filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
| January 31, 2024 | October 31, 2023 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,118,944 | $ | 1,438,913 | |||||||
| Short-term investments | 154,490 | 151,639 | |||||||||
| Total cash, cash equivalents and short-term investments | 1,273,434 | 1,590,552 | |||||||||
| Accounts receivable, net | 1,064,135 | 946,967 | |||||||||
| Inventories | 382,727 | 325,590 | |||||||||
| Prepaid and other current assets | 687,632 | 567,515 | |||||||||
| Total current assets | 3,407,928 | 3,430,624 | |||||||||
| Property and equipment, net | 567,038 | 557,261 | |||||||||
| Operating lease right-of-use assets, net | 551,452 | 568,829 | |||||||||
| Goodwill | 4,131,418 | 4,070,336 | |||||||||
| Intangible assets, net | 377,415 | 374,194 | |||||||||
| Deferred income taxes | 954,495 | 860,914 | |||||||||
| Other long-term assets | 568,513 | 470,973 | |||||||||
| Total assets | $ | 10,558,259 | $ | 10,333,131 | |||||||
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | 699,474 | $ | 1,123,761 | |||||||
| Operating lease liabilities | 89,194 | 85,690 | |||||||||
| Deferred revenue | 1,855,839 | 1,776,000 | |||||||||
| Total current liabilities | 2,644,507 | 2,985,451 | |||||||||
| Long-term operating lease liabilities | 563,815 | 584,035 | |||||||||
| Long-term deferred revenue | 189,841 | 175,128 | |||||||||
| Long-term debt | 16,951 | 18,078 | |||||||||
| Other long-term liabilities | 436,528 | 386,138 | |||||||||
| Total liabilities | 3,851,642 | 4,148,830 | |||||||||
| Redeemable non-controlling interest | 31,043 | 31,043 | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding | — | — | |||||||||
| Common stock, $0.01 par value: 400,000 shares authorized; 152,536 and 152,053 shares outstanding, respectively | 1,525 | 1,521 | |||||||||
| Capital in excess of par value | 1,183,473 | 1,276,152 | |||||||||
| Retained earnings | 7,188,550 | 6,741,699 | |||||||||
| Treasury stock, at cost: 4,725 and 5,207 shares, respectively | (1,539,340) | (1,675,650) | |||||||||
| Accumulated other comprehensive income (loss) | (163,224) | (196,414) | |||||||||
| Total Synopsys stockholders’ equity | 6,670,984 | 6,147,308 | |||||||||
| Non-controlling interest | 4,590 | 5,950 | |||||||||
| Total stockholders’ equity | 6,675,574 | 6,153,258 | |||||||||
| Total liabilities, redeemable non-controlling interest and stockholders’ equity | $ | 10,558,259 | $ | 10,333,131 |
See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Time-based products | $ | 904,378 | $ | 782,313 | |||||||||||||||||||
| Upfront products | 447,863 | 336,658 | |||||||||||||||||||||
| Total products revenue | 1,352,241 | 1,118,971 | |||||||||||||||||||||
| Maintenance and service | 296,989 | 242,369 | |||||||||||||||||||||
| Total revenue | 1,649,230 | 1,361,340 | |||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Products | 193,638 | 174,367 | |||||||||||||||||||||
| Maintenance and service | 115,081 | 91,347 | |||||||||||||||||||||
| Amortization of acquired intangible assets | 20,456 | 18,640 | |||||||||||||||||||||
| Total cost of revenue | 329,175 | 284,354 | |||||||||||||||||||||
| Gross margin | 1,320,055 | 1,076,986 | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 552,056 | 465,329 | |||||||||||||||||||||
| Sales and marketing | 263,408 | 210,785 | |||||||||||||||||||||
| General and administrative | 138,374 | 97,364 | |||||||||||||||||||||
| Amortization of acquired intangible assets | 6,597 | 6,717 | |||||||||||||||||||||
| Restructuring charges | — | 40,859 | |||||||||||||||||||||
| Total operating expenses | 960,435 | 821,054 | |||||||||||||||||||||
| Operating income | 359,620 | 255,932 | |||||||||||||||||||||
| Interest and other income (expense), net | 105,484 | 23,292 | |||||||||||||||||||||
| Income before income taxes | 465,104 | 279,224 | |||||||||||||||||||||
| Provision (benefit) for income taxes | 18,897 | 10,597 | |||||||||||||||||||||
| Net income | $ | 446,207 | $ | 268,627 | |||||||||||||||||||
| Net income (loss) attributed to non-controlling interest and redeemable non-controlling interest | (2,905) | (2,909) | |||||||||||||||||||||
| Net income attributed to Synopsys | $ | 449,112 | $ | 271,536 | |||||||||||||||||||
| Net income per share attributed to Synopsys: | |||||||||||||||||||||||
| Basic | $ | 2.95 | $ | 1.78 | |||||||||||||||||||
| Diluted | $ | 2.89 | $ | 1.75 | |||||||||||||||||||
| Shares used in computing per share amounts: | |||||||||||||||||||||||
| Basic | 152,311 | 152,401 | |||||||||||||||||||||
| Diluted | 155,334 | 155,076 |
See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Net income | $ | 446,207 | $ | 268,627 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Change in foreign currency translation adjustment | 18,290 | 40,317 | |||||||||||||||||||||
| Change in unrealized gains (losses) on available-for-sale securities, net of tax of $0 for periods presented | 1,012 | 1,158 | |||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Deferred gains (losses), net of tax $(3,003) and $(14,807), respectively. | 10,610 | 42,112 | |||||||||||||||||||||
| Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(1,690) and $(3,099), respectively. | 3,278 | 8,357 | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | 33,190 | 91,944 | |||||||||||||||||||||
| Comprehensive income | 479,397 | 360,571 | |||||||||||||||||||||
| Less: Net income (loss) attributed to non-controlling interest and redeemable non-controlling interest | (2,905) | (2,909) | |||||||||||||||||||||
| Comprehensive income attributed to Synopsys | $ | 482,302 | $ | 363,480 |
See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, 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, 2023 | 152,053 | $ | 1,521 | $ | 1,276,152 | $ | 6,741,699 | $ | (1,675,650) | $ | (196,414) | $ | 6,147,308 | $ | 5,950 | $ | 6,153,258 | ||||||||||||||||||||||||||||||||||||
| Net income | 449,112 | 449,112 | (644) | 448,468 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | 33,190 | 33,190 | 33,190 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (74) | (1) | 1 | (45,000) | (45,000) | (45,000) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity forward contract, net | 45,000 | 45,000 | 45,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued, net of shares withheld for employee taxes | 557 | 5 | (318,516) | 181,310 | (137,201) | (137,201) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 179,338 | 179,338 | 1,314 | 180,652 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments to redeemable non-controlling interest | (2,261) | (2,261) | (2,261) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Recognition of non-controlling interest upon issuance of subsidiary stock | 1,498 | 1,498 | (2,030) | (532) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 31, 2024 | 152,536 | $ | 1,525 | $ | 1,183,473 | $ | 7,188,550 | $ | (1,539,340) | $ | (163,224) | $ | 6,670,984 | $ | 4,590 | $ | 6,675,574 | ||||||||||||||||||||||||||||||||||||
| 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, 2022 | 152,375 | $ | 1,524 | $ | 1,487,126 | $ | 5,534,307 | $ | (1,272,955) | $ | (234,277) | $ | 5,515,725 | $ | 4,801 | $ | 5,520,526 | ||||||||||||||||||||||||||||||||||||
