Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2016
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-34795
___________________________________________
MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________
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Oregon | 93-0786033 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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8005 SW Boeckman Road, Wilsonville, Oregon | 97070-7777 |
(Address of principal executive offices) | (Zip Code) |
(503) 685-7000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | x | Accelerated Filer | ¨ |
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Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of common stock, no par value, outstanding as of December 1, 2016: 109,521,738
MENTOR GRAPHICS CORPORATION
Index to Form 10-Q
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PART I. FINANCIAL INFORMATION | |
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Item 1. | Financial Statements (unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
Mentor Graphics Corporation
Condensed Consolidated Statements of Income
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
In thousands, except per share data | | | | | | | |
Revenues: | | | | | | | |
System and software | $ | 198,605 |
| | $ | 168,699 |
| | $ | 439,064 |
| | $ | 486,831 |
|
Service and support | 123,911 |
| | 121,817 |
| | 365,435 |
| | 356,890 |
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Total revenues | 322,516 |
| | 290,516 |
| | 804,499 |
| | 843,721 |
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Cost of revenues: | | | | | | | |
System and software | 13,713 |
| | 9,759 |
| | 37,375 |
| | 36,432 |
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Service and support | 35,649 |
| | 35,286 |
| | 100,910 |
| | 100,275 |
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Amortization of purchased technology | 1,828 |
| | 1,844 |
| | 5,400 |
| | 5,496 |
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Total cost of revenues | 51,190 |
| | 46,889 |
| | 143,685 |
| | 142,203 |
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Gross profit | 271,326 |
| | 243,627 |
| | 660,814 |
| | 701,518 |
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Operating expenses: | | | | | | | |
Research and development | 101,023 |
| | 99,669 |
| | 285,561 |
| | 278,237 |
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Marketing and selling | 91,646 |
| | 93,165 |
| | 259,816 |
| | 262,857 |
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General and administration | 20,015 |
| | 19,665 |
| | 56,777 |
| | 56,298 |
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Equity in earnings of Frontline | (634 | ) | | (1,755 | ) | | (2,311 | ) | | (3,976 | ) |
Amortization of intangible assets | 1,462 |
| | 2,364 |
| | 4,536 |
| | 6,817 |
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Special charges | 1,500 |
| | 4,831 |
| | 5,936 |
| | 43,994 |
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Total operating expenses | 215,012 |
| | 217,939 |
| | 610,315 |
| | 644,227 |
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Operating income: | 56,314 |
| | 25,688 |
| | 50,499 |
| | 57,291 |
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Other income, net | 268 |
| | 320 |
| | 1,795 |
| | 849 |
|
Interest expense | (5,143 | ) | | (4,915 | ) | | (14,971 | ) | | (14,381 | ) |
Income before income tax | 51,439 |
| | 21,093 |
| | 37,323 |
| | 43,759 |
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Income tax expense | 9,677 |
| | 7,204 |
| | 5,560 |
| | 9,763 |
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Net income | 41,762 |
| | 13,889 |
| | 31,763 |
| | 33,996 |
|
Less: Loss attributable to noncontrolling interest | — |
| | (790 | ) | | — |
| | (2,010 | ) |
Net income attributable to Mentor Graphics shareholders | $ | 41,762 |
| | $ | 14,679 |
| | $ | 31,763 |
| | $ | 36,006 |
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Net income per share: | | | | | | | |
Basic | $ | 0.38 |
| | $ | 0.13 |
| | $ | 0.29 |
| | $ | 0.31 |
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Diluted | $ | 0.37 |
| | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.30 |
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Weighted average number of shares outstanding: | | | | | | | |
Basic | 108,887 |
| | 117,759 |
| | 108,442 |
| | 116,787 |
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Diluted | 114,112 |
| | 120,141 |
| | 110,931 |
| | 121,963 |
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Cash dividends declared per common share | $ | 0.055 |
| | $ | 0.055 |
| | $ | 0.165 |
| | $ | 0.165 |
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See accompanying notes to unaudited condensed consolidated financial statements.
Mentor Graphics Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
In thousands | | | | | | | |
Net income | $ | 41,762 |
| | $ | 13,889 |
| | $ | 31,763 |
| | $ | 33,996 |
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Other comprehensive income (loss), net of tax: | | | | | | | |
Change in accumulated translation adjustment | (3,245 | ) | | (1,698 | ) | | 1,076 |
| | (5,858 | ) |
Change in unrealized gain (loss) on derivative instruments | (4 | ) | | (408 | ) | | 19 |
| | (49 | ) |
Change in pension liability | (29 | ) | | (1 | ) | | (54 | ) | | (5 | ) |
Other comprehensive income (loss) | (3,278 | ) | | (2,107 | ) | | 1,041 |
| | (5,912 | ) |
Comprehensive income | 38,484 |
| | 11,782 |
| | 32,804 |
| | 28,084 |
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Less amounts attributable to the noncontrolling interest: | | | | | | | |
Net loss | — |
| | (790 | ) | | — |
| | (2,010 | ) |
Change in accumulated translation adjustment | — |
| | (16 | ) | | — |
| | 26 |
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Comprehensive loss attributable to the noncontrolling interest | — |
| | (806 | ) | | — |
| | (1,984 | ) |
Comprehensive income attributable to Mentor Graphics shareholders | $ | 38,484 |
| | $ | 12,588 |
| | $ | 32,804 |
| | $ | 30,068 |
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See accompanying notes to unaudited condensed consolidated financial statements.
Mentor Graphics Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
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As of | October 31, 2016 | | January 31, 2016 |
In thousands | | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 262,762 |
| | $ | 334,826 |
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Trade accounts receivable, net of allowance for doubtful accounts of $3,548 as of October 31, 2016 and $3,826 as of January 31, 2016 | 429,534 |
| | 493,209 |
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Other receivables | 18,361 |
| | 23,120 |
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Inventory | 14,276 |
| | 24,762 |
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Prepaid expenses and other | 31,979 |
| | 22,550 |
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Total current assets | 756,912 |
| | 898,467 |
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Property, plant, and equipment, net of accumulated depreciation of $368,149 as of October 31, 2016 and $348,597 as of January 31, 2016 | 200,781 |
| | 182,092 |
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Term receivables | 251,416 |
| | 268,657 |
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Goodwill | 610,006 |
| | 606,842 |
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Intangible assets, net of accumulated amortization of $235,768 as of October 31, 2016 and $225,818 as of January 31, 2016 | 35,455 |
| | 37,446 |
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Other assets | 79,005 |
| | 70,860 |
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Total assets | $ | 1,933,575 |
| | $ | 2,064,364 |
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Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Short-term borrowings | $ | 21,475 |
| | $ | 33,449 |
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Current portion of notes payable (Note 6) | 240,865 |
| | — |
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Accounts payable | 13,431 |
| | 16,740 |
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Income taxes payable | 5,339 |
| | 3,966 |
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Accrued payroll and related liabilities | 68,189 |
| | 73,371 |
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Accrued and other liabilities | 32,114 |
| | 37,059 |
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Deferred revenue | 213,630 |
| | 258,725 |
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Total current liabilities | 595,043 |
| | 423,310 |
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Notes payable (Note 6) | 5,188 |
| | 240,076 |
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Deferred revenue | 34,242 |
| | 18,303 |
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Income tax liability | 19,957 |
| | 25,116 |
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Other long-term liabilities | 31,977 |
| | 37,130 |
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Total liabilities | 686,407 |
| | 743,935 |
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Commitments and contingencies (Note 7) |
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Convertible notes (Note 6) | 12,092 |
| | — |
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Stockholders’ equity: | | | |
Common stock, no par value, 300,000 shares authorized as of October 31, 2016 and January 31, 2016; 109,491 shares issued and outstanding as of October 31, 2016 and 114,934 shares issued and outstanding as of January 31, 2016 | 708,128 |
| | 818,683 |
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Retained earnings | 547,007 |
| | 522,846 |
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Accumulated other comprehensive loss | (20,059 | ) | | (21,100 | ) |
Total stockholders’ equity | 1,235,076 |
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| 1,320,429 |
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Total liabilities and stockholders’ equity | $ | 1,933,575 |
| | $ | 2,064,364 |
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See accompanying notes to unaudited condensed consolidated financial statements.
