term Loan). The Credit Agreement amended and restated the Company’s previous credit agreement dated May 19, 2015 (the 2015 agreement), in order to increase the size of the revolving credit facility from $500.0 million to $650.0 million, provide a new $150.0 million senior unsecured term loan facility, and to extend the termination date of the revolving credit facility from May 19, 2020 to November 28, 2021. Subject to obtaining additional commitments from lenders, the principal amount of the loans provided under the Credit Agreement may be increased by the Company by up to an additional $150.0 million. The Credit Agreement contains financial covenants requiring the Company to operate within a maximum leverage ratio and a minimum interest coverage ratio, as well as other non-financial covenants. As of January 31, 2019, the Company was in compliance with all financial covenants.
As of January 31, 2019, the Company had $131.0 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $116.3 million was classified as long-term liabilities. Outstanding principal payments under the Term Loan are due as follows:
Fiscal year
(in thousands)
Remainder of fiscal 2019
$
11,250

2020
17,813

2021
27,187

2022
75,000

Total
$
131,250

As of October 31, 2018, the Company had $133.8 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $120.0 million was classified as long-term liabilities, and $330.0 million outstanding balance under the Revolver.
The total outstanding balance of the Revolver as of January 31, 2019 was $400.0 million, which was included in short-term liabilities. The Company expects its borrowings under the Revolver will fluctuate from quarter to quarter. Borrowings bear interest at a floating rate based on a margin over the Company’s choice of market observable base rates as defined in the Credit Agreement. As of January 31, 2019, borrowings under the Term Loan bore interest at LIBOR +1.125% and the applicable interest rate for the Revolver was LIBOR +1.000%. In addition,

20



commitment fees are payable on the Revolver at rates between 0.125% and 0.200% per year based on the Company’s leverage ratio on the daily amount of the revolving commitment.
The carrying amount of the short-term and long-term debt approximates the estimated fair value. These borrowings under the Credit Agreement have a variable interest rate structure and are classified within Level 2 of the fair value hierarchy.
Note 8. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
 
As of January 31, 2019
 
As of October 31, 2018
 
(in thousands)
Cumulative currency translation adjustments
$
(83,906
)
 
$
(89,289
)
Unrealized gain (loss) on derivative instruments, net of taxes
(13,946
)
 
(23,888
)
Total accumulated other comprehensive income (loss)
$
(97,852
)
 
$
(113,177
)
The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income was as follows:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Reclassifications from accumulated other comprehensive income (loss) into unaudited condensed consolidated statement of operations:
 
 
 
Gain (loss) on cash flow hedges, net of taxes
 
 
 
Revenues
$
164

 
$
1,667

Operating expenses
(4,639
)
 
3,639

Gain (loss) on available-for-sale securities
 
 
 
Other income (expense)

 
(4
)
Total reclassifications into net income
$
(4,475
)
 
$
5,302


Note 9. Stock Repurchase Program
The Company’s Board of Directors (the Board) previously approved a stock repurchase program pursuant to which the Company was authorized to purchase up to $500.0 million of its common stock, and has periodically replenished the stock repurchase program to such amount. The Board replenished the stock repurchase program up to $500.0 million on April 5, 2018. The program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated at any time by the Company's Chief Financial Officer or the Board. The Company repurchases shares to offset dilution caused by ongoing stock issuances from existing equity plans for equity compensation awards and issuances related to acquisitions, and when management believes it is a good use of cash. Repurchases are transacted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and may be made through any means including, but not limited to, open market purchases, plans executed under Rule 10b5-1(c) of the Exchange Act and structured transactions. As of January 31, 2019, $295.8 million remained available for further repurchases under the program.

21



Stock repurchase activities are as follows:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Total shares repurchased(1)
346

 
1,987

Total cost of the repurchased shares
$
29,185

 
$
180,000

Reissuance of treasury stock
357

 
495

(1)
The first quarter of fiscal 2018 includes the settlement of the $20.0 million equity forward contract related to the Company's accelerated share repurchase agreement entered into in September 2017.
Note 10. Stock Compensation
The compensation cost recognized in the unaudited condensed consolidated statements of operations for the Company’s stock compensation arrangements was as follows:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Cost of products
$
4,126

 
$
3,383

Cost of maintenance and service
1,459

 
1,247

Research and development expense
18,304

 
15,396

Sales and marketing expense
7,272

 
6,621

General and administrative expense
7,299

 
5,676

Stock compensation expense before taxes
38,460

 
32,323

Income tax benefit
(6,449
)
 