| Net income | 271,536 | 271,536 | (294) | 271,242 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax effects | 91,944 | 91,944 | 91,944 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (806) | (8) | 8 | (260,724) | (260,724) | (260,724) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity forward contract, net | (45,000) | (45,000) | (45,000) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued, net of shares withheld for employee taxes | 811 | 8 | (282,020) | 212,499 | (69,513) | (69,513) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 132,786 | 132,786 | 1,441 | 134,227 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 31, 2023 | 152,380 | $ | 1,524 | $ | 1,292,900 | $ | 5,805,843 | $ | (1,321,180) | $ | (142,333) | $ | 5,636,754 | $ | 5,948 | $ | 5,642,702 | ||||||||||||||||||||||||||||||||||||
See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Three Months Ended January 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 446,207 | $ | 268,627 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Amortization and depreciation | 62,888 | 57,294 | |||||||||
| Reduction of operating lease right-of-use assets | 24,376 | 23,903 | |||||||||
| Amortization of capitalized costs to obtain revenue contracts | 18,726 | 18,850 | |||||||||
| Stock-based compensation | 180,652 | 134,227 | |||||||||
| Allowance for credit losses | 6,059 | 3,700 | |||||||||
| Gain on sale of strategic investments | (55,077) | — | |||||||||
| Amortization of bridge financing costs | 1,000 | — | |||||||||
| Deferred income taxes | (101,332) | (65,495) | |||||||||
| Other non-cash | (786) | 4,535 | |||||||||
| Net changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | |||||||||||
| Accounts receivable | (119,571) | (237,360) | |||||||||
| Inventories | (60,883) | (8,610) | |||||||||
| Prepaid and other current assets | (96,916) | (355) | |||||||||
| Other long-term assets | (72,096) | (54,196) | |||||||||
| Accounts payable and accrued liabilities | (266,704) | (144,258) | |||||||||
| Operating lease liabilities | (23,569) | (17,629) | |||||||||
| Income taxes | (117,798) | 50,416 | |||||||||
| Deferred revenue | 87,034 | 81,102 | |||||||||
| Net cash provided by (used in) operating activities | (87,790) | 114,751 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sales and maturities of short-term investments | 24,559 | 30,971 | |||||||||
| Purchases of short-term investments | (25,612) | (28,829) | |||||||||
| Proceeds from sales of strategic investments | 55,696 | 5,735 | |||||||||
| Purchases of strategic investments | (822) | — | |||||||||
| Purchases of property and equipment | (40,391) | (43,500) | |||||||||
| Acquisitions, net of cash acquired | (67,827) | — | |||||||||
| Capitalization of software development costs | — | (624) | |||||||||
| Net cash used in investing activities | (54,397) | (36,247) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayment of debt | (1,303) | (1,294) | |||||||||
| Payment of bridge financing costs | (48,000) | — | |||||||||
| Issuances of common stock | 9,483 | 22,338 | |||||||||
| Payments for taxes related to net share settlement of equity awards | (147,330) | (92,095) | |||||||||
| Purchase of equity forward contract | — | (45,000) | |||||||||
| Purchases of treasury stock | — | (260,724) | |||||||||
| Net cash used in financing activities | (187,150) | (376,775) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 9,320 | 35,675 | |||||||||
| Net change in cash, cash equivalents and restricted cash | (320,017) | (262,596) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 1,441,187 | 1,419,864 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 1,121,170 | $ | 1,157,268 |
See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
SYNOPSYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business
Synopsys, Inc. (Synopsys, we, our or us) provides products and services used across the entire Silicon to Software spectrum to bring Smart Everything to life. From engineers creating advanced semiconductors to product teams developing advanced electronic systems to software developers seeking to ensure the security and quality of their code, our customers trust that our technologies will enable them to meet new requirements for energy efficiency, reliability, mobility, security and more.
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 or silicon. We provide software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them, including cloud-based digital design flow to boost chip-design development productivity. 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 Design Automation segment.
We also offer a broad and comprehensive portfolio of 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. These products and services are part of our Design IP 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 and Basis of Presentation
We have prepared the accompanying 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). The condensed consolidated financial statements are unaudited but, in management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our quarterly results. 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, 2023 as filed with the SEC on December 12, 2023 (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 condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and could have a material impact on our operating results and financial position.
Principles of Consolidation. The condensed consolidated financial statements include our accounts and the accounts of our wholly and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year and Fiscal Quarter End. Our fiscal year 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 2024 is a 53-week year ending on November 2, 2024, which impacts our revenue, expenses and operating results. Fiscal 2023 was a 52-week year and ended on October 28, 2023.
Our results of operations for the first quarter of fiscal 2024 and 2023 included 14 weeks and 13 weeks, respectively, and ended on February 3, 2024 and January 28, 2023, respectively. For presentation purposes, the 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*.*
Recently Issued Accounting Pronouncements
In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 will be applied prospectively. Early adoption is permitted. Any future impact from the adoption of this guidance will depend on the facts and circumstances of future transactions.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the Chief Operating Decision Maker (CODM) and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. The ASU is effective for our annual reports beginning in the fiscal year 2025, and interim period reports beginning in the first quarter of the fiscal year 2026 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures primarily through changes to the rate reconciliation and income taxes paid information. The standard will become effective for us beginning on November 1, 2025 and will be applied on a prospective basis, with a retrospective option. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.