Mentor Graphics Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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| | | | | | | |
| Nine months ended October 31, |
| 2016 | | 2015 |
In thousands | | | |
Operating Cash Flows: | | | |
Net income | $ | 31,763 |
| | $ | 33,996 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation of property, plant, and equipment | 29,107 |
| | 26,999 |
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Amortization of intangible assets, debt costs and other | 16,362 |
| | 18,926 |
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Stock-based compensation | 33,518 |
| | 30,889 |
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Deferred income taxes | 3,977 |
| | (1,352 | ) |
Changes in other long-term liabilities | 556 |
| | (1,016 | ) |
Equity in income of unconsolidated entities, net of dividends received | 1,370 |
| | 157 |
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Other | 106 |
| | (702 | ) |
Changes in operating assets and liabilities, net of effect of acquired businesses: | | | |
Trade accounts receivable, net | 63,228 |
| | 97,037 |
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Prepaid expenses and other | (1,349 | ) | | (10,722 | ) |
Term receivables, long-term | 17,049 |
| | 17,059 |
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Accounts payable and accrued liabilities | (19,101 | ) | | (41,728 | ) |
Income taxes receivable and payable | (3,526 | ) | | 2,746 |
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Deferred revenue | (29,354 | ) | | (50,013 | ) |
Net cash provided by operating activities | 143,706 |
| | 122,276 |
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Investing Cash Flows: | | | |
Proceeds from sale of building | — |
| | 2,068 |
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Purchases of property, plant, and equipment | (43,585 | ) | | (28,337 | ) |
Acquisitions of businesses and equity interests, net | (11,759 | ) | | (11,700 | ) |
Net cash used in investing activities | (55,344 | ) | | (37,969 | ) |
Financing Cash Flows: | | | |
Proceeds from issuance of common stock | 18,186 |
| | 21,294 |
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Repurchase of common stock | (146,050 | ) | | (10,000 | ) |
Payments related to tax withholding on vesting of share based awards | (4,117 | ) | | (2,430 | ) |
Dividends paid | (17,782 | ) | | (19,263 | ) |
Net decrease in short-term borrowing, excluding revolving credit facility | (7,079 | ) | | (5,875 | ) |
Repayments of revolving credit facility | (5,000 | ) | | — |
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Repayments of other borrowings | (1,475 | ) | | (7,225 | ) |
Purchase of remaining noncontrolling interest in majority owned subsidiaries | — |
| | (11,088 | ) |
Proceeds for the sale of subsidiary shares to noncontrolling interest | — |
| | 7 |
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Net cash used in financing activities | (163,317 | ) | | (34,580 | ) |
Effect of exchange rate changes on cash and cash equivalents | 2,891 |
| | (1,007 | ) |
Net change in cash and cash equivalents | (72,064 | ) | | 48,720 |
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Cash and cash equivalents at the beginning of the period | 334,826 |
| | 230,281 |
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Cash and cash equivalents at the end of the period | $ | 262,762 |
| | $ | 279,001 |
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See accompanying notes to unaudited condensed consolidated financial statements.
Mentor Graphics Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
All numerical dollar and share references are in thousands, except for per share and conversion rate data.
1. General
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP) and reflect all material normal recurring adjustments. However, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the condensed consolidated financial statements include adjustments necessary for a fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Any changes in estimates will be reflected in the financial statements in future periods.
The condensed consolidated financial statements include our financial statements and those of our wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
2. Recent Accounting Pronouncements
Recently Adopted Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, as part of their simplification initiative to improve the accounting for share-based payments to employees. The new standard affects several aspects of the accounting for share-based payments. It requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement when awards vest or are exercised. Cash flows associated with excess tax benefits are no longer classified as cash flows from financing activities but will be classified as operating activities, consistent with other income tax cash flows. The standard also allows for additional employee tax withholding on the exercise or release of awards, without triggering liability classification of the award. Additionally, when we withhold shares for tax-withholding purposes and in-turn pay cash for taxes on behalf of an employee, the cash payment is classified as a financing activity in our statement of cash flows. Finally, the standard allows an accounting policy election for the treatment of forfeitures of stock based awards. Companies can elect to continue to estimate forfeitures expected to occur, or account for forfeitures as they occur. This standard is effective for us in the first quarter of fiscal year 2018, with early adoption permitted.
We early adopted the new standard effective February 1, 2016. The primary impact to our financial statements was the recognition of $48,605 in deferred tax assets associated with excess tax benefits offset by a valuation allowance of $38,425 and a cumulative-effect adjustment of $10,180 to retained earnings as of January 31, 2016. We elected to continue to estimate forfeitures expected to occur when estimating the amount of compensation expense recorded in each accounting period.
We retrospectively applied to all periods presented in our statements of cash flows, the presentation of excess tax benefits and cash paid for employee taxes where shares were withheld. As a result of this election excess tax benefits were reclassified from financing activities to operating activities and cash paid for shares withheld were reclassified from operating activities to financing activities. The net impact on previously reported results is as follows:
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Nine months ended October 31, 2015 | As originally reported | | As Adjusted |
Net cash provided by operations | $ | 119,846 |
| | $ | 122,276 |
|
Net cash used in financing activities | $ | (32,150 | ) | | $ | (34,580 | ) |
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. This standard eliminates the requirement for an acquirer to retrospectively account for adjustments made to provisional amounts recognized in a business combination. The standard requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are identified. Changes in depreciation, amortization, and any other income effects resulting from adjustments to
provisional amounts, should be computed as of the acquisition date. The standard requires that an entity present separately, by line item, the amounts included in current-period earnings that would have been recorded in previous reporting periods, if the adjustments to provisional amounts had been recognized on the acquisition date. We adopted this standard beginning February 1, 2016. Adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer accounts for fees related to the software license element consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer accounts for the arrangement as a service contract. An arrangement would contain a software license element if both: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. We adopted this standard beginning February 1, 2016 on a prospective basis. Adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
Issued Pronouncements not yet Adopted
Revenue Recognition
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients. This ASU amends narrow aspects of Topic 606 in ASU 2014-09, Revenue from Contracts with Customers, related to the assessment of collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. Practical expedients are provided in the ASU to simplify the transition to the new standard.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. This ASU clarifies guidance in ASU 2014-09, Revenue from Contracts with Customers related to identifying performance obligations and licensing implementation. This ASU is expected to: (i) reduce the cost and complexity of applying the guidance on identifying promised goods or services; (ii) improve guidance on criteria in assessing whether promises to transfer goods and services are separately identifiable; and (iii) improve the operability and understandability of the licensing implementation guidance.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations. This ASU amends the principal versus agent guidance in ASU 2014-09, Revenue from Contracts with Customers, and clarifies that the analysis must determine whether an entity controls the specified goods or services before they are transferred to the customer.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to be entitled to in exchange for the transfer of goods and services to customers. This ASU requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU also requires qualitative and quantitative disclosure about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard permits one of two methods for adoption: (i) retrospectively to each prior reporting period presented, with the ability to utilize certain practical expedients; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, including additional disclosures. We have not yet selected a transition method.
We are evaluating the effect that each of these ASUs will have on our condensed consolidated financial statements and related disclosures. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted beginning in the first quarter of fiscal year 2018.
Other
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. Examples of assets included in the scope of this ASU are intellectual property (IP) and property, plant, and equipment. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We will be required to implement this
guidance in the first quarter of fiscal year 2019. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. We are evaluating the effect that ASU 2016-16 will have on our condensed consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Clarification of Certain Cash Receipts and Cash Payments. This ASU adds and clarifies guidance on the presentation and classification of eight specific cash flow items related to cash receipts and cash payments in the Statement of Cash Flows, with the intent of reducing diversity in practice. The amendments in this ASU should be applied retrospectively for each period presented. For those issues where it is impractical to apply these amendments retrospectively, the amendments should be applied prospectively as of the earliest date practicable. We will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted. This ASU is not expected to have a material impact on our condensed consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU changes how companies measure and recognize credit losses for various financial assets. This ASU will require companies to use an expected credit loss model to recognize estimated credit losses expected to occur over the remaining life of the financial assets rather than the current incurred credit loss model methodology. This revised guidance is applicable to our trade and term receivables. We will be required to implement this guidance in the first quarter of fiscal year 2021. Early adoption is permitted beginning in the first quarter of fiscal year 2020. We are evaluating the effect that ASU 2016-13 will have on our condensed consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a lessee to recognize in the statement of financial position a liability to make lease payments, and a right-of-use asset representing its right to use the underlying asset for the lease term. We will be required to implement this guidance in the first quarter of fiscal year 2020. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our condensed consolidated financial statements and related disclosures.