(6,038
)
Stock compensation expense after taxes
$
32,011

 
$
26,285

As of January 31, 2019, there was $249.7 million of unamortized share-based compensation expense relating to options and restricted stock units and awards, which is expected to be amortized over a weighted-average period of approximately 2.4 years.
The intrinsic values of equity awards exercised during the periods are as follows:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Intrinsic value of awards exercised
$
8,152

 
$
18,775

Note 11. Net Income (Loss) per Share
The Company computes basic net income (loss) per share by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the dilution from potential common shares outstanding, such as stock options and unvested restricted stock units and awards, during the period using the treasury stock method.

22



The table below reconciles the weighted-average common shares used to calculate basic net income (loss) per share with the weighted-average common shares used to calculate diluted net income (loss) per share:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands, except per share amounts)
Numerator:
 
 
 
Net income (loss)
$
153,514

 
$
(3,691
)
Denominator:
 
 
 
Weighted-average common shares for basic net income (loss) per share
149,288

 
149,441

Dilutive effect of potential common shares from equity-based compensation
3,373

 

Weighted-average common shares for diluted net income (loss) per share
152,661

 
149,441

Net income (loss) per share:
 
 
 
Basic
$
1.03

 
$
(0.02
)
Diluted
$
1.01

 
$
(0.02
)
Anti-dilutive employee stock-based awards excluded(1)
1,601

 
4,627


(1)
These employee stock-based awards were anti-dilutive for the respective periods and are excluded in calculating diluted net income (loss) per share. While such awards were anti-dilutive for the respective periods, they could be dilutive in the future.
Note 12. Segment Disclosure
Certain disclosures are required for operating segments, products and services, geographic areas of operation and major customers. Segment reporting is based upon the “management approach,” i.e., how management organizes the Company’s operating segments for which separate financial information is (1) available and (2) evaluated regularly by the Chief Operating Decision Makers (CODMs) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are its two co-Chief Executive Officers.
In prior periods, the Company operated in a single segment. Effective in fiscal 2019, the Company realigned its business to evaluate the results of its Software Integrity business separately from the Company’s traditional EDA and semiconductor IP business. The CODMs now regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. The Company’s historical results have been recast to retrospectively reflect the change from one to two reportable segments.
As a result of the change in reporting structure, financial information provided to and used by the CODMs to assist in making operational decisions, allocating resources, and assessing performance reflects consolidated financial information as well as revenue, adjusted operating income, and adjusted operating margin information for the Semiconductor & System Design and Software Integrity segments, accompanied by disaggregated information relating to revenues by geographic region.

23



Information by reportable segment was as follows:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Total Segments:
 
 
 
Revenues
$
820,401

 
$
769,426

Adjusted operating income
200,952

 
195,946

Adjusted operating margin
24
%
 
25
 %
Semiconductor & System Design:
 
 
 
Revenues
$
737,906

 
$
705,333

Adjusted operating income
195,317

 
199,116

Adjusted operating margin
26
%
 
28
 %
Software Integrity:
 
 
 
Revenues
$
82,495

 
$
64,093

Adjusted operating income
5,635

 
(3,170
)
Adjusted operating margin
7
%
 
(5
)%
Certain operating expenses are not allocated to the segments and are managed at a consolidated level. The unallocated expenses managed at a consolidated level, including amortization of intangible assets, stock compensation and other operating expenses, are presented in the table below to provide a reconciliation of the total adjusted operating income from segments to the Company's consolidated operating income:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Total segment adjusted operating income
$
200,952

 
$
195,946

Reconciling items:
 
 
 
Amortization of intangible expense
(28,227
)
 
(28,547
)
Stock-based compensation expense
(38,460
)
 
(32,323
)
Other
13,149

 
(27,358
)
Total operating income
$
147,414

 
$
107,718

The CODMs do not use total assets by segment to evaluate segment performance or allocate resources. As a result, total assets by segment are not required to be disclosed.
Revenue by Geography
The CODMs consider where individual “seats” or licenses to the Company’s products are located in allocating revenue to particular geographic areas. Revenue is defined as revenues from external customers. Revenues related to operations in the United States and other geographic areas were: 

24



 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Revenue:
 
 
 
United States
$
407,799

 
$
384,574

Europe
83,886

 
85,465

Japan
65,073

 
68,389

Asia-Pacific and Other
263,643

 
230,998

Consolidated
$
820,401

 
$
769,426

Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and the Company’s methodology.
For the three months ended January 31, 2019 and 2018, one customer, including its subsidiaries, through multiple agreements accounted for greater than 10% of the Company's total revenues.