Note 3. Pending Acquisition of Ansys
On January 15, 2024, we entered into an Agreement and Plan of Merger (the Merger Agreement) to acquire all of the outstanding shares of ANSYS, Inc. (Ansys), a provider of broad engineering simulation and analysis software and services, in a cash-and-stock transaction (the Ansys Merger) that values Ansys at approximately $35.0 billion, based on the closing price of Synopsys common stock on December 21, 2023.
Under the terms of the Merger Agreement, at the effective time of the Ansys Merger (the Effective Time), each share of Ansys common stock issued and outstanding immediately prior to the Effective Time (with certain exceptions set forth in the Merger Agreement) will be converted into the right to receive 0.3450 (the Exchange Ratio) of a share of Synopsys common stock and $197.00 in cash, without interest. The Merger Agreement also provides for Synopsys’ assumption of certain outstanding Ansys options and other unvested Ansys equity awards held by continuing Ansys employees. If the stock consideration to be issued by Synopsys in connection with the Ansys Merger would exceed 19.9999% of the shares of Synopsys common stock issued and outstanding immediately prior to the Effective Time, the Exchange Ratio will be reduced to the minimum extent necessary to ensure that the aggregate number of shares of Synopsys common stock to be issued in connection with the Ansys Merger does not exceed such threshold, and the cash consideration will be correspondingly increased to offset such adjustment.
The Ansys Merger, which is anticipated to close in the first half of calendar year 2025, is subject to the satisfaction or waiver of customary closing conditions, including adoption of the Merger Agreement by holders of a majority of the outstanding shares of Ansys common stock, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, the clearance of the Ansys Merger under certain other antitrust and foreign investment regimes and the effectiveness of a registration statement on Form S-4 to be filed by us. We and Ansys each have termination rights under the Merger Agreement. A fee of $1.5 billion may be payable by us to Ansys, or a fee of $950.0 million may be payable by Ansys to us, upon termination of the Merger Agreement under specified circumstances, each as more fully described in the Merger Agreement.
In connection with the execution of the Merger Agreement, we entered into a commitment letter on January 15, 2024 (the Bridge Commitment Letter) with certain financial institutions that committed to provide, subject to the satisfaction of customary closing conditions, a senior unsecured bridge facility (the Bridge Commitment) in an aggregate principal amount of up to $16.0 billion (which we subsequently reduced to $11.7 billion in connection with
our entry into the Term Loan Agreement as further described below). On February 13, 2024, we entered into a term loan facility credit agreement (the Term Loan Agreement), which provides us with the ability to borrow up to $4.3 billion at the closing of the Ansys Merger, subject to the satisfaction of customary closing conditions for similar facilities, for the purpose of financing a portion of the cash consideration to be paid in the Ansys Merger and paying related fees and expenses in connection with the Ansys Merger and the other transactions contemplated by the Merger Agreement. Effective February 13, 2024, we terminated $4.3 billion of the original $16.0 billion of commitments under the Bridge Commitment, in lieu of which we expect to borrow the committed amounts available under the Term Loan Agreement. See Note 10. Bridge Commitment Letter, Term Loan and Revolving Credit Facilities of the Notes to Condensed Consolidated Financial Statements for more information on the Bridge Commitment and the Term Loan Agreement.
Note 4. Business Combination
During the three months ended January 31, 2024, we completed one acquisition for aggregate purchase consideration of $67.8 million, net of cash acquired. The purchase consideration was allocated as follows: $29.4 million to identifiable intangible assets, $48.0 million to goodwill, and $9.6 million to net tangible liabilities. The total purchase consideration is preliminary, and as additional information becomes available, we may further revise it during the remainder of the measurement period, which will not exceed 12 months from the closing of the acquisition. The goodwill recognized from this acquisition was assigned to the Design Automation reporting unit, and was not deductible for income tax purposes.
We have included the financial results of this acquisition in our condensed consolidated financial statements from the date of acquisition. These results were not material to our condensed consolidated financial statements.
Transaction costs were $31.9 million during the three months ended January 31, 2024. These costs mainly consisted of professional fees and administrative costs for closed and pending acquisitions and were expensed as incurred in our condensed consolidated statements of income.
Note 5. Revenue
Disaggregated Revenue
The following table shows the percentage of revenue by product groups:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| EDA | 58.9 | % | 64.3 | % | |||||||||||||||||||
| Design IP | 31.9 | % | 25.2 | % | |||||||||||||||||||
| Software Integrity | 8.4 | % | 9.4 | % | |||||||||||||||||||
| Other | 0.8 | % | 1.1 | % | |||||||||||||||||||
| Total | 100.0 | % | 100.0 | % |
Contract Balances
The contract assets indicated below are presented as prepaid and other current assets in the 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 condensed consolidated balance sheets.
Contract balances are as follows:
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Contract assets, net | $ | 469,002 | $ | 389,042 | |||||||
| Unbilled receivables | $ | 40,522 | $ | 60,016 | |||||||
| Deferred revenue | $ | 2,045,680 | $ | 1,951,128 |
During the three months ended January 31, 2024, we recognized revenue of $846.7 million that was included in the deferred revenue balance as of October 31, 2023, including previously unfulfilled contracts that have expired and are no longer subject to an implied promise to provide future services.
Contracted but unsatisfied or partially unsatisfied performance obligations (backlog) were approximately $8.2 billion as of January 31, 2024, which includes $1.3 billion 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 40% of the backlog as of January 31, 2024, excluding non-cancellable FSA, is expected to be recognized as revenue over the next 12 months, with the remainder recognized thereafter. The majority of the remaining backlog is expected to be recognized in the following three years.
During the three months ended January 31, 2024 and 2023, we recognized $25.4 million and $24.7 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 January 31, 2024 were $88.5 million and are included in other long-term assets in our condensed consolidated balance sheets. Amortization of these assets was $18.7 million and $18.9 million during the three months ended January 31, 2024 and 2023, respectively, and are included in sales and marketing expense in our condensed consolidated statements of income.