In September 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU provides guidance on management's responsibility in evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide related disclosures if required. Evaluation is required every reporting period, including interim periods. We will be required to implement this guidance in the fourth quarter of fiscal year 2017. Early adoption is permitted. This ASU is not expected to have a material impact on our condensed consolidated financial statements and related disclosures.
3. Fair Value Measurement
The following table presents information about financial liabilities measured at fair value on a recurring basis:
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| | | | | | | | | | | | | | | |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
Contingent consideration at October 31, 2016 | $ | 2,457 |
| | $ | — |
| | $ | — |
| | $ | 2,457 |
|
Contingent consideration at January 31, 2016 | $ | 3,749 |
| | $ | — |
| | $ | — |
| | $ | 3,749 |
|
The FASB's authoritative guidance for the hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. The fair value hierarchy consists of the following three levels:
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• | Level 1—Quoted prices for identical instruments in active markets; |
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• | Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and |
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• | Level 3—One or more significant inputs to the valuation model are unobservable. |
In connection with certain acquisitions, payment of a portion of the purchase price is typically contingent upon the acquired business’ achievement of certain revenue goals. The short-term portion of the total recorded contingent consideration is included in accrued and other liabilities and the long-term portion of the total recorded contingent consideration is included in other long-term liabilities on our condensed consolidated balance sheet. The following table summarizes the total recorded contingent consideration:
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| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Contingent consideration, short-term | $ | 965 |
| | $ | 1,460 |
|
Contingent consideration, long-term | 1,492 |
| | 2,289 |
|
Total contingent consideration | $ | 2,457 |
| | $ | 3,749 |
|
We have estimated the fair value of our contingent consideration as the present value of the expected payments over the term of the arrangements. The fair value measurement of our contingent consideration as of October 31, 2016 encompasses the following significant unobservable inputs (Level 3):
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| | | | |
Unobservable Inputs | | Range |
Total estimated contingent consideration | | $125 | - | $2,932 |
Discount rate | | 9.5% | - | 15.0% |
Timing of cash flows (in years) | | 0 | - | 2 |
Changes in the fair value of our contingent consideration are primarily driven by changes in the estimated amount and timing of payments, resulting from changes in the forecasted revenues of the acquired businesses. Significant changes in any of the inputs in isolation could result in a fluctuation in the fair value measurement of contingent consideration. Changes in fair value are recognized in special charges in our condensed consolidated statement of operations in the period in which the change is identified.
The following table summarizes contingent consideration activity:
|
| | | |
Balance as of January 31, 2016 | $ | 3,749 |
|
Payments | (1,475 | ) |
Changes in fair value | 99 |
|
Interest accretion | 84 |
|
Balance as of October 31, 2016 | $ | 2,457 |
|
The following table summarizes the fair value and carrying value of our 4.00% Convertible Subordinated Debentures (4.00% Debentures):
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Fair value of notes payable | $ | 363,292 |
| | $ | 255,487 |
|
Carrying value of notes payable | $ | 240,865 |
| | $ | 234,888 |
|
We based the fair value of our 4.00% Debentures on the quoted market price at the balance sheet date. Our notes are not actively traded and the quoted market price is derived from observable inputs including our stock price, stock volatility, and interest rate (Level 2). We believe the carrying value of other notes payable of $5,188 at October 31, 2016 and January 31, 2016 approximated fair value. Of the total carrying value of notes payable, $240,865 was classified as current on our condensed consolidated balance sheet as of October 31, 2016 and none was classified as current on our consolidated balance sheet as of January 31, 2016. See additional discussion of notes payable in Note 6. “Notes Payable.”
The carrying amounts of cash equivalents, trade accounts receivable, net, term receivables, short-term borrowings, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments or because amounts have been appropriately discounted.
During the quarter ended July 31, 2016, we acquired a non-marketable equity security which was accounted for using the cost method of accounting. Our cost method investments are reported at cost net of impairment losses. The carrying amount of the non-marketable equity security was $3,000 at October 31, 2016. Investments accounted for under the cost method of accounting are remeasured and recorded at fair value when identified events or changes in circumstances have a significant
adverse effect on the fair value of the investments. When these events or changes in circumstances occur, these investments are classified as Level 3 because they are valued using significant unobservable inputs. We periodically review our cost method investments for these types of events or changes in circumstances.
4. Term Receivables and Trade Accounts Receivable
We have long-term installment receivables that are attributable to multi-year, multi-element term license sales agreements. Balances for term agreements that are due within one year of the balance sheet date are included in trade accounts receivable, net and balances that are due more than one year from the balance sheet date are included in term receivables, long-term. We discount the total product portion of the agreements to reflect the interest component of the transaction. We amortize the interest component of the transaction to system and software revenues over the period in which payments are made and balances are outstanding, using the effective interest method. We determine the discount rate at the outset of the arrangement based upon the current credit rating of the customer. We reset the discount rate periodically considering changes in prevailing interest rates but do not adjust previously discounted balances.
Term receivable and trade accounts receivable balances were as follows:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Trade accounts receivable | $ | 125,453 |
| | $ | 176,021 |
|
Term receivables, short-term | $ | 304,081 |
| | $ | 317,188 |
|
Term receivables, long-term | $ | 251,416 |
| | $ | 268,657 |
|
Trade accounts receivable include billed amounts whereas term receivables, short-term are comprised of unbilled amounts. Term receivables, short-term represent the portion of long-term installment agreements that are due within one year of the balance sheet date. Billings for term agreements typically occur thirty days prior to the contractual due date, in accordance with individual contract installment terms. Term receivables, long-term represent unbilled amounts which are scheduled to be billed beyond one year from the balance sheet date.
We perform a credit risk assessment of all customers using the Standard & Poor’s (S&P) credit rating as our primary credit-quality indicator. The S&P credit ratings are based on the most recent S&P score available at the time of assessment. For customers that do not have an S&P credit rating, we base our credit risk assessment on results provided in the customers’ most recent financial statements at the time of assessment. We determine whether or not to extend credit to these customers based on the results of our internal credit assessment, thus mitigating our risk of loss.
The credit risk assessment for our long-term receivables was as follows:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
S&P credit rating: | | | |
AAA+ through BBB- | $ | 176,338 |
| | $ | 195,764 |
|
BB+ and lower | 35,286 |
| | 22,520 |
|
| 211,624 |
| | 218,284 |
|
Internal credit assessment | 39,792 |
| | 50,373 |
|
Total long-term term receivables | $ | 251,416 |
| | $ | 268,657 |
|
We maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectibility of our trade accounts receivable based on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer’s operating results, financial position, or credit rating, we record a specific reserve for bad debt to reduce the related receivable to the amount believed to be collectible. We also record unspecified reserves for bad debt for all other customers based on a variety of factors including length of time the receivables are past due, the financial health of customers, the current business environment, and historical experience. If these factors change or circumstances related to specific customers change, we adjust the estimates of the recoverability of receivables resulting in either additional selling expense or a reduction in selling expense in the period the determination is made.
The following shows the change in allowance for doubtful accounts:
|
| | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | Beginning balance | | Expense adjustment | | Other deductions(1) | | Ending balance |
Nine months ended October 31, 2016 | | $ | 3,826 |
| | $ | (611 | ) | | $ | 333 |
| | $ | 3,548 |
|
Nine months ended October 31, 2015 | | $ | 4,217 |
| | $ | (522 | ) | | $ | (42 | ) | | $ | 3,653 |
|
(1)Specific account write-offs and foreign exchange.
