filings.toolsItem 1. Financial Statements
115K characters. Original on sec.gov · Markdown
Item 1. Financial Statements
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
| July 31, 2022 | October 31, 2021* | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,383,559 | $ | 1,432,840 | |||||||
| Short-term investments | 147,599 | 147,949 | |||||||||
| Total cash, cash equivalents and short-term investments | 1,531,158 | 1,580,789 | |||||||||
| Accounts receivable, net | 682,647 | 568,501 | |||||||||
| Inventories | 219,736 | 229,023 | |||||||||
| Prepaid and other current assets | 465,487 | 430,028 | |||||||||
| Total current assets | 2,899,028 | 2,808,341 | |||||||||
| Property and equipment, net | 486,872 | 472,398 | |||||||||
| Operating lease right-of-use assets, net | 574,501 | 493,251 | |||||||||
| Goodwill | 3,854,889 | 3,575,785 | |||||||||
| Intangible assets, net | 404,652 | 279,132 | |||||||||
| Deferred income taxes | 617,429 | 612,655 | |||||||||
| Other long-term assets | 492,176 | 510,698 | |||||||||
| Total assets | $ | 9,329,547 | $ | 8,752,260 | |||||||
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | 736,099 | $ | 741,191 | |||||||
| Operating lease liabilities, current | 54,170 | 79,678 | |||||||||
| Deferred revenue | 1,755,594 | 1,517,623 | |||||||||
| Short-term debt | — | 74,992 | |||||||||
| Total current liabilities | 2,545,863 | 2,413,484 | |||||||||
| Operating lease liabilities, non-current | 592,930 | 487,003 | |||||||||
| Long-term deferred revenue | 164,964 | 136,303 | |||||||||
| Long-term debt | 21,960 | 25,094 | |||||||||
| Other long-term liabilities | 352,188 | 391,433 | |||||||||
| Total liabilities | 3,677,905 | 3,453,317 | |||||||||
| Redeemable non-controlling interest | 43,516 | — | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding | — | — | |||||||||
| Common stock, $0.01 par value: 400,000 shares authorized; 153,004 and 153,062 shares outstanding, respectively | 1,530 | 1,531 | |||||||||
| Capital in excess of par value | 1,415,244 | 1,576,363 | |||||||||
| Retained earnings | 5,377,586 | 4,549,713 | |||||||||
| Treasury stock, at cost: 4,257 and 4,198 shares, respectively | (1,034,841) | (782,866) | |||||||||
| Accumulated other comprehensive income (loss) | (155,493) | (49,604) | |||||||||
| Total Synopsys stockholders’ equity | 5,604,026 | 5,295,137 | |||||||||
| Non-controlling interest | 4,100 | 3,806 | |||||||||
| Total stockholders’ equity | 5,608,126 | 5,298,943 | |||||||||
| Total liabilities, redeemable non-controlling interest and stockholders’ equity | $ | 9,329,547 | $ | 8,752,260 |
*Derived from audited financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Time-based products | $ | 754,322 | $ | 665,563 | $ | 2,185,626 | $ | 1,945,647 | |||||||||||||||
| Upfront products | 268,584 | 203,301 | 973,483 | 586,798 | |||||||||||||||||||
| Maintenance and service | 224,860 | 188,266 | 638,141 | 519,329 | |||||||||||||||||||
| Total revenue | 1,247,766 | 1,057,130 | 3,797,250 | 3,051,774 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Products | 164,077 | 127,592 | 480,166 | 389,677 | |||||||||||||||||||
| Maintenance and service | 87,774 | 65,604 | 253,665 | 202,210 | |||||||||||||||||||
| Amortization of intangible assets | 19,330 | 11,870 | 47,145 | 35,164 | |||||||||||||||||||
| Total cost of revenue | 271,181 | 205,066 | 780,976 | 627,051 | |||||||||||||||||||
| Gross margin | 976,585 | 852,064 | 3,016,274 | 2,424,723 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 444,826 | 371,146 | 1,218,761 | 1,090,959 | |||||||||||||||||||
| Sales and marketing | 199,246 | 171,428 | 571,329 | 514,810 | |||||||||||||||||||
| General and administrative | 91,461 | 83,846 | 246,426 | 234,028 | |||||||||||||||||||
| Amortization of intangible assets | 7,124 | 8,570 | 23,036 | 25,273 | |||||||||||||||||||
| Restructuring charges | — | 15,151 | 12,057 | 15,151 | |||||||||||||||||||
| Total operating expenses | 742,657 | 650,141 | 2,071,609 | 1,880,221 | |||||||||||||||||||
| Operating income | 233,928 | 201,923 | 944,665 | 544,502 | |||||||||||||||||||
| Other income (expense), net | 2,426 | 11,414 | (41,280) | 61,934 | |||||||||||||||||||
| Income before income taxes | 236,354 | 213,337 | 903,385 | 606,436 | |||||||||||||||||||
| Provision for income taxes | 16,708 | 14,945 | 76,506 | 51,214 | |||||||||||||||||||
| Net income | $ | 219,646 | $ | 198,392 | $ | 826,879 | $ | 555,222 | |||||||||||||||
| Net income (loss) attributed to non-controlling interest and redeemable non-controlling interest | (2,980) | (254) | (4,215) | (847) | |||||||||||||||||||
| Net income attributed to Synopsys | $ | 222,626 | $ | 198,646 | $ | 831,094 | $ | 556,069 | |||||||||||||||
| Net income per share attributed to Synopsys: | |||||||||||||||||||||||
| Basic | $ | 1.46 | $ | 1.30 | $ | 5.43 | $ | 3.64 | |||||||||||||||
| Diluted | $ | 1.43 | $ | 1.27 | $ | 5.31 | $ | 3.54 | |||||||||||||||
| Shares used in computing per share amounts: | |||||||||||||||||||||||
| Basic | 152,938 | 152,635 | 153,082 | 152,619 | |||||||||||||||||||
| Diluted | 155,806 | 156,907 | 156,545 | 157,158 |
See accompanying notes to unaudited condensed consolidated financial statements.
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | 219,646 | $ | 198,392 | $ | 826,879 | $ | 555,222 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Change in foreign currency translation adjustment | (23,378) | (5,905) | (63,989) | 8,857 | |||||||||||||||||||
| Changes in unrealized gains (losses) on available-for-sale securities, net of tax of $0 for periods presented | (1) | 15 | (1,674) | 15 | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Deferred gains (losses), net of tax $6,780 and $16,191, for the three and nine months ended July 31, 2022, respectively, and of $(909) and $(1,876) for each of the same periods in fiscal 2021, respectively. | (19,051) | 3,664 | (41,769) | 8,971 | |||||||||||||||||||
| Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(28) and $(499), for the three and nine months ended July 31, 2022, respectively, and of $1,460 and $3,808 for each of the same periods in fiscal 2021, respectively. | 36 | (4,830) | 1,543 | (12,180) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | (42,394) | (7,056) | (105,889) | 5,663 | |||||||||||||||||||
| Comprehensive income | 177,252 | 191,336 | 720,990 | 560,885 | |||||||||||||||||||
| Less: net income (loss) attributed to non-controlling interest and redeemable non-controlling interest | (2,980) | (254) | (4,215) | (847) | |||||||||||||||||||
| Comprehensive income attributed to Synopsys | $ | 180,232 | $ | 191,590 | $ | 725,205 | $ | 561,732 |
See accompanying notes to unaudited condensed consolidated financial statements.