Note 13. Other Income (Expense), net
The following table presents the components of other income (expense), net:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Interest income
$
1,565

 
$
1,636

Interest expense
(4,554
)
 
(2,843
)
Gain (loss) on assets related to executive deferred compensation plan assets
4,289

 
13,440

Foreign currency exchange gain (loss)
(416
)
 
(1,019
)
Other, net
(1,243
)
 
1,171

Total
$
(359
)
 
$
12,385

Note 14. Taxes
Effective Tax Rate
The Company estimates its annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account the Company's estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and possible outcomes of audits.
The following table presents the provision (benefit) for income taxes and the effective tax rates:
 
Three Months Ended 
 January 31,
 
2019
 
2018
 
(in thousands)
Income before income taxes
$
147,055

 
$
120,103

Provision (benefit) for income taxes
$
(6,459
)
 
$
123,794

Effective tax rate
(4.4
)%
 
103.1
%
The Tax Cuts and Jobs Act (Tax Act), enacted on December 22, 2017, lowered the statutory federal corporate income tax rate from 35% to 21% effective on January 1, 2018. Beginning in the Company's fiscal 2019, the annual statutory federal corporate tax rate is 21%.
The Company’s effective tax rate for the three months ended January 31, 2019 is lower than the statutory federal corporate tax rate of 21.0% primarily due to U.S. federal and California research credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, and a decrease in unrecognized foreign tax benefits, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings.

25



The Company's effective tax rate decreased in the three months ended January 31, 2019 as compared to the same period in fiscal 2018, primarily due to accounting for the effects of the enactment of the Tax Act in fiscal 2018, offset by the benefit resulting from a decrease in unrecognized foreign tax benefits.

The Tax Act includes certain new tax provisions listed below in the first quarter of fiscal 2019.
A tax on global intangible low-tax income (GILTI), which is determined annually based on the Company’s aggregate foreign subsidiaries’ income in excess of certain qualified business asset investment return. In the first quarter of fiscal 2019, the Company adopted an accounting policy to account for the tax effects of GILTI in the period that it is subject to such tax.
A base erosion and anti-abuse tax (BEAT), which functions as a minimum tax that partially disallows deductions for certain related party transactions and certain tax credits.
A special tax deduction for foreign-derived intangible income (FDII), which, in general, allows a deduction of certain intangible income earned in the U.S. and derived from foreign sources.

In the first quarter of 2019, the U.S. Treasury Department issued proposed regulations that could impact the calculation of taxes related to these provisions. While the Company continues to evaluate the potential impact on its estimated annual tax rate, such regulations have not been finalized and are subject to change.

On July 27, 2015, the United States Tax Court (Tax Court) issued an opinion (Altera Corp. et al. v. Commissioner) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. In view of the Tax Court opinion, the Company amended its cost-sharing arrangement effective February 1, 2016 to exclude stock-based compensation expense on a prospective basis and has reflected the corresponding benefits in its income tax expense for fiscal year 2016, 2017 and 2018. On July 24, 2018, the United States Court of Appeals for the Ninth Circuit reversed the decision of the Tax Court, however, subsequently withdrew the decision on August 7, 2018. A rehearing of the case was held on October 16, 2018, but a decision has not yet been issued. As the final resolution with respect to historical cost-sharing of stock-based compensation, and the potential impact on the Company, is unclear, the Company is recording no impact at this time and will continue to monitor developments related to this opinion and the potential impact of those developments on the Company's prior fiscal years. The Company's intercompany cost-sharing arrangement was terminated at the end of fiscal 2018 as part of a tax restructuring.