We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $45,104 for the nine months ended October 31, 2016 compared to $42,030 for the nine months ended October 31, 2015. Amounts collected from customers on accounts receivable previously sold on a non-recourse basis to financial institutions are included in short-term borrowings on the balance sheet. These amounts are remitted to the financial institutions in the month following quarter-end.
5. Short-Term Borrowings
Short-term borrowings consisted of the following:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Senior revolving credit facility | $ | 20,000 |
| | $ | 25,000 |
|
Collections of previously sold accounts receivable | 489 |
| | 7,568 |
|
Other borrowings | 986 |
| | 881 |
|
Short-term borrowings | $ | 21,475 |
| | $ | 33,449 |
|
We have a syndicated, senior, unsecured, revolving credit facility which expires on January 9, 2020.
The revolving credit facility has a maximum borrowing capacity of $125,000. As stated in the revolving credit facility, we have the option to pay interest based on:
| |
(i) | London Interbank Offered Rate (LIBOR) with varying maturities commensurate with the borrowing period we select, plus a spread of between 2.00% and 2.50% based on a pricing grid tied to a financial covenant, or |
| |
(ii) | A base rate plus a spread of between 1.00% and 1.50%, based on a pricing grid tied to a financial covenant. |
As a result of these interest rate options, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates.
Commitment fees are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40% based on a pricing grid tied to a financial covenant.
This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our common stock over the term of the facility to $200,000 plus 70% of our cumulative consolidated net income (loss) for periods ending after February 1, 2016.
We were in compliance with all financial covenants as of October 31, 2016. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.
6. Notes Payable
Notes payable consist of the following:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
4.00% Debentures | $ | 240,865 |
| | $ | 234,888 |
|
Other | 5,188 |
| | 5,188 |
|
Notes payable | 246,053 |
| | 240,076 |
|
4.00% Debentures, current portion | (240,865 | ) | | — |
|
Notes payable, long-term | $ | 5,188 |
| | $ | 240,076 |
|
Our 4.00% Debentures are due in 2031, but we may be required to repay them earlier under the conversion and redemption provisions described below.
4.00% Debentures
In April 2011, we issued $253,000 of 4.00% Debentures in a private placement pursuant to the SEC Rule 144A under the Securities Act of 1933. Interest on the 4.00% Debentures is payable semi-annually in April and October. The 4.00% Debentures are unsecured obligations.
Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 50.4551 shares of our common stock (equivalent to a conversion price of $19.82 per share). The initial conversion rate for the 4.00% Debentures was 48.6902 shares of our common stock for each one thousand dollars in principal amount (equivalent to a conversion price of $20.54 per share). The conversion rate is adjusted because we declare and pay quarterly cash dividends, beginning in the first quarter of fiscal year 2014.
The 4.00% Debentures are convertible, under certain circumstances, into shares of our common stock at the conversion rate noted above. The circumstances for conversion include:
| |
• | The market price of our common stock exceeding 120% of the conversion price, or $23.78 per share as of October 31, 2016, for at least 20 of the last 30 trading days in the previous fiscal quarter; |
| |
• | A call for redemption of the 4.00% Debentures; |
| |
• | Specified distributions to holders of our common stock; |
| |
• | If a fundamental change, such as a change of control, occurs; |
| |
• | During the two months prior to, but not on, the maturity date; or |
| |
• | The market price of the 4.00% Debentures declining to less than 98% of the value of the common stock into which the 4.00% Debentures are convertible. |
Upon conversion of any 4.00% Debentures, a holder will receive:
| |
(i) | Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and |
| |
(ii) | Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount. |
As of October 31, 2016, the if-converted value of the 4.00% Debentures to the note holders exceeded the principal amount by $115,893.
During the fiscal quarter ended October 31, 2016, the market price of our common stock exceeded 120% of the conversion price for at least 20 of the last 30 trading days of the period. Accordingly, the 4.00% Debentures are convertible at the option of the holders through January 31, 2017. Therefore, the carrying value of the 4.00% Debentures is classified as a current liability. Additionally, the excess of the principal amount over the carrying amount of the 4.00% Debentures is reclassified from permanent equity to temporary equity in our condensed consolidated balance sheet. The determination of whether or not the 4.00% Debentures are convertible is performed at each balance sheet date and may change from quarter to quarter. If this threshold is not met next quarter, the 4.00% Debentures will be reclassified as a long-term liability and the temporary equity will be reclassified to permanent equity in our consolidated balance sheet.
If a holder elects to convert their 4.00% Debentures through January 31, 2017, we would be required to pay cash for at least the principal amount of the converted 4.00% Debentures.
If the proposed acquisition of the Company by Siemens Industry, Inc. is completed at a price of $37.25 per share and the 4.00% Debentures are converted, an estimated cash payment of $475,000 to the debenture holders would be required, including the impact of the dividend declared on November 22, 2016.
Effective April 5, 2016, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices, expressed as a percentage of principal plus any accrued and unpaid interest:
|
| | |
Period | Redemption Price |
Beginning on April 5, 2016 and ending on March 31, 2017 | 101.143 | % |
Beginning on April 1, 2017 and ending on March 31, 2018 | 100.571 | % |
On April 1, 2018 and thereafter | 100.000 | % |
The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, our repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.
The 4.00% Debentures contain a conversion feature allowing for settlement of the debt in cash upon conversion, therefore we separately account for the implied liability and equity components of the 4.00% Debentures. The principal amount, unamortized debt discount, unamortized debt issuance costs, net carrying amount of the liability component, and carrying amount of the equity component of the 4.00% Debentures are as follows:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Principal amount | $ | 252,957 |
| | $ | 252,957 |
|
Unamortized debt discount | (10,744 | ) | | (16,007 | ) |
Unamortized debt issuance costs | (1,348 | ) | | (2,062 | ) |
Net carrying amount of the liability component | $ | 240,865 |
| | $ | 234,888 |
|
Equity component, net of debt issuance costs | $ | 42,518 |
| | $ | 42,518 |
|
The unamortized debt discount and debt issuance costs amortize to interest expense using the effective interest method through March 2018.
We recognized the following amounts in interest expense in the condensed consolidated statement of income related to the 4.00% Debentures:
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Interest expense at the contractual interest rate | $ | 2,530 |
| | $ | 2,530 |
| | $ | 7,589 |
| | $ | 7,590 |
|
Amortization of debt discount | $ | 1,786 |
| | $ | 1,663 |
| | $ | 5,263 |
| | $ | 4,900 |
|
Amortization of debt issuance costs | $ | 238 |
| | $ | 238 |
| | $ | 714 |
| | $ | 714 |
|
The effective interest rate on the 4.00% Debentures was 7.25% for the nine months ended October 31, 2016 and 2015.
Other Notes Payable
In February 2015, we issued a subordinated note payable as part of a business combination. The principal amount of $3,188 was outstanding as of October 31, 2016. The note bears interest at a rate of 4.0% and is due in full on February 25, 2019.
In September 2015, we issued a subordinated note payable as part of a business combination. The principal amount of $2,000 was outstanding as of October 31, 2016. The note bears interest at a rate of 4.0% and is due in full on September 8, 2018.
7. Commitments and Contingencies
Indemnifications
Our license and services agreements generally include a limited indemnification provision for claims from third parties relating to our IP. The indemnification is generally limited to the amount paid by the customer, a multiple of the amount paid by the customer, or a set cap. As of October 31, 2016, we were not aware of any material liabilities arising from these indemnification obligations.
Legal Proceedings
From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to IP rights, contracts, distributorships, and employee relations matters. Periodically, we
review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.
In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in the U.S. District Court for the Northern District of California, alleging that our Veloce® family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent and Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys appealed the decisions by both the district court and the U.S. Patent and Trademark Office. The Court of Appeals for the Federal Circuit has unanimously confirmed the invalidity of all four Synopsys patents.
In June 2013, Synopsys also filed a claim against us in the U.S District Court for the District of Oregon, similarly alleging that our Veloce family of products infringed on two additional Synopsys U.S. patents. These claims have been dismissed, and have been appealed.
We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.