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 April 30, 2022 | 152,955 | $ | 1,530 | $ | 1,517,481 | $ | 5,157,633 | $ | (999,234) | $ | (113,099) | $ | 5,564,311 | $ | 3,119 | $ | 5,567,430 | ||||||||||||||||||||||||||||||||||||
| Net income | 222,626 | 222,626 | (307) | 222,319 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | (42,394) | (42,394) | (42,394) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (715) | (8) | 8 | (217,266) | (217,266) | (217,266) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity forward contract, net | (40,000) | (40,000) | (40,000) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued, net of shares withheld for employee taxes | 764 | 8 | (188,562) | 181,659 | (6,895) | (6,895) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 126,317 | 126,317 | 1,288 | 127,605 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments to redeemable non-controlling interest | (2,673) | (2,673) | (2,673) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 31, 2022 | 153,004 | $ | 1,530 | $ | 1,415,244 | $ | 5,377,586 | $ | (1,034,841) | $ | (155,493) | $ | 5,604,026 | $ | 4,100 | $ | 5,608,126 | ||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2021 | 153,062 | $ | 1,531 | $ | 1,576,363 | $ | 4,549,713 | $ | (782,866) | $ | (49,604) | $ | 5,295,137 | $ | 3,806 | $ | 5,298,943 | ||||||||||||||||||||||||||||||||||||
| Net income | 831,094 | 831,094 | (994) | 830,100 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | (105,889) | (105,889) | (105,889) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (2,400) | (24) | 24 | (752,266) | (752,266) | (752,266) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity forward contract, net | (5,000) | (5,000) | (5,000) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued, net of shares withheld for employee taxes | 2,342 | 23 | (488,292) | 500,291 | 12,022 | 12,022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 332,149 | 332,149 | 1,288 | 333,437 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments to redeemable non-controlling interest | (3,221) | (3,221) | (3,221) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 31, 2022 | 153,004 | $ | 1,530 | $ | 1,415,244 | $ | 5,377,586 | $ | (1,034,841) | $ | (155,493) | $ | 5,604,026 | $ | 4,100 | $ | 5,608,126 | ||||||||||||||||||||||||||||||||||||
| 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 April 30, 2021 | 152,554 | $ | 1,526 | $ | 1,679,801 | $ | 4,149,620 | $ | (701,457) | $ | (41,355) | $ | 5,088,135 | $ | 4,370 | $ | 5,092,505 | ||||||||||||||||||||||||||||||||||||
| Net income | 198,646 | 198,646 | (254) | 198,392 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | (7,056) | (7,056) | (7,056) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (521) | (5) | 5 | (140,000) | (140,000) | (140,000) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity forward contract, net | (35,000) | (35,000) | (35,000) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued, net of shares withheld for employee taxes | 564 | 5 | (122,988) | 84,116 | (38,867) | (38,867) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 85,162 | 85,162 | 85,162 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 31, 2021 | 152,597 | $ | 1,526 | $ | 1,606,980 | $ | 4,348,266 | $ | (757,341) | $ | (48,411) | $ | 5,151,020 | $ | 4,116 | $ | 5,155,136 | ||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2020 | 152,618 | $ | 1,528 | $ | 1,653,166 | $ | 3,795,397 | $ | (488,613) | $ | (54,074) | $ | 4,907,404 | $ | 4,963 | $ | 4,912,367 | ||||||||||||||||||||||||||||||||||||
| Net income | 556,069 | 556,069 | (847) | 555,222 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Retained earnings adjustment due to adoption of ASC 326(1) | (3,200) | (3,200) | (3,200) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | 5,663 | 5,663 | 5,663 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (2,114) | (21) | 21 | (538,082) | (538,082) | (538,082) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity forward contract, net | (35,000) | (35,000) | (35,000) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued, net of shares withheld for employee taxes | 2,093 | 19 | (259,737) | 269,354 | 9,636 | 9,636 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 248,530 | 248,530 | 248,530 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 31, 2021 | 152,597 | $ | 1,526 | $ | 1,606,980 | $ | 4,348,266 | $ | (757,341) | $ | (48,411) | $ | 5,151,020 | $ | 4,116 | $ | 5,155,136 |
*(*1) At the beginning of fiscal 2021, we adopted the Accounting Standards Codification (ASC) 326, Measurement of Credit Losses on Financial Instruments, issued by the Financial Accounting Standards Board (FASB). ASC 326 replaced the incurred loss methodology with an expected loss methodology.
See accompanying notes to unaudited condensed consolidated financial statements.
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income attributed to Synopsys | $ | 831,094 | $ | 556,069 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Amortization and depreciation | 169,708 | 151,274 | |||||||||
| Reduction of operating lease right-of-use assets | 65,980 | 64,920 | |||||||||
| Amortization of capitalized costs to obtain revenue contracts | 54,438 | 46,973 | |||||||||
| Stock-based compensation | 333,437 | 248,530 | |||||||||
| Allowance for credit losses | (4,516) | 13,813 | |||||||||
| Deferred income taxes | 5,843 | (33,116) | |||||||||
| Other non-cash | 6,141 | 2,936 | |||||||||
| Net changes in operating assets and liabilities, net of acquired assets and liabilities: | |||||||||||
| Accounts receivable | (121,786) | 188,996 | |||||||||
| Inventories | 118 | (51,448) | |||||||||
| Prepaid and other current assets | (56,075) | (62,201) | |||||||||
| Other long-term assets | (20,058) | (117,922) | |||||||||
| Accounts payable and accrued liabilities | (46,356) | 51,991 | |||||||||
| Operating lease liabilities | (66,187) | (61,666) | |||||||||
| Income taxes | (60,739) | (29,414) | |||||||||
| Deferred revenue | 254,353 | 152,328 | |||||||||
| Net cash provided by operating activities | 1,345,395 | 1,122,063 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sales and maturities of short-term investments | 70,847 | 1,128 | |||||||||
| Purchases of short-term investments | (73,330) | (146,082) | |||||||||
| Proceeds from sales of long-term investments | 582 | — | |||||||||
| Purchases of long-term investments | (7,000) | (7,591) | |||||||||
| Purchases of property and equipment | (102,934) | (66,957) | |||||||||
| Cash paid for acquisitions, net of cash acquired | (416,323) | (164,053) | |||||||||
| Capitalization of software development costs | (1,970) | (1,517) | |||||||||
| Other | (1,200) | (800) | |||||||||
| Net cash used in investing activities | (531,328) | (385,872) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayment of debt | (76,838) | (21,637) | |||||||||
| Issuances of common stock | 161,416 | 113,976 | |||||||||
| Payments for taxes related to net share settlement of equity awards | (149,130) | (104,291) | |||||||||
| Purchase of equity forward contract | (40,000) | (35,000) | |||||||||
| Purchases of treasury stock | (717,266) | (538,082) | |||||||||
| Other | (3,413) | (4,375) | |||||||||
| Net cash used in financing activities | (825,231) | (589,409) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (38,155) | 2,985 | |||||||||
| Net change in cash, cash equivalents and restricted cash | (49,319) | 149,767 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 1,435,183 | 1,237,970 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 1,385,864 | $ | 1,387,737 |
See accompanying notes to unaudited condensed consolidated financial statements.
SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys, we, our or us) provides products and services used across the entire Silicon to Software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the security and quality of their code.
We are a global leader in 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. We also provide technical services and support to help our customers develop advanced chips and electronic systems. These products and services are part of our Semiconductor & System Design segment.
We are also a leading provider of software tools and services that improve the security, quality and compliance of software in a wide variety of industries, including electronics, financial services, automotive, medicine, energy and industrials. These tools and services are part of our Software Integrity segment.
Note 2. Summary of Significant Accounting Policies
We have 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, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our unaudited condensed consolidated balance sheets, results of operations, comprehensive income, stockholders’ equity and cash flows. Our 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 our Annual Report on Form 10-K for the fiscal year ended October 31, 2021 as filed with the SEC on December 13, 2021 (our Annual Report).
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 our operating results and financial position.
Principles of Consolidation. The unaudited condensed consolidated financial statements include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated.
Fiscal Year End. Our fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, we have a 53-week year. When a 53-week year occurs, we include the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2022 and 2021 are both 52-week years. Fiscal 2022 will end on October 29, 2022. Fiscal 2021 ended on October 30, 2021. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Significant Accounting Policies. There have been no material changes to our significant accounting policies included in our Annual Report, other than our accounting policy for redeemable non-controlling interest*.*
Redeemable Non-controlling Interest. Non-controlling interest that is not solely redeemable within our control is reported as the temporary equity in our unaudited condensed consolidated balance sheets. The carrying value of the redeemable non-controlling interest equals the redemption value at the end of each reporting period, after giving effect to the change from the net income (loss) attributable to the redeemable non-controlling interest. We adjust the redemption value of the non-controlling interest on a quarterly basis and changes in the estimated redemption value are recorded with corresponding adjustments against retained earnings.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. We adopted the standard as of the beginning of fiscal 2022 on a prospective basis and the adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. We early adopted the standard in the second quarter of fiscal 2022 and the adoption had no material impact on our unaudited condensed consolidated financial statements for acquisitions completed in the first two quarters of fiscal 2022. The adoption of ASU 2021-08 resulted in the recognition of deferred revenue at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value for the business acquisition completed in the third quarter of fiscal 2022. See Note 4. Business Combinations for further information.
Recently Issued Accounting Pronouncements
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (ASU 2022-03), which applies to all equity securities measured at fair value that are subject to contractual sale restrictions. This change prohibits entities from taking into account contractual restrictions on the sale of equity securities when estimating fair value and introduces required disclosures for such transactions. The standard will become effective for us beginning on November 1, 2024 and should be applied prospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our unaudited condensed consolidated financial statements.
Note 3. Revenue
Disaggregated Revenue
The following table showed the percentage of revenue by product groups:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| EDA | 50.0 | % | 55.8 | % | 49.9 | % | 56.2 | % | |||||||||||||||
| IP & System Integration | 39.7 | % | 34.4 | % | 40.7 | % | 34.2 | % | |||||||||||||||
| Software Integrity Products & Services | 9.5 | % | 9.3 | % | 8.9 | % | 9.3 | % | |||||||||||||||
| Other | 0.8 | % | 0.5 | % | 0.5 | % | 0.3 | % | |||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Contract Balances
The contract assets indicated below are presented as prepaid and other current assets in the unaudited condensed consolidated balance sheets. The contract assets are transferred to receivables when the rights to invoice and receive payment become unconditional. Unbilled receivables are presented as accounts receivable, net, in the unaudited condensed consolidated balance sheets.
Contract balances were as follows:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Contract assets, net | $ | 280,507 | $ | 284,574 | |||||||
| Unbilled receivables | $ | 41,863 | $ | 35,589 | |||||||
| Deferred revenue | $ | 1,920,558 | $ | 1,653,926 |
During the three and nine months ended July 31, 2022, we recognized revenue of $171.2 million and $1.1 billion, respectively, that was included in the deferred revenue balance as of October 31, 2021.
Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $7.1 billion as of July 31, 2022, which includes $998.1 million in non-cancellable Flexible Spending Account (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. We have elected to exclude future sales-based royalty payments from the remaining performance obligations. Approximately 42% of the contracted but unsatisfied or partially unsatisfied performance obligations as of July 31, 2022, excluding non-cancellable FSA, are expected to be recognized over the next 12 months, with the remainder recognized thereafter.
During the three and nine months ended July 31, 2022, we recognized $33.9 million and $103.5 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods. During the three and nine months ended July 31, 2021, we recognized $27.9 million and $88.7 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods.
Costs of Obtaining a Contract with Customer
Capitalized commission costs, net of accumulated amortization, as of July 31, 2022 were $105.0 million and included in other long-term assets in our unaudited condensed consolidated balance sheets. Amortization of these assets was $19.9 million and $54.4 million during the three and nine months ended July 31, 2022, respectively, and included in sales and marketing expense in our unaudited condensed consolidated statements of income. Amortization of these assets was $16.5 million and $47.0 million during the three and nine months ended July 31, 2021, respectively, and included in sales and marketing expense in our unaudited condensed consolidated statements of income.
Note 4. Business Combinations
On June 22, 2022, we completed the acquisition of all outstanding shares of NTT Security AppSec Solutions Inc. (which has operated under the name WhiteHat Security, or WhiteHat), a provider of dynamic application security testing solutions, from NTT Security Corporation for an aggregate purchase price of $330.1 million in cash. With this acquisition, we have broadened our product offering in the application security testing market.
Preliminary Purchase Price Allocation
The aggregate purchase consideration was preliminarily allocated as follows:
| (in thousands) | ||||||||
| Total purchase consideration | $ | 330,112 | ||||||
| Less: cash acquired | 22,849 | |||||||
| Total purchase consideration, net of cash acquired | $ | 307,263 | ||||||
| Allocations | ||||||||
| Goodwill | $ | 247,734 | ||||||
| Intangible assets | 97,500 | |||||||
| Deferred revenue | (40,367) | |||||||
| Other tangible assets, net | 2,396 | |||||||
| $ | 307,263 | |||||||
The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of WhiteHat. The $247.7 million of goodwill was assigned to the Software Integrity reporting unit and the amount recognized was not deductible for tax purposes. The acquired identifiable intangible assets of $97.5 million were valued using the income or cost approach. The intangible assets are being amortized over their respective useful lives ranging from 5 to 10 years.
Other Fiscal 2022 Acquisitions
During the three months ended January 31, 2022, we completed an acquisition for purchase consideration of $20.0 million, net of cash acquired. The preliminary purchase price was allocated as follows: $4.3 million to identifiable intangible assets and $15.7 million to goodwill, which were attributable to the Semiconductor & System Design reporting unit. There was no tax-deductible goodwill related to the acquisition.
During the three months ended April 30, 2022, we acquired 75% equity interest in OpenLight Photonics, Inc. (OpenLight) for cash consideration of $90.0 million. The remaining 25% equity interest in OpenLight is held by Juniper Networks, Inc. (the Minority Investor) from their contribution of IP and certain tangible assets.