The timing of the resolution of income tax examinations is highly uncertain, as are the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $21 million. In addition, a settlement or changes in guidance could result in changes to the Company's valuation allowance.
Intra-Entity Transfers of Assets
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory. This ASU was adopted on the first day of fiscal 2019. As a result of the adoption, the Company recorded a decrease of approximately $130.5 million in retained earnings as of the beginning of the period of adoption, with a corresponding decrease in prepaid taxes related to the unamortized tax expense attributed to intra-entity transfers of assets other than inventory previously deferred. The Company will recognize the income tax consequences of new intra-entity transfers of assets other than inventory in the consolidated statement of income in the period when the transaction takes place.
Non-U.S. Examinations

In July 2017, the Hungarian Tax Authority (HTA) issued a final assessment against the Company’s Hungarian subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA has applied withholding taxes on certain payments made to affiliates, resulting in an aggregate tax assessment of approximately $25.0 million and interest and penalties of $11.0 million (at current exchange rates). On August 2, 2017, Synopsys Hungary filed a claim contesting the final assessment with the Hungarian Administrative Court. In the first quarter of fiscal 2018,

26



Synopsys Hungary paid the assessments, penalties and interest as required by law and recorded these amounts as prepaid taxes on its balance sheet, while continuing its challenge to the assessment through the Hungarian Administrative Court. Another court hearing is scheduled for February 26, 2019. If the Company ultimately prevails in the case, the assessment of $25.0 million and associated interest and penalties would be canceled.  

In the fourth quarter of 2018, the Company made significant changes to its international tax structure by transferring intangible assets between certain foreign subsidiaries, including its Hungarian subsidiary. In the first quarter of fiscal 2019, the Company received a ruling from the Hungarian authorities, which provided guidance on determining the tax associated with the gain recognized on the transfer, resulting in a benefit of $22.8 million recognized in the first quarter of fiscal 2019.

In the first quarter of fiscal 2019, the Company reached final settlement with Taiwanese tax authorities for fiscal year 2017 and recognized $5.5 million in previously unrecognized tax benefits.

The Company is also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.
Note 15. Contingencies
Legal Proceedings
The Company is subject to routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of its business. The ultimate outcome of any litigation is often uncertain and unfavorable outcomes could have a negative impact on the Company’s results of operations and financial condition. The Company regularly reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount is estimable, the Company accrues a liability for the estimated loss. Legal proceedings are inherently uncertain and as circumstances change, it is possible that the amount of any accrued liability may increase, decrease, or be eliminated.
The Company has determined that, except as set forth below, no disclosure of estimated loss is required for a claim against the Company because: (1) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (2) a reasonably possible loss or range of loss cannot be estimated; or (3) such estimate is immaterial.
In March 2017, Siemens PLM Software (Siemens) acquired Mentor. On June 29, 2018, the Company, Siemens and Mentor settled all outstanding patent litigation between the Company and Mentor for a $65.0 million payment made from the Company to Mentor. The settlement included mutual seven-year patent cross-licenses between the Company and Siemens, and between the Company and Mentor. The Company and Mentor also amended an existing interoperability agreement to collaborate on a wide range of EDA products for the benefit of their mutual customers. The amendment includes a one-time termination charge between $0.0 and $25.0 million, payable to Mentor under certain conditions. As of January 31, 2019, there has been no change to the status of the contingent charges.
Tax Matters
The Company undergoes examination from time to time by U.S. and foreign authorities for non-income based taxes, such as sales, use and value-added taxes, and is currently under examination by tax authorities in certain jurisdictions. If the potential loss from such examinations is considered probable and the amount or the range of loss could be estimated, the Company would accrue a liability for the estimated expense.
In addition to the foregoing, the Company is, from time to time, party to various other claims and legal proceedings in the ordinary course of its business, including with tax and other governmental authorities. For a description of certain of these other matters, refer to Note 14. Taxes.

27



Note 16. Effect of New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)," which supersedes the lease requirements in "Leases (Topic 840)." This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the consolidated balance sheets. This ASU also makes minor changes to lessor accounting and aligns with the new revenue recognition guidance. This ASU will be effective for fiscal 2020, including interim periods within that reporting period, and earlier adoption is permitted. The Company is currently evaluating its lease portfolio and the impact of adoption is expected to be material to the consolidated balance sheets.