On October 10, 2014, the jury in our patent lawsuit filed in the U.S. District Court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36,000 as well as certain royalties. As of October 31, 2016, nothing has been included in our financial results for this award. Synopsys has filed an appeal, and is currently seeking to have the infringed claims invalidated by the U.S. Patent and Trademark Office.
On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.
In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which sought compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. A Japanese appeals court has ratified that verdict.
We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus no liability has been established nor has a range of loss been disclosed.
8. Stockholders' Equity
Dividends
The following table summarizes dividends declared since the beginning of fiscal year 2016:
|
| | | | | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Per Share Amount | | Total Amount |
Fiscal Year 2017 | | | | | | |
11/22/2016 | | 12/8/2016 | | 1/3/2017 | |
| $0.055 |
| | |
8/18/2016 | | 9/19/2016 | | 9/30/2016 | |
| $0.055 |
| |
| $6,016 |
|
5/19/2016 | | 6/10/2016 | | 6/30/2016 | |
| $0.055 |
| |
| $5,886 |
|
3/3/2016 | | 3/10/2016 | | 3/31/2016 | |
| $0.055 |
| |
| $5,880 |
|
Fiscal Year 2016 | | | | | | |
11/19/2015 | | 12/15/2015 | | 1/4/2016 | |
| $0.055 |
| |
| $6,326 |
|
8/20/2015 | | 9/10/2015 | | 9/30/2015 | |
| $0.055 |
| |
| $6,491 |
|
5/22/2015 | | 6/10/2015 | | 6/30/2015 | |
| $0.055 |
| |
| $6,389 |
|
2/26/2015 | | 3/10/2015 | | 3/31/2015 | |
| $0.055 |
| |
| $6,383 |
|
Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.
9. Stock-Based Compensation
Stock Option and Stock Plans
Our 2010 Omnibus Incentive Plan (Incentive Plan) is administered by the Compensation Committee of our Board of Directors and permits accelerated vesting of outstanding options, restricted stock units, restricted stock awards, and other equity incentives upon the occurrence of certain changes in control of our company. Stock options and time-based restricted stock units under the Incentive Plan are generally expected to vest over four years. Stock options have an expiration date of ten years from the date of grant and an exercise price no less than the fair market value of the shares on the date of grant. Performance-based restricted stock units vest after three years and include goals for operating income margin. We estimate forfeitures based on our historical forfeiture rates. The source of shares issued under the Incentive Plan is new shares. We have not issued any options since fiscal year 2013. Our current equity strategy is to grant restricted stock units rather than options to ensure that we deliver value to our employees when there is volatility in the market.
Employee Stock Purchase Plans
We have an employee stock purchase plan (ESPP) for U.S. employees and an ESPP for certain foreign subsidiary employees. The ESPPs provide for six-month offerings commencing on January 1 and July 1 of each year with purchases on June 30 and December 31 of each year. Each eligible employee may purchase up to six thousand shares of stock on each purchase date (subject to a plan limit on the total fair market value) at prices no less than 85% of the lesser of the fair market value of the shares on the offering date or on the purchase date.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense recognized:
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Cost of revenues | $ | 785 |
| | $ | 665 |
| | $ | 2,277 |
| | $ | 1,981 |
|
Operating expenses: | | | | | | | |
Research and development | 4,708 |
| | 4,095 |
| | 13,598 |
| | 12,213 |
|
Marketing and selling | 2,911 |
| | 2,468 |
| | 8,612 |
| | 7,314 |
|
General and administration | 2,687 |
| | 2,797 |
| | 9,031 |
| | 9,381 |
|
Equity plan-related compensation expense | $ | 11,091 |
| | $ | 10,025 |
| | $ | 33,518 |
| | $ | 30,889 |
|
10. Net Income Per Share
We compute basic net income per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and potentially dilutive
common shares outstanding during the period. Potentially dilutive common shares consist of common shares issuable upon vesting of restricted stock units, exercise of stock options and ESPP purchase rights, and conversion of the 4.00% Debentures using the treasury stock method.
The following provides the computation of basic and diluted net income per share:
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income attributable to Mentor Graphics shareholders | $ | 41,762 |
| | $ | 14,679 |
| | $ | 31,763 |
| | $ | 36,006 |
|
Adjustment to redemption value of noncontrolling interest with redemption feature | — |
| | 133 |
| | — |
| | 258 |
|
Adjusted net income attributable to Mentor Graphics shareholders, basic | 41,762 |
| | 14,812 |
| | 31,763 |
| | 36,264 |
|
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures | 519 |
| | — |
| | — |
| | 519 |
|
Adjusted net income attributable to Mentor Graphics shareholders | $ | 42,281 |
| | $ | 14,812 |
| | $ | 31,763 |
| | $ | 36,783 |
|
| | | | | | | |
Weighted average common shares used to calculate basic net income per share | 108,887 |
| | 117,759 |
| | 108,442 |
| | 116,787 |
|
Potentially dilutive common shares | 5,225 |
| | 2,382 |
| | 2,489 |
| | 5,176 |
|
Weighted average common and potentially dilutive common shares used to calculate diluted net income per share | 114,112 |
| | 120,141 |
| | 110,931 |
| | 121,963 |
|
| | | | | | | |
Net income per share attributable to Mentor Graphics shareholders: | | | | | | | |
Basic net income per share | $ | 0.38 |
| | $ | 0.13 |
| | $ | 0.29 |
| | $ | 0.31 |
|
Diluted net income per share | $ | 0.37 |
| | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.30 |
|
We have adjusted the numerator of our basic and diluted net income per share calculation for the three and nine months ended October 31, 2015 for the adjustment of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings. The effect of the conversion of the 4.00% Debentures was dilutive for the three months ended October 31, 2016 and the nine months ended October 31, 2015. We assume that the excess of the value of the converted shares over the principal amount of the 4.00% Debentures will be settled in common stock for the purposes of calculating the dilutive effect of net income per share. We have adjusted the numerator of our diluted earnings per share calculation for the forfeited interest, net of tax, resulting from the assumed conversion.
The effect of the conversion of the 4.00% Debentures was anti-dilutive for the nine months ended October 31, 2016 and the three months ended October 31, 2015 and therefore excluded from the computation of diluted net income per share. The conversion feature of the 4.00% Debentures, which allows for settlement in cash or a combination of cash and common stock, is further described in Note 6. “Notes Payable.”
The following details the adjustments to net income excluded from the computation of diluted net income per share:
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Adjustment for convertible debt interest, net of tax to be forfeited upon conversion of 4.00% Debentures | $ | — |
| | $ | 519 |
| | $ | 519 |
| | $ | — |
|
The following details shares excluded from the computation of diluted net income per share:
|
| | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Shares of common stock for restricted stock units | — |
| | — |
| | 1,278 |
| | — |
|
Shares of common stock for convertible debt | — |
| | 2,695 |
| | 1,071 |
| | — |
|
Total anti-dilutive shares excluded | — |
| | 2,695 |
| | 2,349 |
| | — |
|
The stock options and the 4.00% Debentures were determined to be anti-dilutive as a result of applying the treasury stock method.
11. Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss, net of tax effects:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Foreign currency translation adjustment | $ | (19,937 | ) | | $ | (21,013 | ) |
Unrealized loss on derivatives | (17 | ) | | (36 | ) |
Pension liability | (105 | ) | | (51 | ) |
Total accumulated other comprehensive loss | $ | (20,059 | ) | | $ | (21,100 | ) |
During the first nine months of fiscal years 2017 and 2016, there were no significant amounts reclassified to net income from accumulated other comprehensive loss related to foreign currency translation adjustment, cash flow hedges or pension plans.
12. Special Charges
The following is a summary of the components of special charges:
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Employee severance and related costs | $ | 354 |
| | $ | 3,485 |
| | $ | 2,884 |
| | $ | 14,188 |
|
Litigation costs | (19 | ) | | 1,122 |
| | 1,344 |
| | 3,641 |
|
Voluntary early retirement program | — |
| | (203 | ) | | — |
| | 25,232 |
|
Other costs, net | 1,165 |
| | 427 |
| | 1,708 |
| | 933 |
|
Total special charges | $ | 1,500 |
| | $ | 4,831 |
| | $ | 5,936 |
| | $ | 43,994 |
|
Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.