The agreement with the Minority Investor contains redemption features whereby the interest held by the Minority Investor is redeemable either (i) at the option of the Minority Investor on or after the third anniversary of the acquisition or sooner in certain circumstances or (ii) at our option beginning on the third anniversary of the acquisition. This option is exercisable at the greater of fair value at the time of redemption or $30.0 million and was valued at $10.1 million, resulting in a total consideration of $100.1 million.
The preliminary purchase price was allocated as follows: $94.0 million to identifiable intangible assets and $45.1 million to goodwill, which were attributable to the Semiconductor & System Design reporting unit. The goodwill was mainly attributable to the assembled workforce and planned growth in new markets. There was no tax-deductible goodwill related to the acquisition.
From the date of acquisition through July 31, 2022, OpenLight incurred a net loss of $12.9 million, of which $3.2 million was attributable to redeemable non-controlling interest. As of July 31, 2022, the carrying amount of the redeemable non-controlling interest was recorded at its estimated fair value of $43.5 million in the unaudited condensed consolidated balance sheets.
We have included the financial results of these acquisitions in our unaudited condensed consolidated financial statements from the date of acquisition. We do not consider these acquisitions to be material, individually or in the aggregate, to our unaudited condensed consolidated financial statements.
Preliminary Fair Value Estimates
For all acquisitions completed, the purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management at the time of acquisition. These estimates and assumptions are subject to change as additional information becomes available during the respective measurement period, which is not expected to exceed 12 months from applicable acquisition date.
Acquisition-Related Transaction Costs
Transaction costs were $5.2 million and $11.3 million during the three and nine months ended July 31, 2022, respectively. Transaction costs were $5.7 million and $11.6 million during the three and nine months ended July 31, 2021, respectively. These costs mainly consisted of professional fees and administrative costs and were expensed as incurred in our unaudited condensed consolidated statements of income.
Note 5. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the nine months ended July 31, 2022 were as follows:
| (in thousands) | |||||
| Balance at October 31, 2021 | $ | 3,575,785 | |||
| Additions | 308,532 | ||||
| Adjustments | 1,285 | ||||
| Effect of foreign currency translation | (30,713) | ||||
| Balance at July 31, 2022 | $ | 3,854,889 |
During the nine months ended July 31, 2022, we finalized certain estimates impacting total purchase consideration for certain acquisitions and recorded the resulting measurement period adjustments which increased goodwill.
Intangible Assets
Intangible assets as of July 31, 2022 consisted of the following:
| Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Core/developed technology | $ | 1,078,103 | $ | 793,937 | $ | 284,166 | |||||||||||
| Customer relationships | 423,739 | 328,459 | 95,280 | ||||||||||||||
| Contract rights intangible | 191,430 | 188,524 | 2,906 | ||||||||||||||
| Trademarks and trade names | 52,795 | 33,157 | 19,638 | ||||||||||||||
| Capitalized software development costs | 48,068 | 45,406 | 2,662 | ||||||||||||||
| Total | $ | 1,794,135 | $ | 1,389,483 | $ | 404,652 |
Intangible assets as of October 31, 2021 consisted of the following:
| Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Core/developed technology | $ | 911,903 | $ | 748,759 | $ | 163,144 | |||||||||||
| Customer relationships | 404,571 | 308,355 | 96,216 | ||||||||||||||
| Contract rights intangible | 193,317 | 188,231 | 5,086 | ||||||||||||||
| Trademarks and trade names | 43,095 | 31,155 | 11,940 | ||||||||||||||
| Capitalized software development costs | 46,098 | 43,352 | 2,746 | ||||||||||||||
| Total | $ | 1,598,984 | $ | 1,319,852 | $ | 279,132 |
Amortization expense related to intangible assets consisted of the following:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Core/developed technology | $ | 18,603 | $ | 11,431 | $ | 45,180 | $ | 33,416 | |||||||||||||||
| Customer relationships | 6,322 | 7,960 | 20,819 | 23,443 | |||||||||||||||||||
| Contract rights intangible | 727 | 439 | 2,180 | 1,748 | |||||||||||||||||||
| Trademarks and trade names | 802 | 610 | 2,002 | 1,830 | |||||||||||||||||||
| Capitalized software development costs(1) | 619 | 1,010 | 2,052 | 3,120 | |||||||||||||||||||
| Total | $ | 27,073 | $ | 21,450 | $ | 72,233 | $ | 63,557 |
(1) Amortization of capitalized software development costs is included in cost of products revenue in the unaudited condensed consolidated statements of income.
The following table presented the estimated future amortization of intangible assets as of July 31, 2022:
| Fiscal year | (in thousands) | ||||
| Remainder of fiscal 2022 | $ | 26,960 | |||
| 2023 | 98,039 | ||||
| 2024 | 86,748 | ||||
| 2025 | 70,102 | ||||
| 2026 | 57,677 | ||||
| 2027 and thereafter | 65,126 | ||||
| Total | $ | 404,652 |
Note 6. Balance Sheets Components
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Other long-term assets: | |||||||||||
| Deferred compensation plan assets | $ | 295,415 | $ | 343,820 | |||||||
| Capitalized commission, net | 105,036 | 92,249 | |||||||||
| Other long-term assets | 91,725 | 74,629 | |||||||||
| Total | $ | 492,176 | $ | 510,698 | |||||||
| Accounts payable and accrued liabilities: | |||||||||||
| Payroll and related benefits | $ | 522,041 | $ | 581,687 | |||||||
| Other accrued liabilities | 142,060 | 132,091 | |||||||||
| Accounts payable | 71,998 | 27,413 | |||||||||
| Total | $ | 736,099 | $ | 741,191 | |||||||
| Other long-term liabilities: | |||||||||||
| Deferred compensation plan liabilities | $ | 295,413 | $ | 343,820 | |||||||
| Other long-term liabilities | 56,775 | 47,613 | |||||||||
| Total | $ | 352,188 | $ | 391,433 |
Note 7. Financial Assets and Liabilities
Short-term investments. Gross unrealized gains and losses on our available-for-sale debt securities as of July 31, 2022 were not significant. The stated maturities of our available-for-sale debt securities as of July 31, 2022 were as follows:
| Amortized Cost | Fair Value | ||||||||||
| (in thousands) | |||||||||||
| less than 1 year | $ | 72,253 | $ | 71,567 | |||||||
| 1-5 years | 71,480 | 70,403 | |||||||||
| 5-10 years | 4,176 | 4,102 | |||||||||
| >10 years | 1,610 | 1,527 | |||||||||
| Total | $ | 149,519 | $ | 147,599 |
As of July 31, 2022, the balances of our cash equivalents and short-term investments were as follows:
| 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 | $ | 94,796 | $ | — | $ | — | $ | — | $ | 94,796 | |||||||||||||||||||
| Total: | $ | 94,796 | $ | — | $ | — | $ | — | $ | 94,796 | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||
| U.S. government agency & T-bills | $ | 19,917 | $ | 6 | $ | (117) | $ | — | $ | 19,806 | |||||||||||||||||||
| Municipal bonds | 3,105 | — | (79) | — | 3,026 | ||||||||||||||||||||||||
| Corporate debt securities | 98,318 | 30 | (1,289) | (108) | 96,951 | ||||||||||||||||||||||||
| Asset-backed securities | 28,179 | 1 | (328) | (36) | 27,816 | ||||||||||||||||||||||||
| Total: | $ | 149,519 | $ | 37 | $ | (1,813) | $ | (144) | $ | 147,599 | |||||||||||||||||||
*(1)*See Note 8. Fair Value Measurements for further discussion on fair values of cash equivalents and short-term investments.