Note 6. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the three months ended January 31, 2024 are as follows:
| (in thousands) | |||||
| Balance at October 31, 2023 | $ | 4,070,336 | |||
| Additions | 47,994 | ||||
| Adjustments | 138 | ||||
| Effect of foreign currency translation | 12,950 | ||||
| Balance at January 31, 2024 | $ | 4,131,418 |
Intangible Assets
Intangible assets as of January 31, 2024 consist of the following:
| Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Core/developed technology | $ | 1,158,892 | $ | 904,829 | $ | 254,063 | |||||||||||
| Customer relationships | 469,340 | 364,328 | 105,012 | ||||||||||||||
| Contract rights intangible | 195,879 | 191,984 | 3,895 | ||||||||||||||
| Trademarks and trade names | 52,825 | 38,380 | 14,445 | ||||||||||||||
| Total | $ | 1,876,936 | $ | 1,499,521 | $ | 377,415 |
Intangible assets as of October 31, 2023 consist of the following:
| Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Core/developed technology | $ | 1,135,347 | $ | 885,555 | $ | 249,792 | |||||||||||
| Customer relationships | 463,371 | 358,421 | 104,950 | ||||||||||||||
| Contract rights intangible | 194,930 | 190,670 | 4,260 | ||||||||||||||
| Trademarks and trade names | 52,825 | 37,633 | 15,192 | ||||||||||||||
| Capitalized software development costs | 50,795 | 50,795 | — | ||||||||||||||
| Total | $ | 1,897,268 | $ | 1,523,074 | $ | 374,194 |
Amortization expense related to intangible assets consists of the following:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Core/developed technology | $ | 19,265 | $ | 18,269 | |||||||||||||||||||
| Customer relationships | 5,850 | 5,824 | |||||||||||||||||||||
| Contract rights intangible | 1,191 | 371 | |||||||||||||||||||||
| Trademarks and trade names | 747 | 893 | |||||||||||||||||||||
| Capitalized software development costs(1) | — | 559 | |||||||||||||||||||||
| Total | $ | 27,053 | $ | 25,916 |
(1) Amortization of capitalized software development costs is included in cost of products revenue in the condensed consolidated statements of income.
The following table presents the estimated future amortization of acquired intangible assets as of January 31, 2024:
| Fiscal year | (in thousands) | ||||
| Remainder of fiscal 2024 | $ | 79,696 | |||
| 2025 | 88,515 | ||||
| 2026 | 75,333 | ||||
| 2027 | 54,888 | ||||
| 2028 | 29,467 | ||||
| 2029 and thereafter | 49,516 | ||||
| Total | $ | 377,415 |
Note 7. Balance Sheet Components
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Other long-term assets: | |||||||||||
| Deferred compensation plan assets | $ | 349,003 | $ | 300,731 | |||||||
| Capitalized commission, net | 88,463 | 88,614 | |||||||||
| Other | 131,047 | 81,628 | |||||||||
| Total | $ | 568,513 | $ | 470,973 | |||||||
| Accounts payable and accrued liabilities: | |||||||||||
| Payroll and related benefits | $ | 370,626 | $ | 583,854 | |||||||
| Accrued income taxes | 124,287 | 226,762 | |||||||||
| Other accrued liabilities | 127,753 | 157,254 | |||||||||
| Accounts payable | 76,808 | 155,891 | |||||||||
| Total | $ | 699,474 | $ | 1,123,761 | |||||||
| Other long-term liabilities: | |||||||||||
| Deferred compensation plan liabilities | $ | 349,003 | $ | 300,731 | |||||||
| Other | 87,525 | 85,407 | |||||||||
| Total | $ | 436,528 | $ | 386,138 |
Note 8. Financial Assets and Liabilities
Cash Equivalents and Short-term Investments
As of January 31, 2024, the balances of our cash equivalents and short-term investments are as follows:
| Amortized 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 | $ | 44,751 | $ | — | $ | — | $ | — | $ | 44,751 | |||||||||||||||||||
| U.S. Treasury, agency & T-bills | 2,886 | — | — | — | 2,886 | ||||||||||||||||||||||||
| Total: | $ | 47,637 | $ | — | $ | — | $ | — | $ | 47,637 | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||
| U.S. Treasury, agency & T-bills | $ | 16,778 | $ | 6 | $ | (29) | $ | — | $ | 16,755 | |||||||||||||||||||
| Municipal bonds | 515 | — | — | (9) | 506 | ||||||||||||||||||||||||
| Corporate debt securities | 102,108 | 208 | (81) | (173) | 102,062 | ||||||||||||||||||||||||
| Asset-backed securities | 35,163 | 71 | (12) | (55) | 35,167 | ||||||||||||||||||||||||
| Total: | $ | 154,564 | $ | 285 | $ | (122) | $ | (237) | $ | 154,490 | |||||||||||||||||||
*(1)*See Note 9. Fair Value Measurements for further discussion on fair values.
The contractual maturities of our available-for-sale debt securities as of January 31, 2024 are as follows:
| Amortized Cost | Fair Value | ||||||||||
| (in thousands) | |||||||||||
| less than 1 year | $ | 75,193 | $ | 74,999 | |||||||
| 1-5 years | 75,224 | 75,359 | |||||||||
| 5-10 years | 2,798 | 2,812 | |||||||||
| >10 years | 1,349 | 1,320 | |||||||||
| Total | $ | 154,564 | $ | 154,490 |
As of October 31, 2023, the balances of our cash equivalents and short-term investments are as follows:
| Amortized 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 | $ | 10,129 | $ | — | $ | — | $ | — | $ | 10,129 | |||||||||||||||||||
| U.S. Treasury, agency & T-bills | 2,994 | — | — | — | 2,994 | ||||||||||||||||||||||||
| Total: | $ | 13,123 | $ | — | $ | — | $ | — | $ | 13,123 | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||
| U.S. Treasury, agency & T-bills | $ | 15,752 | $ | — | $ | (61) | $ | (2) | $ | 15,689 | |||||||||||||||||||
| Municipal bonds | 515 | — | — | (16) | 499 | ||||||||||||||||||||||||
| Corporate debt securities | 103,213 | 13 | (455) | (396) | 102,375 | ||||||||||||||||||||||||
| Asset-backed securities | 33,245 | 21 | (93) | (97) | 33,076 | ||||||||||||||||||||||||
| Total: | $ | 152,725 | $ | 34 | $ | (609) | $ | (511) | $ | 151,639 | |||||||||||||||||||
*(1)*See Note 9. Fair Value Measurements for further discussion on fair values.