We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 in which 110 employees elected to participate. The costs presented here are for severance benefits.
Employee severance and related costs include severance benefits and notice pay. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.
Approximately 87% of the employee severance and related costs for the nine months ended October 31, 2016 were paid during the period. We expect to pay the remainder during the fiscal year ending January 31, 2017. Substantially all of the employee severance and related costs for the nine months ended October 31, 2015 were paid during the fiscal year ending January 31, 2016. There were no significant modifications to the amount of those charges.
Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, EVE, and Synopsys regarding emulation technology.
Accrued special charges are included in accrued and other liabilities in the condensed consolidated balance sheets. The following table shows changes in accrued special charges during the nine months ended October 31, 2016:
|
| | | | | | | | | | | | | | | |
| Accrued special charges as of | | Charges during the nine months ended | | Payments during the nine months ended | | Accrued special charges as of |
| January 31, 2016 | | October 31, 2016 | | October 31, 2016 | | October 31, 2016 |
Employee severance and related costs | $ | 1,935 |
| | $ | 2,884 |
| | $ | (4,232 | ) | | $ | 587 |
|
Litigation costs | 311 |
| | 1,344 |
| | (1,152 | ) | | 503 |
|
Other costs, net | 760 |
| | 1,708 |
| | (2,069 | ) | | 399 |
|
Total accrued special charges | $ | 3,006 |
| | $ | 5,936 |
| | $ | (7,453 | ) | | $ | 1,489 |
|
13. Income Taxes
The provision for income taxes was as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Income tax expense | $ | 9,677 |
| | $ | 7,204 |
| | $ | 5,560 |
| | $ | 9,763 |
|
Effective tax rate | 18.8 | % | | 34.2 | % | | 14.9 | % | | 22.3 | % |
Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full fiscal year and record adjustments in each quarter. Such adjustments consider period specific items and, when applicable, a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.
Our effective tax rate is 14.9% for the nine months ended October 31, 2016, after the inclusion of $(1,532) in net favorable period specific items. For our full fiscal year forecast, we project an 18.0% effective tax rate. This rate is inclusive of period specific items recognized through October 31, 2016. Our projected rate for the full fiscal year differs from tax computed at the U.S. federal statutory rate of 35.0% primarily due to:
| |
• | The benefit of lower tax rates on earnings of foreign subsidiaries; and |
| |
• | Forecasted utilization of net operating loss carryforwards, foreign tax credit carryforwards, and research and experimentation credit carryforwards for which no tax benefit has been recognized. |
These differences are partially offset by:
| |
• | Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to account for the impact of future repatriations; |
| |
• | Net increase in liabilities for uncertain tax positions; and |
Actual results may differ significantly from our current projections. Further, our effective tax rate could fluctuate considerably on a quarterly basis and could be significantly affected to the extent our actual mix of earnings among individual jurisdictions is different than our expectations.
We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. In addition, we record deferred tax assets for net operating loss carryforwards and tax credit carryforwards. We calculate the deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized. We have determined that it is uncertain whether our U.S. entity will generate sufficient taxable income to fully utilize tax credit carryforwards and certain net operating losses. Accordingly, we recorded a valuation allowance against those deferred tax assets for which realization does not meet the more likely than not standard. We have established valuation allowances related to certain foreign deferred tax assets based on limitations on the utilization of such deferred tax assets in certain jurisdictions. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.
As of October 31, 2016, we had a liability of $25,296 for income taxes associated with uncertain income tax positions. Of this liability, $5,339 was classified as short-term liabilities in income taxes payable in our condensed consolidated balance sheet as
we generally anticipate the settlement of such liabilities will require payment of cash within the next twelve months. The remaining $19,957 of income tax associated with uncertain tax positions was classified as long-term liabilities. Certain liabilities may result in the reduction of deferred tax assets rather than settlement in cash. We are not able to reasonably estimate the timing of any cash payments required to settle the long-term liabilities and do not believe that the ultimate settlement of these liabilities will materially affect our liquidity.
14. Supplemental Cash Flow Information
The following provides information concerning supplemental disclosures of cash flow activities:
|
| | | | | | | |
| Nine months ended October 31, |
| 2016 | | 2015 |
Cash paid, net for: | | | |
Interest | $ | 12,535 |
| | $ | 11,497 |
|
Income taxes | $ | 10,170 |
| | $ | 10,426 |
|
15. Segment Reporting
Our Chief Operating Decision Makers (CODMs), which consist of the Chief Executive Officer and the President, review our consolidated results within one operating segment. In making operating decisions, our CODMs primarily consider consolidated financial information accompanied by disaggregated revenue information by geographic region.
We eliminate all intercompany revenues in computing revenues by geographic regions. Revenues related to operations in the geographic regions were as follows: |
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues: | | | | | | | |
United States | $ | 139,251 |
| | $ | 115,984 |
| | $ | 328,931 |
| | $ | 360,773 |
|
Europe | 63,065 |
| | 65,645 |
| | 165,529 |
| | 181,484 |
|
Japan | 21,651 |
| | 32,947 |
| | 83,163 |
| | 69,888 |
|
Pacific Rim | 94,183 |
| | 72,186 |
| | 217,292 |
| | 219,773 |
|
Other | 4,366 |
| | 3,754 |
| | 9,584 |
| | 11,803 |
|
Total revenues | $ | 322,516 |
| | $ | 290,516 |
| | $ | 804,499 |
| | $ | 843,721 |
|
For the three months ended October 31, 2016, one customer accounted for approximately 10.0% of our total revenues. For the three months ended October 31, 2015, no customer accounted for 10.0% or more of our total revenues. For the nine months ended October 31, 2016, no customer accounted for 10.0% or more of our total revenues. For the nine months ended October 31, 2015, one customer accounted for approximately 10.0% of our total revenues.
16. Subsequent Events
On November 12, 2016, we entered into a definitive agreement to be acquired by Siemens Industry, Inc. (Siemens) and Meadowlark Subsidiary Corporation, a wholly-owned subsidiary of Siemens. The transaction is valued at $37.25 per share in cash, or approximately $4.5 billion, and has been approved by our Board of Directors. The closing of the transaction is subject to approval by the affirmative vote of the holders of at least a majority of the outstanding shares of Mentor Graphics common stock. The closing of the transaction is also subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; receipt of clearance from the Committee on Foreign Investment in the U.S. and other specified regulatory approvals; the accuracy of representations and warranties contained in the agreement. We are also subject to compliance with covenants and agreements contained in the agreement, including a restriction on the amount we can borrow of no more than $10,000 in each fiscal quarter and a prohibition on the repurchase of common stock. The closing of the transaction is not subject to a financing condition and is expected to occur in 2017.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Unless otherwise indicated, numerical references are in millions, except for percentages, per share data, and conversion rate data.
Overview
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this Form 10-Q. Certain discussions below contain forward-looking statements. These statements are predictions based upon our current expectations about future trends and events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. In particular, we refer you to the risks discussed in Part II, Item 1A. “Risk Factors” and in our other Securities and Exchange Commission filings, which identify important risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this Form 10-Q. We do not intend, and undertake no obligation, to update these forward-looking statements.
The Company
We are a supplier of electronic design automation (EDA) tools — advanced computer software and emulation hardware systems used to automate the design, analysis, and testing of complex electro-mechanical systems, electronic hardware, and embedded systems software in electronic systems and components. We market our products and services worldwide, primarily to large companies in the communications, computer, consumer electronics, semiconductor, networking, military and aerospace, multimedia, and transportation industries. Through the diversification of our customer base among these various customer markets, we attempt to reduce our exposure to fluctuations within each market. We sell and license our products through our direct sales force and a channel of distributors and sales representatives. In addition to our corporate offices in Wilsonville, Oregon, we have sales, support, research and development, and professional service offices worldwide.
We generally focus on products and design platforms where we have or believe we can attain leading market share. Part of this approach includes developing new applications and exploring new markets where EDA companies have not generally participated. We believe this strategy leads to a more diversified product and customer mix and can help reduce the volatility of our business and our risk as a creditor, while increasing our potential for growth.