As of October 31, 2021, the balances of our cash equivalents and short-term investments were as follows:
| 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 | $ | 172,934 | $ | — | $ | — | $ | — | $ | 172,934 | |||||||||||||||||||
| Total: | $ | 172,934 | $ | — | $ | — | $ | — | $ | 172,934 | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||
| U.S. government agency & T-bills | $ | 6,447 | $ | — | $ | (5) | $ | — | $ | 6,442 | |||||||||||||||||||
| Municipal bonds | 4,588 | — | (12) | — | 4,576 | ||||||||||||||||||||||||
| Corporate debt securities | 103,615 | 7 | (170) | — | 103,452 | ||||||||||||||||||||||||
| Asset-backed securities | 33,545 | 6 | (72) | — | 33,479 | ||||||||||||||||||||||||
| Total: | $ | 148,195 | $ | 13 | $ | (259) | $ | — | $ | 147,949 | |||||||||||||||||||
*(1)*See Note 8. Fair Value Measurements for further discussion on fair values of cash equivalents and short-term investments.
Restricted cash. We include 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 unaudited condensed consolidated statements of cash flows. Restricted cash is primarily associated with office leases.
The following table provided a reconciliation of cash, cash equivalents and restricted cash included in the unaudited condensed consolidated balance sheets:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash and cash equivalents | $ | 1,383,559 | $ | 1,432,840 | |||||||
| Restricted cash included in prepaid and other current assets | 1,594 | 1,560 | |||||||||
| Restricted cash included in other long-term assets | 711 | 783 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 1,385,864 | $ | 1,435,183 |
Non-marketable equity securities. Our portfolio of non-marketable equity securities consists of strategic investments in privately held companies. There were no impairments of non-marketable equity securities during the three and
nine months ended July 31, 2022. There were no impairments of non-marketable equity securities during the three and nine months ended July 31, 2021.
Derivatives
We recognize derivative instruments as either assets or liabilities in the unaudited condensed consolidated balance sheets at fair value and provide qualitative and quantitative disclosures about such derivatives. We operate internationally and are exposed to potentially adverse movements in foreign currency exchange rates. We enter into hedges in the form of foreign currency forward contracts to reduce our 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, the majority of which are short-term, ranges from approximately 1 month to 27 months at inception. We do not use foreign currency forward contracts for speculative or trading purposes. We enter into foreign exchange forward contracts with high credit quality financial institutions that are rated "A" or above and to date have not experienced nonperformance by counterparties. In addition, we mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty and anticipate 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. The cash flow impact upon settlement of the derivative contracts will be included in net cash provided by operating activities in the unaudited condensed consolidated statements of cash flows.
Cash Flow Hedging Activities
Certain foreign exchange forward contracts are designated and qualify as cash flow hedges. These contracts have durations of approximately 27 months or less. Certain forward contracts are rolled over periodically to capture the full length of exposure to our 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 related 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 (loss) (OCI) in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the hedged transactions affect earnings. We expect a minority of the hedge balance in OCI to be reclassified to the statements of income within the next 12 months.
We did not record any gains or losses related to discontinuation of cash flow hedges during the nine months ended July 31, 2022 and 2021.
Non-designated Hedging Activities
Our 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 our balance sheet exposure is approximately one month.
We also have 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 our hedging program is to minimize the impact of currency fluctuations on the net income over the fiscal year.
The effects of the non-designated derivative instruments on our unaudited condensed consolidated statements of income were summarized as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Gains (losses) recorded in other income (expense), net | $ | (5,182) | $ | (837) | $ | (10,443) | $ | 1,420 |
The notional amounts in the table below for derivative instruments provided one measure of the transaction volume outstanding:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Total gross notional amounts | $ | 1,295,726 | $ | 1,176,152 | |||||||
| Net fair value | $ | (13,289) | $ | 13,404 |
Our exposure to the market gains or losses 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.
The following table represented the unaudited condensed consolidated balance sheets 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) | |||||||||||
| Balance at July 31, 2022 | |||||||||||
| Other current assets | $ | 11,232 | $ | 1,510 | |||||||
| Accrued liabilities | $ | 25,975 | $ | 55 | |||||||
| Balance at October 31, 2021 | |||||||||||
| Other current assets | $ | 15,455 | $ | 17 | |||||||
| Accrued liabilities | $ | 2,027 | $ | 42 |
The following table represented the location of the amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax in the unaudited condensed consolidated statements of income:
| Location of gains (losses) recognized in OCI on derivatives | Amount of gains (losses) recognized in OCI on derivatives (effective portion) | Location of gains (losses) reclassified from OCI | Amount of gains (losses) reclassified from OCI (effective portion) | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Three months ended July 31, 2022 | |||||||||||||||||||||||
| Foreign exchange contracts | Revenue | $ | (4,702) | Revenue | $ | 3,651 | |||||||||||||||||
| Foreign exchange contracts | Operating expenses | (14,349) | Operating expenses | (3,687) | |||||||||||||||||||
| Total | $ | (19,051) | $ | (36) | |||||||||||||||||||
| Three months ended July 31, 2021 | |||||||||||||||||||||||
| Foreign exchange contracts | Revenue | $ | 251 | Revenue | $ | 1,563 | |||||||||||||||||
| Foreign exchange contracts | Operating expenses | 3,413 | Operating expenses | 3,267 | |||||||||||||||||||
| Total | $ | 3,664 | $ | 4,830 | |||||||||||||||||||
| Nine months ended July 31, 2022 | |||||||||||||||||||||||
| Foreign exchange contracts | Revenue | $ | (12,527) | Revenue | $ | 3,309 | |||||||||||||||||
| Foreign exchange contracts | Operating expenses | (29,242) | Operating expenses | (4,852) | |||||||||||||||||||
| Total | $ | (41,769) | $ | (1,543) | |||||||||||||||||||
| Nine months ended July 31, 2021 | |||||||||||||||||||||||
| Foreign exchange contracts | Revenue | $ | 1,892 | Revenue | $ | 2,597 | |||||||||||||||||
| Foreign exchange contracts | Operating expenses | 7,079 | Operating expenses | 9,583 | |||||||||||||||||||
| Total | $ | 8,971 | $ | 12,180 |
Note 8. Fair Value Measurements
ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes guidelines and enhances disclosure requirements for fair value measurements. The accounting guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance also establishes 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;
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, we measure the fair value of certain of our assets and liabilities, which include cash equivalents, non-qualified deferred compensation plan assets, and foreign currency derivative contracts.
Our cash equivalents and short-term investments 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.
Our 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.
Our 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.
Our borrowings under the 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 for our debt with similar terms and maturities. See Note 10. Credit and Term Loan Facilities for more information on these borrowings.