Restricted cash. We include amounts generally described as restricted cash in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows. Restricted cash is primarily associated with office leases and employee loan programs.
The following table provides a reconciliation of cash, cash equivalents and restricted cash included in the condensed consolidated balance sheets:
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cash and cash equivalents | $ | 1,118,944 | $ | 1,438,913 | |||||||
| Restricted cash included in prepaid and other current assets | 1,490 | 1,549 | |||||||||
| Restricted cash included in other long-term assets | 736 | 725 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 1,121,170 | $ | 1,441,187 |
Non-marketable equity securities. Our portfolio of non-marketable equity securities consists of strategic investments in privately held companies. In November 2023, we completed the sale of strategic investments in privately-held companies. The gain recognized from the sales was $55.1 million and included in interest and other income (expense), net, in our condensed consolidated statements of income. There were no material impairments of non-marketable equity securities during the three months ended January 31, 2024 and 2023.
Derivatives
We recognize derivative instruments as either assets or liabilities in the 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 3 months 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 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 is included in net cash provided by operating activities in the 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 majority 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 three months ended January 31, 2024 and 2023.
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 interest and 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 interest and 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 interest and 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 the condensed consolidated statements of income are summarized as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Gains (losses) recorded in Interest and other income (expense), net | $ | 3,290 | $ | 8,221 |
The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Total gross notional amounts | $ | 1,680,619 | $ | 1,666,758 | |||||||
| Net fair value | $ | 11,452 | $ | (2,308) |
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 represents the 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 January 31, 2024 | |||||||||||
| Other current assets | $ | 15,912 | $ | 577 | |||||||
| Accrued liabilities | $ | 4,174 | $ | 863 | |||||||
| Balance at October 31, 2023 | |||||||||||
| Other current assets | $ | 12,962 | $ | 491 | |||||||
| Accrued liabilities | $ | 14,665 | $ | 1,096 |
The following table represents the location of the amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax in the 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 January 31, 2024 | |||||||||||||||||||||||
| Foreign exchange contracts | Revenue | $ | (58) | Revenue | $ | (3,263) | |||||||||||||||||
| Foreign exchange contracts | Operating expenses | 10,668 | Operating expenses | (15) | |||||||||||||||||||
| Total | $ | 10,610 | $ | (3,278) | |||||||||||||||||||
| Three months ended January 31, 2023 | |||||||||||||||||||||||
| Foreign exchange contracts | Revenue | $ | 5,267 | Revenue | $ | (3,967) | |||||||||||||||||
| Foreign exchange contracts | Operating expenses | 36,845 | Operating expenses | (4,390) | |||||||||||||||||||
| Total | $ | 42,112 | $ | (8,357) | |||||||||||||||||||
Note 9. 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 for identical instruments in active markets, quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—Unobservable inputs 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 assets and liabilities, which include cash equivalents, short-term investments, 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 our 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 us for debt with similar terms and maturities. See Note 10. Bridge Commitment Letter, Term Loan and Revolving Credit Facilities of the Notes to Condensed Consolidated Financial Statements 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 are summarized below as of January 31, 2024:
| 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 | $ | 44,751 | 44,751 | $ | — | $ | — | ||||||||||||||||
| U.S. Treasury, agency & T-bills | 2,886 | — | 2,886 | — | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. Treasury, agency & T-bills | 16,755 | — | 16,755 | — | |||||||||||||||||||
| Municipal bonds | 506 | — | 506 | — | |||||||||||||||||||
| Corporate debt securities | 102,062 | — | 102,062 | — | |||||||||||||||||||
| Asset-backed securities | 35,167 | — | 35,167 | — | |||||||||||||||||||
| Prepaid and other current assets: | |||||||||||||||||||||||
| Foreign currency derivative contracts | 16,489 | — | 16,489 | — | |||||||||||||||||||
| Other long-term assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 349,003 | 349,003 | — | — | |||||||||||||||||||
| Total assets | $ | 567,619 | $ | 393,754 | $ | 173,865 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Accounts payable and accrued liabilities: | |||||||||||||||||||||||
| Foreign currency derivative contracts | $ | 5,037 | $ | — | $ | 5,037 | $ | — | |||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Deferred compensation plan liabilities | 349,003 | 349,003 | — | — | |||||||||||||||||||
| Total liabilities | $ | 354,040 | $ | 349,003 | $ | 5,037 | $ | — |
Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2023:
| 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 | $ | 10,129 | $ | 10,129 | $ | — | $ | — | |||||||||||||||
| U.S. Treasury, agency & T-bills | 2,994 | — | 2,994 | — | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. Treasury, agency & T-bills | 15,689 | — | 15,689 | — | |||||||||||||||||||
| Municipal bonds | 499 | — | 499 | — | |||||||||||||||||||
| Corporate debt securities | 102,375 | — | 102,375 | — | |||||||||||||||||||
| Asset-backed securities | 33,076 | — | 33,076 | — | |||||||||||||||||||
| Prepaid and other current assets: | |||||||||||||||||||||||
| Foreign currency derivative contracts | 13,453 | — | 13,453 | — | |||||||||||||||||||
| Other long-term assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 300,731 | 300,731 | — | — | |||||||||||||||||||
| Total assets | $ | 478,946 | $ | 310,860 | $ | 168,086 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Accounts payable and accrued liabilities: | |||||||||||||||||||||||
| Foreign currency derivative contracts | $ | 15,761 | $ | — | $ | 15,761 | $ | — | |||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Deferred compensation plan liabilities | 300,731 | 300,731 | — | — | |||||||||||||||||||
| Total liabilities | $ | 316,492 | $ | 300,731 | $ | 15,761 | $ | — |
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 a combination of observable transaction price and unobservable inputs or data in an inactive market due to the absence of market price and inherent lack of liquidity.