28



Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the “safe harbor” created by those sections. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “could,” “would,” “can,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project,” “continue,” "forecast," or the negatives of such terms, and similar expressions, are intended to identify forward-looking statements. Without limiting the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements concerning expected growth in the semiconductor and electronics industries, the effects of consolidation among our customers and within the industries in which we operate, our business outlook, our business model, our growth strategy, the ability of our prior acquisitions to drive revenue growth, the sufficiency of our cash, cash equivalents and cash generated from operations, our future liquidity requirements, and other statements that involve certain known and unknown risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those identified below in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. The information included herein represents our estimates and assumptions as of the date of this filing. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. All subsequent written or oral forward-looking statements attributable to Synopsys or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that attempt to advise interested parties of the risks and factors that may affect our business.
The following summary of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report and with our audited consolidated financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018, as filed with the SEC on December 17, 2018.
Overview
Business Summary
Synopsys, Inc. provides products and services used by designers across the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the security and quality of their code. We are a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. We also offer semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, we provide technical services and support to help our customers develop advanced chips and electronic systems. We are also a leading provider of software tools and services that improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials.
Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help these companies overcome the challenges of developing increasingly advanced electronics products while also helping them reduce their design and manufacturing costs. While our products are an important part of our customers’ development process, our sales could be affected based on their research and development budgets, and our customers' spending decisions may be affected by their business outlook and willingness to invest in new and increasingly complex chip designs. In addition, a number of consolidations have taken place in the semiconductor and electronics industries over the past several years. While we do not believe customer consolidations have had a material impact on our results, the future impact of potential consolidation remains uncertain. For a discussion of potential risks, please see the risk factor titled “Consolidation among our customers and within the industries in which we operate, as well as our dependence on a relatively small number of large customers, may negatively impact our operating results” in Part II, Item 1A. Risk Factors.
Our Software Integrity business delivers products and services that enable software developers to test their code - while it is being written - for known security vulnerabilities, quality defects, as well as testing for open source security vulnerabilities and license compliance. Our Software Integrity customers are software developers across many industries, including but also well beyond the semiconductor and systems industries. Our Software Integrity products and services form a platform that helps our customers build security into the software development lifecycle and across the entire cyber supply chain.
Despite global economic uncertainty, we have consistently grown our revenue since 2005. We achieved these results not only because of our solid execution, leading technologies and strong customer relationships, but also because of our time-based revenue business model. Under this model, a substantial majority of our customers pay over time and we typically recognize this revenue over the life of the contract, which averages approximately three years. Time-based revenue consists of time-based products, maintenance and service revenue. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. Due to our business model, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.
Our growth strategy is based on (1) building on our leadership in our EDA products, (2) expanding and proliferating our IP offerings, and (3) driving growth in the software security and quality market. As we continue to expand our product portfolio and our total addressable market, for instance in the software security and quality space, and as hardware product sales grow, we expect to experience increased variability in our total revenue. In addition, due to our adoption of ASC 606 in fiscal 2019, as further described in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements, the way in which we are required to account for certain types of arrangements will increase the variability in our total revenue from period to period. We expect approximately 80% to 85% of non-hardware revenue to be time-based, or recognized over time. The accounting impact of ASC 606 has not affected our cash generation or changed the way we operate our business. Based on our leading technologies, customer relationships, business model, diligent expense management, and acquisition strategy, we believe that we will continue to execute our strategies successfully.
Business Segments
Effective in fiscal 2019, we realigned our business to evaluate the results of our Software Integrity business separately from our traditional EDA and semiconductor IP business. The CODMs now regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. Our historical results have been recast to retrospectively reflect the change from one to two reportable segments.
As a result of the change in reporting structure, financial information provided to and used by the CODMs to assist in making operational decisions, allocating resources and assessing performance reflects consolidated financial information as well as revenue, adjusted operating income, and adjusted operating margin for the Semiconductor & System Design and Software Integrity segments, accompanied by disaggregated information relating to revenues by geographic region.
Semiconductor & System Design. This segment includes our advanced silicon design, verification products and services, and semiconductor IP portfolio, which encompasses products and services that serve companies primarily in the semiconductor and electronics industries. EDA includes digital, custom and Field Programmable Gate Array (FPGA) IC design software, verification products, and manufacturing software products. A large number of our EDA products are used by designers to automate the complex IC design process. For IP, we are a leading provider of high-quality, silicon-proven IP solutions for system-on-chips (SoCs). This includes IP that has been optimized to address specific application requirements for the mobile, automotive, digital home, internet of things, and cloud computing markets, enabling designers to quickly develop SoCs in these areas.
Software Integrity. This segment includes a broad portfolio of products and services such as leading testing technologies, automated analysis, and consulting experts. Beginning in fiscal 2019, we expect to deliver a secure, integrated platform that unites these elements to provide an even more valuable way for developers to better develop personalized approaches for open source license compliance and detect and remediate known security vulnerabilities and quality defects early in the development process, thereby minimizing risk and maximizing productivity.
Fiscal Year End
Our fiscal year ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that every five or six years, we have a 53-week year. When a 53-week year occurs, we include the additional week in the first