Assets/Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis were summarized below as of July 31, 2022:
| 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 | $ | 94,796 | 94,796 | ||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. government agency & T-bills | 19,806 | 19,806 | |||||||||||||||||||||
| Municipal bonds | 3,026 | 3,026 | |||||||||||||||||||||
| Corporate debt securities | 96,951 | 96,951 | |||||||||||||||||||||
| Asset-backed securities | 27,816 | 27,816 | |||||||||||||||||||||
| Prepaid and other current assets: | |||||||||||||||||||||||
| Foreign currency derivative contracts | 12,742 | 12,742 | |||||||||||||||||||||
| Other long-term assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 295,415 | 295,415 | |||||||||||||||||||||
| Total assets | $ | 550,552 | $ | 390,211 | $ | 160,341 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Accounts payable and accrued liabilities: | |||||||||||||||||||||||
| Foreign currency derivative contracts | $ | 26,031 | $ | 26,031 | |||||||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Deferred compensation plan liabilities | 295,413 | 295,413 | |||||||||||||||||||||
| Total liabilities | $ | 321,444 | $ | 295,413 | $ | 26,031 | $ | — |
Assets and liabilities measured at fair value on a recurring basis were summarized below as of October 31, 2021:
| 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 | $ | 172,934 | $ | 172,934 | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. government agency & T-bills | 6,442 | 6,442 | |||||||||||||||||||||
| Municipal bonds | 4,576 | 4,576 | |||||||||||||||||||||
| Corporate debt securities | 103,452 | 103,452 | |||||||||||||||||||||
| Asset-backed securities | 33,479 | 33,479 | |||||||||||||||||||||
| Prepaid and other current assets: | |||||||||||||||||||||||
| Foreign currency derivative contracts | 15,472 | 15,472 | |||||||||||||||||||||
| Other long-term assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 343,820 | 343,820 | |||||||||||||||||||||
| Total assets | $ | 680,175 | $ | 516,754 | $ | 163,421 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Accounts payable and accrued liabilities: | |||||||||||||||||||||||
| Foreign currency derivative contracts | $ | 2,068 | $ | 2,068 | |||||||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Deferred compensation plan liabilities | 343,820 | 343,820 | |||||||||||||||||||||
| Total liabilities | $ | 345,888 | $ | 343,820 | $ | 2,068 | $ | — |
Assets/Liabilities Measured at Fair Value on a Non-Recurring Basis
Non-Marketable Equity Securities
Non-marketable equity securities are classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market due to the absence of market price and inherent lack of liquidity.
Note 9. Restructuring Charges
In the third quarter of fiscal 2021, we initiated a restructuring plan for involuntary and voluntary employee termination and facility closure actions as part of a business reorganization (the 2021 Plan).
The 2021 Plan was substantially completed in the first quarter of fiscal 2022 and the total charges under the 2021 Plan were $45.5 million. During the three months ended July 31, 2022, we made payments of $0.9 million under the 2021 Plan. As of July 31, 2022, the outstanding restructuring related liabilities were immaterial and recorded in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.
Note 10. Credit and Term Loan Facilities
On January 22, 2021, we entered into a Fourth Extension and Amendment Agreement (the Fourth Amendment), which amended and restated our previous credit agreement, dated as of November 28, 2016 (as amended and restated, the Credit Agreement). Our outstanding borrowings under the previous credit agreement, which as of January 22, 2021 consisted of term loans in the aggregate principal amount of $97.5 million, were carried over under the Credit Agreement and fully repaid on November 26, 2021.
The Fourth Amendment extended the termination date of the existing $650.0 million senior unsecured revolving credit facility (the Revolver) from November 28, 2021 to January 22, 2024, which could be further extended at our option. The Credit Agreement also provides an uncommitted incremental loan facility of up to $150 million in the aggregate principal amount. The Credit Agreement contains financial covenants requiring us to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, as well as other non-financial covenants. As of July 31, 2022, we were in compliance with all financial covenants.
There was no outstanding balance under the Revolver as of July 31, 2022 and October 31, 2021. We expect our borrowings, if any, under the Revolver will fluctuate from quarter to quarter. Borrowings bear interest at a floating rate based on a margin over our choice of market observable base rates as defined in the Credit Agreement. As of July 31, 2022, Revolver bore interest at LIBOR +1.000%. In addition, commitment fees are payable on the Revolver at rates between 0.125% and 0.200% per year based on our leverage ratio on the daily amount of the revolving commitment.
In July 2018, we entered into a 12-year 220.0 million Renminbi (approximately $33.0 million) credit agreement with a lender in China to support our facilities expansion. Borrowings bear interest at a floating rate based on the 5 year Loan Prime Rate plus 0.74%. As of July 31, 2022, we had $22.0 million outstanding balance under the agreement.
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 11. Leases
We have operating lease arrangements for office space, data center, equipment and other corporate assets. These leases have various expiration dates through December 31, 2040, some of which include options to extend the leases for up to 10 years. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments.
The components of our lease expense during the period presented were as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating lease expense (1) | $ | 23,914 | $ | 23,843 | $ | 68,105 | $ | 70,818 | |||||||||||||||
| Variable lease expense (2) | 2,910 | 2,184 | 7,904 | 5,361 | |||||||||||||||||||
| Total lease expense | $ | 26,824 | $ | 26,027 | $ | 76,009 | $ | 76,179 |
(1) Operating lease expense includes immaterial amounts of short-term leases, net of sublease income.
(2) Variable lease expense includes payments to lessors that are not fixed or determinable at lease commencement date. These payments primarily consist of maintenance, property taxes, insurance and variable indexed based payments.
Supplemental cash flow information during the period presented was as follows:
| Nine Months Ended July 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 62,888 | $ | 64,516 | |||||||||||||||||||
| ROU assets obtained in exchange for operating lease liabilities | $ | 154,693 | $ | 92,149 |
Lease term and discount rate information related to our operating leases as of the end of the period presented were as follows:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| Weighted-average remaining lease term (in years) | 9.32 | 8.00 | |||||||||
| Weighted-average discount rate | 2.18 | % | 2.01 | % |
The following represented the maturities of our future lease payments due under operating leases as of July 31, 2022:
| Lease Payments | |||||
| Fiscal year | (in thousands) | ||||
| Remainder of fiscal 2022 | $ | 18,637 | |||
| 2023 | 67,100 | ||||
| 2024 | 90,806 | ||||
| 2025 | 80,162 | ||||
| 2026 | 70,782 | ||||
| 2027 and thereafter | 400,021 | ||||
| Total future minimum lease payments | 727,508 | ||||
| Less: Imputed interest | 80,408 | ||||
| Total lease liabilities | $ | 647,100 |
In addition, certain facilities owned by us were leased to third parties under non-cancellable operating lease agreements. These leases have annual escalating payments and have expiration dates through March 31, 2031 in accordance with the terms and conditions of the existing agreement. The lease receipts from owned facilities, including sublease income from other facilities leased by us, due to us as of July 31, 2022 were as follows:
| Lease Receipts | |||||||||||
| Fiscal year | (in thousands) | ||||||||||
| Remainder of fiscal 2022 | $ | 4,274 | |||||||||
| 2023 | 16,240 | ||||||||||
| 2024 | 24,591 | ||||||||||
| 2025 | 24,479 | ||||||||||
| 2026 | 25,333 | ||||||||||
| 2027 and thereafter | 110,189 | ||||||||||
| Total | $ | 205,106 |
Note 12. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cumulative currency translation adjustments | $ | (112,037) | $ | (48,047) | |||||||
| Unrealized gains (losses) on derivative instruments, net of taxes | (41,536) | (1,311) | |||||||||
| Unrealized gains (losses) on available-for-sale securities, net of taxes | (1,920) | (246) | |||||||||
| Total | $ | (155,493) | $ | (49,604) |
The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income was as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Reclassifications: | |||||||||||||||||||||||
| Gains (losses) on cash flow hedges, net of taxes | |||||||||||||||||||||||
| Revenues | $ | 3,651 | $ | 1,563 | $ | 3,309 | $ | 2,597 | |||||||||||||||
| Operating expenses | (3,687) | 3,267 | (4,852) | 9,583 | |||||||||||||||||||
| Total | $ | (36) | $ | 4,830 | $ | (1,543) | $ | 12,180 |
Note 13. Stock Repurchase Program
Our Board of Directors (the Board) approved a stock repurchase program (the Program) with authorization to purchase up to $1.0 billion of our common stock in December 2021. As of July 31, 2022, $242.7 million remained available for future repurchases under the Program.