Note 10. Bridge Commitment Letter, Term Loan and Revolving Credit Facilities
On January 15, 2024, we entered into the Bridge Commitment Letter with certain financial institutions that committed to provide, subject to the satisfaction of customary closing conditions, the Bridge Commitment in an aggregate principal amount of up to $16.0 billion (which we subsequently reduced to $11.7 billion in connection with our entry into the Term Loan Agreement as further described below). The proceeds of any borrowing under the Bridge Commitment would be used for the purpose of financing a portion of the cash consideration to be paid in the Ansys Merger and paying related fees and expenses in connection with the Ansys Merger and the other transactions contemplated by the Merger Agreement.
The commitments to provide the Bridge Commitment may be terminated in whole or reduced in part, at our discretion. In addition, the Bridge Commitment Letter provides that net cash proceeds received from certain debt and equity issuances or the sale of certain businesses and assets, as well as term loan commitments under certain qualifying term loan facilities, will result in mandatory commitment reductions under the Bridge Commitment.
On February 13, 2024, we entered into the Term Loan Agreement, which provides us with the ability to borrow up to $4.3 billion at the closing of the Ansys Merger, subject to the satisfaction of customary closing conditions for similar facilities, for the purpose of financing a portion of the cash consideration to be paid in the Ansys Merger and paying related fees and expenses in connection with the Ansys Merger and the other transactions contemplated by the Merger Agreement. Effective February 13, 2024, we terminated $4.3 billion of the original $16.0 billion of
commitments under the Bridge Commitment, in lieu of which Synopsys expects to borrow the committed amounts available under the Term Loan Agreement.
The Term Loan Agreement provides for two tranches of senior unsecured term loans: a $1.45 billion tranche (Tranche 1) that matures two years after funding and a $2.85 billion tranche (Tranche 2) that matures three years after funding.
The Term Loan Agreement contains a financial covenant requiring that Synopsys maintain a maximum consolidated leverage ratio commencing the last day of the first fiscal quarter ending on or after the completion of the Ansys Merger, as well as other non-financial covenants. Under the Term Loan Agreement, borrowings will bear interest on the principal amount outstanding at a floating rate based on, at Synopsys’ election, (i) the Adjusted Term SOFR Rate (as defined in the Term Loan Agreement) plus an applicable margin based on the credit ratings of Synopsys ranging from 0.875% to 1.375% (in the case of Tranche 1) or 1.000% to 1.500% (in the case of Tranche 2) or (ii) the ABR (as defined in the Term Loan Agreement) plus an applicable margin based on the credit ratings of Synopsys ranging from 0.000% to 0.375% (in the case of Tranche 1) or 0.000% to 0.500% (in the case of Tranche 2).
We will also pay a ticking fee under the Term Loan Agreement in an amount equal to a rate per annum equal to 0.10% times the actual daily undrawn portion of the commitments in respect of the term loan facility, from and including May 14, 2024 to but excluding the earlier of (i) termination or expiration of the commitments under the term loan facility or (ii) the funding of the commitments.
On February 13, 2024, we entered into a Sixth Amendment Agreement (the Sixth Amendment), which amended and restated our previous revolving credit agreement, dated as of December 14, 2022 (as amended and restated, the Revolving Credit Agreement).
The Revolving Credit Agreement provides an unsecured $850.0 million committed multicurrency revolving credit facility and an unsecured uncommitted incremental revolving loan facility of up to $150.0 million. The maturity date of the revolving credit facility is December 14, 2027, which may be extended at our option.
Under the Sixth Amendment, certain amendments became effective on February 13, 2024 and certain additional amendments will become effective upon the completion of the Ansys Merger. Upon the effective date, the Sixth Amendment amended the financial covenant to allow netting of the cash proceeds of certain debt incurred to finance the Ansys Merger as well as certain other modifications set forth therein. Upon the completion of the Ansys Merger, the Sixth Amendment, among other things: (i) amends the applicable margin used to determine the interest that accrues on loans and the facility fee payable under the revolving credit facility to be based on our credit ratings, (ii) amends the financial covenant thresholds under the financial covenant in the Revolving Credit Agreement requiring us to maintain a maximum consolidated leverage ratio and (iii) amends certain conditions to borrowing, other non-financial covenants and events of default.
The Revolving Credit Agreement contains a financial covenant requiring us to maintain a maximum consolidated leverage ratio, as well as other non-financial covenants. As of January 31, 2024, we were in compliance with the financial covenant.
Interest accrues on dollar-denominated loans at a floating rate based on, at Synopsys’ election, (i) the Adjusted Term SOFR Rate (as defined in the Revolving Credit Agreement) plus an applicable margin or (ii) the ABR (as defined in the Revolving Credit Agreement) plus an applicable margin. The applicable margin for Adjusted Term SOFR Rate based loans ranges from 0.785% to 0.975%, based upon Synopsys’ consolidated leverage ratio. The applicable margin for ABR based loans is 0.000%. In addition to the interest on any outstanding loans, Synopsys is also required to pay a facility fee on the entire portion of the revolving credit facility ranging from 0.09% to 0.15% based on Synopsys’ consolidated leverage ratio on the daily amount of the revolving commitment.
Subject to the completion of the Ansys Merger, interest under the Revolving Credit Agreement will accrue on dollar-denominated loans at a floating rate based on, at Synopsys’ election, (i) the Adjusted Term SOFR Rate plus an applicable margin based on our credit ratings ranging from 0.795% to 1.200% or (ii) the ABR plus an applicable margin based on our credit ratings ranging from 0.000% to 0.200%. In addition to the interest on any outstanding loans, Synopsys will also be required to pay a facility fee on the entire portion of the revolving credit facility ranging from 0.080% to 0.175% based on the credit ratings of Synopsys on the daily amount of the revolving commitment.
There was no outstanding balance under the Revolving Credit Agreement as of January 31, 2024 and October 31, 2023.
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 January 31, 2024, we had $17.0 million outstanding balance under the agreement.
The carrying amount of the short-term and long-term debt approximates the estimated fair value.