We derive system and software revenues primarily from the sale of term software license contracts, which are typically three to four years in length. We generally recognize revenue for these arrangements upon product delivery at the beginning of the license term. Larger enterprise-wide customer contracts, which are approximately 50% or more of our system and software revenue, drive the majority of our period-to-period revenue variances. We identify term licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily include short-term term licenses as well as other term licenses where we provide the customer with rights to unspecified or unreleased future products. For these reasons, the timing of large contract renewals, customer circumstances, and license terms are the primary drivers of revenue changes from period to period, with revenue changes also being driven by new contracts and additional purchases under existing contracts, to a lesser extent.
The EDA industry is competitive and is characterized by very strong leadership positions in specific segments of the EDA market. These strong leadership positions can be maintained for significant periods of time as the software can be difficult to master and customers are disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from areas in which we are the leader. We expect to continue our strategy of developing high quality tools with number one market share potential, rather than being a broad-line supplier with undifferentiated product offerings. This strategy allows us to focus investment in areas where customer needs are greatest and where we have the opportunity to build significant market share.
Our products and services are dependent to a large degree on new design projects initiated by customers in the integrated circuit (IC) and electronics system industries. These industries can be cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, wide fluctuations in product supply and demand, and industry consolidation. Furthermore, extended economic downturns can result in reduced funding for development due to downsizing and other business restructurings. These pressures are offset by the need for the development and introduction of next generation products once an economic recovery occurs.
Known Trends and Uncertainties Impacting Future Results of Operations
Our revenue has historically fluctuated quarterly and has generally been the highest in the fourth quarter of our fiscal year due to our customers’ corporate calendar year-end spending trends and the timing of contract renewals.
Ten accounts make up approximately 50% of our receivables as of October 31, 2016, including both short and long-term balances. We have not experienced and do not presently expect to experience collection issues with these customers.
Net of reserves, we have no receivables greater than 30 days past due (net of cash based revenue invoices), and continue to experience no difficulty in factoring our high quality receivables.
Bad debt expense recorded for the first nine months of fiscal year 2017 was not material. However, we do have exposures within our receivables portfolio to customers with weak credit ratings. These receivable balances could have a material adverse effect on earnings in any given quarter, should significant additional allowances for doubtful accounts be necessary. However, as discussed in Note 4. “Term Receivables and Trade Accounts Receivable” in Part I, Item 1. “Financial Statements”, we regularly evaluate the collectibility of our trade accounts receivable and record specific and general reserves for bad debt as necessary.
Bookings during the first nine months of fiscal year 2017 increased approximately 15% compared to the first nine months of fiscal year 2016 primarily due to the timing of term license contract renewals. Bookings are the value of executed orders during a period for which revenue has been or will be recognized within six months for software products and emulation hardware systems, and within twelve months for professional services and training. Ten customers accounted for approximately 45% of total bookings for the first nine months of fiscal year 2017 compared to 40% for the first nine months of fiscal year 2016. The number of new customers during the first nine months of fiscal year 2017 were approximately the same as the first nine months of fiscal year 2016.
Product Development
During the first nine months of fiscal year 2017, we continued to execute our strategy of focusing on technical challenges encountered by customers, as well as building upon our well-established product families. We believe that customers, faced with leading-edge design challenges in creating new products, generally choose the best EDA products in each category to build their design environment. Through both internal development and strategic acquisitions, we have focused on areas where we believe we can build a leading market position or extend an existing leading market position.
We believe that the development and commercialization of EDA software tools is generally a three to five year process with limited customer adoption and sales in the first years of tool availability. Once tools are adopted, however, their life spans tend to be long. During the first nine months of fiscal year 2017, we introduced both new products and upgrades to existing products.
Critical Accounting Policies
We base our discussion and analysis of our financial condition and results of operations upon our condensed consolidated financial statements which have been prepared in accordance with United States (U.S.) generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an on-going basis. We base our estimates on historical experience, current facts, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues, costs, and expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.
We believe that the accounting for revenue recognition, valuation of accounts receivable, income taxes, business combinations, goodwill, intangible assets, long-lived assets, special charges, and stock-based compensation are the critical accounting estimates and judgments used in the preparation of our condensed consolidated financial statements. For further discussion of our critical accounting policies, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in Part II of our Annual Report on Form 10-K for the year ended January 31, 2016.
RESULTS OF OPERATIONS
Revenues and Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | Change | | 2015 | | 2016 | | Change | | 2015 |
System and software revenues | $ | 198.6 |
| | 18 | % | | $ | 168.7 |
| | $ | 439.1 |
| | (10 | )% | | $ | 486.8 |
|
System and software gross profit | $ | 183.1 |
| | 17 | % | | $ | 157.0 |
| | $ | 396.3 |
| | (11 | )% | | $ | 444.9 |
|
Gross profit percent | 92 | % | | | | 93 | % | | 90 | % | | | | 91 | % |
Service and support revenues | $ | 123.9 |
| | 2 | % | | $ | 121.8 |
| | $ | 365.4 |
| | 2 | % | | $ | 356.9 |
|
Service and support gross profit | $ | 88.2 |
| | 2 | % | | $ | 86.6 |
| | $ | 264.5 |
| | 3 | % | | $ | 256.6 |
|
Gross profit percent | 71 | % | | | | 71 | % | | 72 | % | | | | 72 | % |
Total revenues | $ | 322.5 |
| | 11 | % | | $ | 290.5 |
| | $ | 804.5 |
| | (5 | )% | | $ | 843.7 |
|
Total gross profit | $ | 271.3 |
| | 11 | % | | $ | 243.6 |
| | $ | 660.8 |
| | (6 | )% | | $ | 701.5 |
|
Gross profit percent | 84 | % | | | | 84 | % | | 82 | % | | | | 83 | % |
System and Software
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | Change | | 2015 | | 2016 | | Change | | 2015 |
Upfront license revenues | $ | 172.6 |
| | 21 | % | | $ | 142.8 |
| | $ | 356.8 |
| | (11 | )% | | $ | 399.4 |
|
Ratable license revenues | 26.0 |
| | — | % | | 25.9 |
| | 82.3 |
| | (6 | )% | | 87.4 |
|
Total system and software revenues | $ | 198.6 |
| | 18 | % | | $ | 168.7 |
| | $ | 439.1 |
| | (10 | )% | | $ | 486.8 |
|
We derive system and software revenues from the sale of licenses of software products and emulation hardware systems, including finance fee revenues from our long-term installment receivables resulting from term product sales. Upfront license revenues consist of perpetual licenses and term licenses for which we recognize revenue upon product delivery at the start of a license term. We identify licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily consist of short-term term licenses and finance fees from the accretion of the discount on long-term installment receivables.
Ten customers accounted for approximately 65% of system and software revenues for the three months ended October 31, 2016 and 40% for the nine months ended October 31, 2016 compared to approximately 60% for the three months ended October 31, 2015 and 45% for the nine months ended October 31, 2015.
System and software revenues increased $29.9 for the three months ended October 31, 2016 compared to the three months ended October 31, 2015. The effect of acquisitions completed in fiscal years 2017 and 2016 on system and software revenues for the three months ended October 31, 2016 was not material. The increase in software license revenues was primarily due to the timing of contract renewals and additional business with existing customers.
System and software revenues decreased $47.7 for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The effect of acquisitions completed in fiscal years 2017 and 2016 on fiscal year 2017 system and software revenues was $0.9, which is a $5.5 decrease in system and software revenues from acquisitions compared to the nine months ended October 31, 2015. Software license revenues decreased $32.1 driven by the timing of contract renewals, with the remaining decrease primarily due to a first quarter decrease in sales of emulation hardware systems.
For the three months ended October 31, 2016, one customer accounted for 10% of total revenues. For the nine months ended October 31, 2016, no single customer accounted for 10% or more of total revenues. For the three months ended October 31, 2015, no single customer accounted for 10% or more of total revenues. For the nine months ended October 31, 2015, one customer accounted for 10% of total revenues.
Service and Support
We derive service and support revenues from software and hardware post-contract maintenance or support services and professional services, which includes consulting, training, and other services. Professional services are lower margin offerings which are staffed according to fluctuations in demand. Support services operate under a less variable cost structure.