In May 2022, we entered into an accelerated stock repurchase agreement (the May 2022 ASR) to repurchase an aggregate of $200.0 million of our common stock. Pursuant to the May 2022 ASR, we made a prepayment of $200.0 million to receive initial deliveries of shares valued at $160.0 million. The remaining balance of $40.0 million was settled in August 2022. Total shares purchased under the May 2022 ASR were approximately 0.6 million shares, at an average purchase price of $320.24 per share.
During the three months ended July 31, 2022, we also repurchased on the open market approximately 0.2 million shares of our common stock at an average price of $298.50 per share for an aggregate purchase price of $57.3 million.
Stock repurchase activities as well as the reissuance of treasury stock for employee stock-based compensation purposes were as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 (1) | 2021**(2)** | 2022**(1)** | 2021**(2)** | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total shares repurchased | 715 | 521 | 2,400 | 2,114 | |||||||||||||||||||
| Total cost of the repurchased shares | $ | 217,266 | $ | 140,000 | $ | 752,266 | $ | 538,082 | |||||||||||||||
| Reissuance of treasury stock | 764 | 564 | 2,342 | 2,093 |
(1) Excluded the 101,821 shares and $40.0 million equity forward contract from the May 2022 ASR settled in August 2022.
(2) Excluded the 99,573 shares and $35.0 million equity forward contract from the June 2021 ASR settled in August 2021.
Note 14. Stock-Based Compensation
The compensation cost recognized in the unaudited condensed consolidated statements of income for our stock compensation arrangements was as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of products | $ | 15,318 | $ | 9,582 | $ | 39,603 | $ | 28,238 | |||||||||||||||
| Cost of maintenance and service | 6,859 | 3,446 | 17,335 | 10,192 | |||||||||||||||||||
| Research and development expense | 68,243 | 42,430 | 175,892 | 124,231 | |||||||||||||||||||
| Sales and marketing expense | 22,998 | 15,330 | 60,090 | 45,040 | |||||||||||||||||||
| General and administrative expense | 14,187 | 14,374 | 40,517 | 40,829 | |||||||||||||||||||
| Stock-based compensation expense before taxes(1) | 127,605 | 85,162 | 333,437 | 248,530 | |||||||||||||||||||
| Income tax benefit | (20,940) | (13,277) | (54,717) | (38,746) | |||||||||||||||||||
| Stock-based compensation expense after taxes | $ | 106,665 | $ | 71,885 | $ | 278,720 | $ | 209,784 |
(1) During the three and nine months ended July 31, 2022, we recognized stock-based compensation expense relating to restricted stock units (RSUs), granted to senior executives in February 2022 with certain market, performance and service conditions (market-based RSUs). Under the award agreements, the vesting of the market-based RSUs is contingent on achieving total stockholder return (TSR) relative to a peer index as well as revenue growth metrics. The performance period during which the achievement goals will be measured is fiscal 2022 and fiscal 2023. The maximum potential awards that may be earned are 187.5% of the target number of the initial a**wards. The awards will vest in equal increments in December 2023 and December 2024 if the TSR target, revenue growth metrics, and service conditions are achieved. The grant date fair value for the market-based RSUs of $280.82 was determined using a Monte Carlo simulation model with the following assumptions: expected volatility of 33.01%, risk-free interest rate of 1.33% and an expected term of 1.69 years.
As of July 31, 2022, we had $1,057.7 million of total unrecognized stock-based compensation expense relating to options, RSUs and restricted stock awards, which is expected to be recognized over a weighted-average period of 2.4 years. As of July 31, 2022, we had $59.7 million of unrecognized stock-based compensation expense relating to our Employee Stock Purchase Plan (ESPP), which is expected to be recognized over a period of approximately 2.0 years.
The intrinsic values of equity awards exercised during the periods were as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Intrinsic value of awards exercised | $ | 86,080 | $ | 30,896 | $ | 245,468 | $ | 143,100 |
Note 15. Net Income Per Share
We compute basic net income per share by dividing net income 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 RSUs and awards during the period using the treasury stock method.
The table below reconciled the weighted average common shares used to calculate basic net income per share with the weighted average common shares used to calculate diluted net income per share:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributed to Synopsys | $ | 222,626 | $ | 198,646 | $ | 831,094 | $ | 556,069 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares for basic net income per share | 152,938 | 152,635 | 153,082 | 152,619 | |||||||||||||||||||
| Dilutive effect of common share equivalents | 2,868 | 4,272 | 3,463 | 4,539 | |||||||||||||||||||
| Weighted average common shares for diluted net income per share | 155,806 | 156,907 | 156,545 | 157,158 | |||||||||||||||||||
| Net income per share attributed to Synopsys: | |||||||||||||||||||||||
| Basic | $ | 1.46 | $ | 1.30 | $ | 5.43 | $ | 3.64 | |||||||||||||||
| Diluted | $ | 1.43 | $ | 1.27 | $ | 5.31 | $ | 3.54 | |||||||||||||||
| Anti-dilutive employee stock-based awards excluded | 336 | 355 | 268 | 405 |
Note 16. Segment Disclosure
Segment reporting is based upon the “management approach,” i.e., how management organizes our operating segments for which separate financial information is (1) available and (2) evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources and in assessing performance. Until the second quarter of fiscal 2022, we had two CODMs, our two Co-Chief Executive Officers. One of our Co-Chief Executive Officers transitioned out of this role effective May 1, 2022. In the third quarter of fiscal 2022, our CODM was our Chief Executive Officer.
We have two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and other associated revenue categories, and (2) Software Integrity, which includes a comprehensive solution for building integrity—security, quality and compliance testing—into the customers’ software development lifecycle and supply chain.
The financial information provided to and used by the CODM 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 revenue by geographic region.