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, 2042, 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 are as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating lease expense (1) | $ | 23,595 | $ | 24,348 | |||||||||||||||||||
| Variable lease expense (2) | 5,627 | 4,325 | |||||||||||||||||||||
| Total lease expense | $ | 29,222 | $ | 28,673 |
(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 is as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 24,172 | $ | 21,053 | |||||||||||||||||||
| ROU assets obtained in exchange for operating lease liabilities | $ | 5,004 | $ | 44,339 |
Lease term and discount rate information related to our operating leases as of the end of the period presented are as follows:
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| Weighted-average remaining lease term (in years) | 8.15 | 8.34 | |||||||||
| Weighted-average discount rate | 2.52 | % | 2.50 | % |
The following table represents the maturities of our future lease payments due under operating leases as of January 31, 2024:
| Lease Payments | |||||
| Fiscal year | (in thousands) | ||||
| Remainder of fiscal 2024 | $ | 76,588 | |||
| 2025 | 105,503 | ||||
| 2026 | 94,057 | ||||
| 2027 | 91,465 | ||||
| 2028 | 77,332 | ||||
| 2029 and thereafter | 282,776 | ||||
| Total future minimum lease payments | 727,721 | ||||
| Less: Imputed interest | 74,712 | ||||
| Total lease liabilities | $ | 653,009 |
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 January 31, 2024 are as follows:
| Lease Receipts | |||||||||||
| Fiscal year | (in thousands) | ||||||||||
| Remainder of fiscal 2024 | $ | 18,518 | |||||||||
| 2025 | 25,351 | ||||||||||
| 2026 | 26,230 | ||||||||||
| 2027 | 27,376 | ||||||||||
| 2028 | 27,557 | ||||||||||
| 2029 and thereafter | 56,491 | ||||||||||
| Total | $ | 181,523 |
Note 12. Redeemable Non-controlling Interest
During the second quarter of fiscal 2022, we acquired a 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 (1) at the option of the Minority Investor on or after the third anniversary of the acquisition or sooner in certain circumstances or (2) 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.
During the three months ended January 31, 2024, our ownership interest in OpenLight was reduced to 71% as a result of the recognition of non-controlling interest upon issuance of OpenLight stock.
During the three months ended January 31, 2024, OpenLight incurred a net loss of $9.4 million, of which $2.3 million was attributable to redeemable non-controlling interest. As of January 31, 2024, the carrying value of the redeemable non-controlling interest was recorded at its estimated fair value of $31.0 million in the condensed consolidated balance sheets.
Note 13. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, are as follows:
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cumulative currency translation adjustments | $ | (151,814) | $ | (170,104) | |||||||
| Unrealized gains (losses) on derivative instruments, net of taxes | (11,336) | (25,224) | |||||||||
| Unrealized gains (losses) on available-for-sale securities, net of taxes | (74) | (1,086) | |||||||||
| Total | $ | (163,224) | $ | (196,414) |
The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income is as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Reclassifications: | |||||||||||||||||||||||
| Gains (losses) on cash flow hedges, net of taxes | |||||||||||||||||||||||
| Revenues | $ | (3,263) | $ | (3,967) | |||||||||||||||||||
| Operating expenses | (15) | (4,390) | |||||||||||||||||||||
| Total | $ | (3,278) | $ | (8,357) |
Amounts reclassified during the three months ended January 31, 2024 and 2023 primarily consisted of gains (losses) from our cash flow hedging activities. See Note 8. Financial Assets and Liabilities of the Notes to Condensed Consolidated Financial Statements.
Note 14. Stock Repurchase Program
In fiscal 2022, our Board of Directors approved a stock repurchase program (the Program) with authorization to purchase up to $1.5 billion of our common stock. As of January 31, 2024, $194.3 million remained available for future repurchases under the Program.
Stock repurchase activities as well as the reissuance of treasury stock for employee stock-based compensation purposes are as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024**(1)** | 2023**(2)** | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total shares repurchased | 74 | 806 | |||||||||||||||||||||
| Total cost of the repurchased shares | $ | 45,000 | $ | 260,724 | |||||||||||||||||||
| Reissuance of treasury stock | 557 | 811 |
(1) Included the 73,903 shares and $45.0 million equity forward contract from the August 2023 Accelerated Share Repurchase (ASR) settled in November 2023.
(2) Excluded the 107,020 shares and $45.0 million equity forward contract from the December 2022 ASR settled in February 2023.
Note 15. Stock-Based Compensation
The compensation cost recognized in the condensed consolidated statements of income for our stock compensation arrangements is as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of products | $ | 20,680 | $ | 16,029 | |||||||||||||||||||
| Cost of maintenance and service | 9,176 | 7,155 | |||||||||||||||||||||
| Research and development expense | 94,888 | 69,231 | |||||||||||||||||||||
| Sales and marketing expense | 35,353 | 24,907 | |||||||||||||||||||||
| General and administrative expense | 20,555 | 16,905 | |||||||||||||||||||||
| Stock-based compensation expense before taxes | 180,652 | 134,227 | |||||||||||||||||||||
| Income tax benefit | (29,410) | (21,570) | |||||||||||||||||||||
| Stock-based compensation expense after taxes | $ | 151,242 | $ | 112,657 |
During the three months ended January 31, 2024 and 2023, we recognized stock-based compensation expense relating to restricted stock units (RSUs) granted to senior executives with certain market, performance and service conditions (market-based RSUs). The grant date fair value of the market-based RSUs and the assumptions used in the Monte Carlo simulation model to determine the grant date fair value during the periods were as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Expected life (in years) | 2.89 years | 0.90 years | |||||||||||||||||||||
| Risk-free interest rate | 4.41 | % | 4.63 | % | |||||||||||||||||||
| Volatility | 34.03 | % | 42.86 | % | |||||||||||||||||||
| Grant date fair value | $ | 600.29 | $ | 408.55 |
As of January 31, 2024, we had $1.6 billion 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 2.7 years. As of January 31, 2024, we had $27.5 million of unrecognized stock-based compensation expense relating to our Employee Stock Purchase Plan, which is expected to be recognized over a period of approximately 2.0 years.
The intrinsic values of equity awards exercised during the periods are as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Intrinsic value of awards exercised | $ | 27,855 | $ | 54,776 |
Note 16. 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 reconciles 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 January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributed to Synopsys | $ | 449,112 | $ | 271,536 | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares for basic net income per share | 152,311 | 152,401 | |||||||||||||||||||||
| Dilutive effect of common share equivalents from equity-based compensation | 3,023 | 2,675 | |||||||||||||||||||||
| Weighted average common shares for diluted net income per share | 155,334 | 155,076 | |||||||||||||||||||||
| Net income per share attributed to Synopsys: | |||||||||||||||||||||||
| Basic | $ | 2.95 | $ | 1.78 | |||||||||||||||||||
| Diluted | $ | 2.89 | $ | 1.75 | |||||||||||||||||||
| Anti-dilutive employee stock-based awards excluded | 702 | 527 |
Note 17. 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 CODM in deciding how to allocate resources and in assessing performance. Our CODM is our CEO.