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quarter to realign fiscal quarters with calendar quarters. Fiscal 2019 is a 52-week year and will end on November 2, 2019. Fiscal 2018 was a 53-week year and ended on November 3, 2018.
Our results of operations for the first quarters of fiscal 2019 and 2018 included 13 weeks and 14 weeks, respectively, and ended on February 2, 2019 and February 3, 2018, respectively. The extra week in the first quarter of fiscal 2018 resulted in approximately $46 million of additional revenue, and approximately $34 million of additional expenses. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Financial Performance Summary
We adopted new revenue guidance, ASC 606, at the beginning of fiscal 2019 under the modified retrospective method which has limited the comparability of prior year results in revenue and commission expense. The comparative information for periods prior to the fiscal quarter ended January 31, 2019 has not been restated. For comparability, refer to Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for the adoption of ASC 606 and our pro-forma financial results under ASC 605 for the fiscal quarter ended January 31, 2018.
In the first quarter of fiscal 2019, compared to the same period of fiscal 2018:
Revenues were $820.4 million, an increase of $51.0 million, or 7%, primarily due to our continued growth both organically and through prior year acquisitions. Fiscal 2018 included an extra week that added approximately $46 million of revenue to the first fiscal quarter of 2018.
Total cost of revenue and operating expenses were $673.0 million, an increase of $11.3 million, or 2%, primarily due to increases in employee-related costs, resulting from increases in headcount to support business growth and headcount from prior year acquisitions. The increase in total cost of revenue and operating expenses was partially offset by a legal settlement of $18.3 million.
Operating income was $147.4 million, an increase of $39.7 million or 37%.
Benefit for income taxes was $6.5 million compared to provision for income taxes of $123.8 million, primarily driven by charges related to the enactment of the Tax Act in the first quarter of fiscal 2018.
ASC 606 impact increased our net income by $27.9 million.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial results under the heading “Results of Operations” below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with U.S. GAAP. In preparing these financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.
The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, are:
Revenue recognition;
Business combinations; and
Income taxes
Revenue Recognition

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Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We have concluded that our EDA software licenses in TSL contracts are not distinct from our obligation to provide unspecified software updates to the licensed software throughout the license term, because those promises represent inputs to a single, combined performance obligation. Where unspecified additional software product rights are part of the contract with the customer, those rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support, because such rights are provided during the same period of time and have the same time-based pattern of transfer to the customer. In reaching this conclusion, we considered the nature of our obligation to customers which is to provide an ongoing right to use the most up to date and relevant software. As EDA customers operate in a rapidly changing and competitive environment, satisfying the obligation requires providing critical updates to the existing software products, including ongoing iterative interaction with customers to make the software relevant to the customers’ ability to meet the time to go to market with advanced products.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include, but are not limited to:
future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;
historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;
the expected use of the acquired assets; and
discount rates.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities.
Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service (IRS) and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from such examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our Unaudited Condensed Consolidated Financial Statements.