Information by reportable segment was as follows:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total Segments: | |||||||||||||||||||||||
| Revenue | $ | 1,247,766 | $ | 1,057,130 | $ | 3,797,250 | $ | 3,051,774 | |||||||||||||||
| Adjusted operating income | 392,127 | 337,396 | 1,321,671 | 941,456 | |||||||||||||||||||
| Adjusted operating margin | 31 | % | 32 | % | 35 | % | 31 | % | |||||||||||||||
| Semiconductor & System Design: | |||||||||||||||||||||||
| Revenue | $ | 1,129,427 | $ | 959,155 | $ | 3,458,499 | $ | 2,767,950 | |||||||||||||||
| Adjusted operating income | 380,871 | 328,742 | 1,285,391 | 916,434 | |||||||||||||||||||
| Adjusted operating margin | 34 | % | 34 | % | 37 | % | 33 | % | |||||||||||||||
| Software Integrity: | |||||||||||||||||||||||
| Revenue | $ | 118,339 | $ | 97,975 | $ | 338,751 | $ | 283,824 | |||||||||||||||
| Adjusted operating income | 11,256 | 8,654 | 36,280 | 25,022 | |||||||||||||||||||
| Adjusted operating margin | 10 | % | 9 | % | 11 | % | 9 | % |
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-based compensation and certain other operating expenses, were presented in the table below to provide a reconciliation of the total adjusted operating income from segments to our consolidated operating income:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total segment adjusted operating income | $ | 392,127 | $ | 337,396 | $ | 1,321,671 | $ | 941,456 | |||||||||||||||
| Reconciling items: | |||||||||||||||||||||||
| Amortization of intangible assets | (26,454) | (20,440) | (70,181) | (60,437) | |||||||||||||||||||
| Stock-based compensation expense | (127,605) | (85,162) | (333,437) | (248,530) | |||||||||||||||||||
| Other | (4,140) | (29,871) | 26,612 | (87,987) | |||||||||||||||||||
| Total operating income | $ | 233,928 | $ | 201,923 | $ | 944,665 | $ | 544,502 |
The CODM does 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.
In allocating revenue to particular geographic areas, the CODM considers where individual “seats” or licenses to our products are located. Revenue is defined as revenue from external customers. Revenue related to operations in the United States and other geographic areas were:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| United States | $ | 575,326 | $ | 477,218 | $ | 1,763,541 | $ | 1,417,636 | |||||||||||||||
| Europe | 127,288 | 112,877 | 376,195 | 324,212 | |||||||||||||||||||
| China | 189,138 | 164,172 | 617,524 | 405,460 | |||||||||||||||||||
| Korea | 125,307 | 110,536 | 358,871 | 314,178 | |||||||||||||||||||
| Other | 230,707 | 192,327 | 681,119 | 590,288 | |||||||||||||||||||
| Consolidated | $ | 1,247,766 | $ | 1,057,130 | $ | 3,797,250 | $ | 3,051,774 |
Geographic revenue data for multi-regional, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and to our methodology.
Note 17. Other Income (Expense), Net
The following table presented the components of other income (expense), net:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Interest income | $ | 2,735 | $ | 657 | $ | 4,876 | $ | 1,413 | |||||||||||||||
| Interest expense | (439) | (757) | (1,339) | (2,301) | |||||||||||||||||||
| Gains (losses) on assets related to deferred compensation plan | (1,092) | 10,473 | (50,001) | 62,697 | |||||||||||||||||||
| Foreign currency exchange gains (losses) | (376) | 2,756 | 3,452 | 5,283 | |||||||||||||||||||
| Other, net | 1,598 | (1,715) | 1,732 | (5,158) | |||||||||||||||||||
| Total | $ | 2,426 | $ | 11,414 | $ | (41,280) | $ | 61,934 |
Note 18. Income Taxes
Effective Tax Rate
We estimate our annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account our 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 presented the provision for income taxes and the effective tax rates:
| Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Income before income taxes | $ | 236,354 | $ | 213,337 | $ | 903,385 | $ | 606,436 | |||||||||||||||
| Provision for income taxes | $ | 16,708 | $ | 14,945 | $ | 76,506 | $ | 51,214 | |||||||||||||||
| Effective tax rate | 7.1 | % | 7.0 | % | 8.5 | % | 8.4 | % |
Our effective tax rate for the nine months ended July 31, 2022 is lower than the statutory federal corporate tax rate of 21.0% primarily due to U.S. federal research tax credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, and U.S. foreign tax credits, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings.
Our effective tax rates for the three months and nine months ended July 31, 2022 are consistent with the same periods in fiscal 2021.
The timing of the resolution of income tax examinations, and the amounts and timing of various tax payments that are part of the settlement process, are highly uncertain. Variations in such amounts and/or timing could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that in the coming 12 months, it is reasonably possible that either certain audits and ongoing tax litigation 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 $33 million.
Non-U.S. Examinations
Hungarian Tax Authority
In 2017, the Hungarian Tax Authority (the HTA) assessed withholding taxes of approximately $25.0 million and interest and penalties of $11.0 million, against our Hungary subsidiary (Synopsys Hungary). Synopsys Hungary contested the assessment with the Hungarian Administrative Court (Administrative Court). As required under Hungarian law, Synopsys Hungary paid the assessment and recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits. The Administrative Court found against
Synopsys Hungary, and we appealed to the Hungarian Supreme Court. During 2021, the Hungarian Supreme Court heard our appeal and remanded the case to the Administrative Court for further proceedings. The Administrative Court once again ruled against Synopsys Hungary and we filed another appeal with the Hungarian Supreme Court. The Hungarian Supreme Court heard our appeal on January 27, 2022, vacated the lower court's decision and remanded the case back to the Administrative Court for further proceedings. A hearing with the Administrative Court was held on June 30, 2022; the next hearing is scheduled for September 22, 2022.
We are also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.
Legislative Developments
On August 16, 2022, the Inflation Reduction Act of 2022 (the IR Act) was enacted in the United States. The IR Act introduces a 15% minimum tax based primarily on global consolidated U.S. GAAP profits with a minimum threshold of $1 billion. The tax takes effect in Synopsys' 2024 fiscal year, with the $1 billion threshold measured as an average over three years commencing in the current fiscal year. Computation of the tax includes adjustments which, among others, provide for offset of income taxes paid or accrued in non-U.S. jurisdictions. The details of the computation will be subject to regulations to be issued by the Department of the Treasury. Synopsys will monitor regulatory developments and will continue to evaluate the impact, if any, of the minimum tax.
The IR Act includes provisions intended to mitigate climate change by, among others, providing tax credit incentives for reductions in greenhouse gas emissions. The details of implementation of these incentives are subject to regulations to be released by the Department of the Treasury. Synopsys is monitoring these developments and will continue to evaluate opportunities to utilize these incentives in the future.
The IR Act imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. We are assessing the potential impact of the stock repurchase excise tax, but based on our preliminary assessment, we do not expect a material impact on our consolidated financial statements.
On August 9, 2022, the CHIPS and Science Act of 2022 (CHIPS Act) was enacted in the United States. The CHIPS Act will provide financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the United States. We are evaluating potential opportunities related to the CHIPS Act.
Note 19. Contingencies
Legal Proceedings
We are subject to routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate outcome of any litigation is often uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. We regularly review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount is estimable, we accrue 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.
We have determined that, except as set forth below, no disclosure of estimated loss is required for a claim against us 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.
Legal Settlement
There have been no changes to the disclosure related to Mentor Graphics Corporation (now part of Siemens AG) since our Annual Report. See Note 9. Contingencies of our Annual Report for further information.
Tax Matters
We undergo 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 are 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, we would accrue a liability for the estimated expense.
In addition to the foregoing, we are, from time to time, party to various other claims and legal proceedings in the ordinary course of our business, including with tax and other governmental authorities. For a description of certain of these other matters, see Note 18. Income Taxes*.*
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