We have three reportable segments: (1) Design Automation, which includes our advanced silicon design, verification products and services, system integration products and services, digital, custom and field programmable gate array (FPGA) IC design software, verification software and hardware products, manufacturing software products and other; (2) Design IP, which includes our Design IP products; and (3) Software Integrity, which includes solutions that test software code for security vulnerabilities and quality defects, as well as professional and managed services.
The financial information provided to and used by the CODM to assist in making operational decisions, allocating resources, and assessing performance includes consolidated financial information as well as revenue, adjusted operating income, and adjusted operating margin information for the Design Automation, Design IP and Software Integrity segments, accompanied by disaggregated information relating to revenue by geographic region.
Information by reportable segment is as follows:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total Segments: | |||||||||||||||||||||||
| Revenue | $ | 1,649,230 | $ | 1,361,340 | |||||||||||||||||||
| Adjusted operating income | 638,358 | 479,167 | |||||||||||||||||||||
| Adjusted operating margin | 39 | % | 35 | % | |||||||||||||||||||
| Design Automation: | |||||||||||||||||||||||
| Revenue | $ | 985,339 | $ | 889,846 | |||||||||||||||||||
| Adjusted operating income | 364,883 | 346,009 | |||||||||||||||||||||
| Adjusted operating margin | 37 | % | 39 | % | |||||||||||||||||||
| Design IP: | |||||||||||||||||||||||
| Revenue | $ | 525,650 | $ | 343,651 | |||||||||||||||||||
| Adjusted operating income | 249,494 | 117,625 | |||||||||||||||||||||
| Adjusted operating margin | 47 | % | 34 | % | |||||||||||||||||||
| Software Integrity: | |||||||||||||||||||||||
| Revenue | $ | 138,241 | $ | 127,843 | |||||||||||||||||||
| Adjusted operating income | 23,981 | 15,533 | |||||||||||||||||||||
| Adjusted operating margin | 17 | % | 12 | % |
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 acquired intangible assets, stock-based compensation, changes in the fair value of deferred compensation plan, restructuring charges, and acquisition/divestiture related items, are 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 January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total segment adjusted operating income | $ | 638,358 | $ | 479,167 | |||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||
| Amortization of acquired intangible assets | (27,053) | (25,357) | |||||||||||||||||||||
| Stock-based compensation expense | (180,652) | (134,227) | |||||||||||||||||||||
| Deferred compensation plan | (40,101) | (20,197) | |||||||||||||||||||||
| Restructuring charges | — | (40,859) | |||||||||||||||||||||
| Acquisition/divestiture related items | (30,932) | (2,595) | |||||||||||||||||||||
| Total operating income | $ | 359,620 | $ | 255,932 |
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 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 are:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| United States | $ | 807,618 | $ | 671,782 | |||||||||||||||||||
| Europe | 159,113 | 135,007 | |||||||||||||||||||||
| China | 249,975 | 197,778 | |||||||||||||||||||||
| Korea | 184,600 | 145,792 | |||||||||||||||||||||
| Other | 247,924 | 210,981 | |||||||||||||||||||||
| Consolidated | $ | 1,649,230 | $ | 1,361,340 |
Geographic revenue data for multi-regional, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and to our allocation methodology.
Note 18. Interest and Other Income (Expense), Net
The following table presents the components of interest and other income (expense), net:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Interest income | $ | 13,150 | $ | 6,899 | |||||||||||||||||||
| Interest expense | (1,324) | (264) | |||||||||||||||||||||
| Gains (losses) on assets related to deferred compensation plan | 40,101 | 20,197 | |||||||||||||||||||||
| Foreign currency exchange gains (losses) | 3,365 | 2,700 | |||||||||||||||||||||
| Gain on sale of strategic investments | 55,077 | — | |||||||||||||||||||||
| Other, net | (4,885) | (6,240) | |||||||||||||||||||||
| Total | $ | 105,484 | $ | 23,292 |
Note 19. 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 presents the provision for income taxes and the effective tax rates:
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Income before income taxes | $ | 465,104 | $ | 279,224 | |||||||||||||||||||
| Provision (benefit) for income taxes | $ | 18,897 | $ | 10,597 | |||||||||||||||||||
| Effective tax rate | 4.1 | % | 3.8 | % |
Our effective tax rate for the three months ended January 31, 2024, is lower than the statutory federal corporate tax rate of 21% 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 and the effect of non-deductible stock-based compensation.
Our effective tax rate increased in the three months ended January 31, 2024, as compared to the same period in fiscal 2023, primarily due to a reduced benefit from U.S. federal research tax credits partially offset by increased excess tax benefits from stock-based compensation.
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 $5.4 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). In fiscal 2018, Synopsys Hungary paid the assessment. Following years of litigation, the Administrative Court issued its written decision in favor of Synopsys Hungary on May 17, 2023, and the HTA subsequently refunded Synopsys Hungary the tax, penalty and interest paid in fiscal 2018, as well as additional interest totaling $39.1 million (including foreign currency effects). During the third quarter of fiscal 2023, Synopsys released its unrecognized tax benefit and offsetting U.S. foreign tax credits, resulting in a net benefit of $23.8 million.
We are also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.
Legislative Developments
Effective our fiscal 2024, we are subject to the new 15% corporate alternative minimum tax (CAMT) enacted as part of the Inflation Reduction Act of 2022. The Company does not expect any impact of CAMT in fiscal 2024.
On January 31, 2024, the House of Representatives has passed the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) which would defer the requirement of capitalizing research and development, based in the United States, until tax years starting after December 31, 2025. The proposed legislation would have a beneficial impact on our cash tax liabilities, if enacted. Synopsys will continue to monitor the status of this legislation.
Note 20. 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 10. Contingencies of the Notes to Consolidated Financial Statements in 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 19. Income Taxes of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
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