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Results of Operations
We adopted new revenue guidance, ASC 606, at the beginning of fiscal 2019 under the modified retrospective method, which has limited the comparability of prior year results in revenue and commission expense. The comparative information for periods prior to the fiscal quarter ended January 31, 2019 has not been restated. For comparability, refer to Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for the adoption of ASC 606 and our pro-forma financial results under ASC 605 for the fiscal quarter ended January 31, 2018.
Revenue
Our revenues are generated from two business segments: the Semiconductor & System Design segment and the Software Integrity segment. Refer to Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information about our reportable segments and revenue by geographic regions.
Further disaggregation of the revenues into various products and services within these two segments is summarized as follows:
Semiconductor & System Design Segment
This segment is comprised of the following:
EDA software includes digital, custom and Field Programmable Gate Array (FPGA) IC design software, verification products and obligations to provide unspecified updates and support services. EDA products and services are typically sold through TSL arrangements that grant customers the right to access and use all of the licensed products at the outset of an arrangement and software updates are generally made available throughout the entire term of the arrangement, which is typically three years. Under ASC 606, we have concluded that the software licenses in TSL contracts are not distinct from the obligation to provide unspecified software updates to the licensed software throughout the license term, because the multiple software licenses represent inputs to a single, combined offering, and timely, relevant software updates are integral to maintaining the utility of the software licenses. We recognize revenue for the combined performance obligation under TSL contracts ratably over the term of the license. Under ASC 605, these arrangements were recognized ratably over the contract term.
IP & System Integration includes our DesignWare® IP portfolio and system-level products and services. Under ASC 606, these arrangements generally have two performance obligations which consist of transferring of the licensed IP and providing related support, which includes rights to technical support and software updates that are provided over the support term and are transferred to the customer over a time. Revenue allocated to the IP licenses is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support is recognized over the support term. Royalties are recognized as revenue in the quarter in which the applicable customer sells its products that incorporate our IP. Payments for IP contracts are generally received upon delivery of the IP. Revenue related to the customization of certain IP is recognized as “Professional Services.” Under ASC 605, we recognized revenues ratably for certain IP licensing and support arrangements.
In the case of Hardware products, we generally have two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product, which includes software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, which includes rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at the time of delivery because the customer obtains control of the product at that point in time. We have concluded that control generally transfers at that point in time because the customer has title to the hardware, physical possession, and a present obligation to pay for the hardware. The portion of the transaction price allocated to the maintenance obligation is recognized as revenue ratably over the maintenance term. The adoption of ASC 606 did not change the timing of revenue recognition for hardware products.
Revenue from Professional Service contracts is recognized over time, generally using costs incurred or hours expended to measure progress. We have a history of reasonably estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing

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requirement changes. The adoption of ASC 606 did not change from ASC 605 the timing of revenue recognition for professional services.
Software Integrity Segment
We sell Software Integrity products in arrangements that provide customers the right to software licenses, maintenance updates and technical support. Over the term of these arrangements, the customer expects us to provide integral maintenance updates to the software licenses, which help customer’s protect their own software from new critical quality defects and potential security vulnerabilities. The licenses and maintenance updates serve together to fulfill our commitment to the customer as both work together to provide the functionality to the customer and represent a combined performance obligation. We will recognize revenue for the combined performance obligation over the term of the arrangement.
Most of our customer arrangements are complex, involving hundreds of products and various license rights, and our customers bargain with us over many aspects of these arrangements. For example, they often demand a broader portfolio of solutions, support and services and seek more favorable terms such as expanded license usage, future purchase rights and other unique rights at an overall lower total cost. No single factor typically drives our customers’ buying decisions, and we compete on all fronts to serve customers in a highly competitive market. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes.
Total Revenue
 
January 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
 
 
 
 
 
 
 
Semiconductor & System Design Segment
$
737.9

 
$
705.3

 
$
32.6

 
5
%
Software Integrity Segment
82.5

 
64.1

 
18.4

 
29
%
Total
$
820.4

 
$
769.4

 
$
51.0

 
7
%
The overall growth of our business, including contributions from acquisitions, has been the primary driver of the increase in our revenue. Our revenues are subject to fluctuations, primarily due to customer requirements, including payment terms and the timing and value of contract renewals. For example, we experience variability in our revenue due to factors such as the timing of IP consulting projects, royalties, variability in hardware sales, and due to certain contracts where revenue is recognized when customer installment payments are due. As revenue from hardware sales is recognized upfront, customer demand and timing requirements for such hardware may result in increased variability of our total revenue.
The increase in total revenue for the three months ended January 31, 2019 compared to the same period in fiscal 2018 was primarily attributable to the overall growth in our business, partially offset an extra week of approximately $46 million additional revenues. The increase was primarily due to higher business growth in all product levels, partially offset by one extra week of revenue in the first quarter of fiscal 2018 and lower time-based license revenue recognized under new revenue standard ASC 606.
Time-Based Products Revenue
 
January 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
553.7

 
$
570.9

 
$
(17.2
)
 
(3
)%
Percentage of total revenue
67
%
 
74
%
 

 

The decrease in time-based products revenue for the three months ended January 31, 2019 compared to the same period in fiscal 2018 was primarily attributable to the impact of the extra week in the first quarter of fiscal 2018, and the $15.9 million impact of revenue recognized under ASC 606. The decrease was partially offset by an increase in TSL license revenue due to arrangements booked in prior periods.

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Upfront Products Revenue
 
January 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
130.5

 
$
91.6

 
$
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