Service and support revenues increased $2.1 for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 primarily due to an increase in consulting and training revenues due to increased customer demand for services.
Service and support revenues increased $8.5 for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The effect of acquisitions completed in fiscal years 2017 and 2016 on service and support revenues for the nine months ended October 31, 2016 was $0.6, which is a $9.8 decrease in service and support revenues from acquisitions compared to the nine months ended October 31, 2015. This decrease was offset by a $12.8 increase in consulting and training revenues due to increased customer demand for services and a $5.1 increase in support revenues resulting from an increase in our installed base.
Geographic Revenues Information
Revenues by Geography
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | Change | | 2015 | | 2016 | | Change | | 2015 |
North America | $ | 143.5 |
| | 20 | % | | $ | 119.7 |
| | $ | 338.5 |
| | (9 | )% | | $ | 372.6 |
|
Europe | 63.1 |
| | (4 | )% | | 65.6 |
| | 165.5 |
| | (9 | )% | | 181.4 |
|
Japan | 21.7 |
| | (34 | )% | | 33.0 |
| | 83.2 |
| | 19 | % | | 69.9 |
|
Pacific Rim | 94.2 |
| | 30 | % | | 72.2 |
| | 217.3 |
| | (1 | )% | | 219.8 |
|
Total revenues | $ | 322.5 |
| | 11 | % | | $ | 290.5 |
| | $ | 804.5 |
| | (5 | )% | | $ | 843.7 |
|
The increase in revenues in North America and Pacific Rim and the decrease in revenues in Japan for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 were primarily due to the timing of contract renewals. The decrease in revenues in North America for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015 were primarily due to the timing of contract renewals.
We recognize additional revenues in periods when the U.S. dollar weakens in value against foreign currencies. Conversely, we recognize lower revenues in periods when the U.S. dollar strengthens in value against foreign currencies. For the three months ended October 31, 2016, approximately 30% of European and approximately 85% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. For the nine months ended October 31, 2016, approximately 35% of European and approximately 85% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. Foreign currency had an immaterial impact on revenues for the three and nine months ended October 31, 2016 compared to the three and nine months ended October 31, 2015.
For additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see discussion in Part I, “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Revenues by Category
We segregate revenues into five categories of similar products and services. Each category includes both product and related support revenues. Revenues for each category as a percent of total revenues are as follows (percentages rounded to the nearest 5%):
|
| | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues: | | | | | | | |
IC Design to Silicon | 45 | % | | 40 | % | | 40 | % | | 40 | % |
Scalable Verification | 20 | % | | 25 | % | | 25 | % | | 25 | % |
Integrated Systems Design | 20 | % | | 20 | % | | 20 | % | | 20 | % |
New and Emerging Markets | 5 | % | | 5 | % | | 5 | % | | 5 | % |
Services and Other | 10 | % | | 10 | % | | 10 | % | | 10 | % |
Total revenues | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | Change | | 2015 | | 2016 | | Change | | 2015 |
Research and development | $ | 101.0 |
| | 1 | % | | $ | 99.6 |
| | $ | 285.5 |
| | 3 | % | | $ | 278.2 |
|
Marketing and selling | 91.6 |
| | (2 | )% | | 93.2 |
| | 259.8 |
| | (1 | )% | | 262.9 |
|
General and administration | 20.0 |
| | 2 | % | | 19.7 |
| | 56.8 |
| | 1 | % | | 56.3 |
|
Equity in earnings of Frontline | (0.6 | ) | | (67 | )% | | (1.8 | ) | | (2.3 | ) | | (43 | )% | | (4.0 | ) |
Amortization of intangible assets | 1.5 |
| | (38 | )% | | 2.4 |
| | 4.6 |
| | (32 | )% | | 6.8 |
|
Special charges | 1.5 |
| | (69 | )% | | 4.8 |
| | 5.9 |
| | (87 | )% | | 44.0 |
|
Total operating expenses | $ | 215.0 |
| | (1 | )% | | $ | 217.9 |
| | $ | 610.3 |
| | (5 | )% | | $ | 644.2 |
|
Selected Operating Expenses as a Percentage of Total Revenues
|
| | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Research and development | 31 | % | | 34 | % | | 36 | % | | 33 | % |
Marketing and selling | 29 | % | | 32 | % | | 32 | % | | 31 | % |
General and administration | 6 | % | | 7 | % | | 7 | % | | 7 | % |
Total selected operating expenses | 66 | % | | 73 | % | | 75 | % | | 71 | % |
We incur a substantial portion of our operating expenses outside the U.S. in various foreign currencies. We recognize additional operating expense in periods when the U.S. dollar weakens in value against foreign currencies and lower operating expenses in periods when the U.S. dollar strengthens in value against foreign currencies. We experienced favorable currency movements in total operating expenses of approximately $0.3 for the three months ended October 31, 2016 compared to the three months ended October 31, 2015, and approximately $3.9 for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015, primarily due to movements in the British pound, Indian rupee, and Chinese yuan, offset in part by unfavorable movements in the Japanese yen. The impact of these currency movements is reflected in the changes in operating expenses detailed below.
Research and Development
Research and development expenses increased by $1.4 for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 and $7.3 for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The components of these changes are summarized as follows:
|
| | | | | | | |
| Change |
| Three Months Ended | | Nine Months Ended |
Salaries, variable compensation, and benefits expenses | $ | 1.7 |
| | $ | 6.8 |
|
Supplies and equipment | 0.4 |
| | 2.2 |
|
Expenses associated with acquired businesses | 0.5 |
| | 1.7 |
|
Stock compensation | 0.6 |
| | 1.4 |
|
Professional services | (0.7 | ) | | (1.3 | ) |
Other expenses | (1.1 | ) | | (3.5 | ) |
Total change in research and development expenses | $ | 1.4 |
| | $ | 7.3 |
|
Marketing and Selling
Marketing and selling expenses decreased by $(1.6) for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 and $(3.1) for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The components of these changes are summarized as follows:
|
| | | | | | | |
| Change |
| Three Months Ended | | Nine Months Ended |
Salaries, variable compensation, and benefits expenses | $ | 3.7 |
| | $ | 5.3 |
|
Emulation demonstration inventory amortization | (2.7 | ) | | (4.8 | ) |
Stock compensation | 0.4 |
| | 1.3 |
|
Other expenses | (3.0 | ) | | (4.9 | ) |
Total change in marketing and selling expenses | $ | (1.6 | ) | | $ | (3.1 | ) |
General and Administration
General and administration expenses increased by $0.3 for the three months ended October 31, 2016 compared to the three months ended October 31, 2015 and $0.5 for the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The components of these changes are summarized as follows:
|
| | | | | | | |
| Change |
| Three Months Ended | | Nine Months Ended |
Professional services | $ | 1.0 |
| | $ | 1.5 |
|
Salaries, variable compensation, and benefits expenses | 0.3 |
| | 1.3 |
|
Other expenses | (1.0 | ) | | (2.3 | ) |
Total change in general and administration expenses | $ | 0.3 |
| | $ | 0.5 |
|
Special Charges
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | Change | | 2015 | | 2016 | | Change | | 2015 |
Employee severance and related costs | $ | 0.3 |
| | (91 | )% | | $ | 3.5 |
| | $ | 2.9 |
| | (80 | )% | | $ | 14.2 |
|
Litigation costs | — |
| | (100 | )% | | 1.1 |
| | 1.3 |
| | (65 | )% | | 3.7 |
|
Voluntary early retirement program | — |
| | (100 | )% | | (0.2 | ) | | — |
| | (100 | )% | | 25.2 |
|
Other costs, net | 1.2 |
| | 200 | % | | 0.4 |
| | 1.7 |
| | 89 | % | | 0.9 |
|
Total special charges | $ | 1.5 |
| | (69 | )% | | $ | 4.8 |
| | $ | 5.9 |
| | (87 | )% | | $ | 44.0 |
|
Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.
We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 in which 110 employees elected to participate. The costs presented here are for severance benefits.
Employee severance and related costs include severance benefits and notice pay. These charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.
Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), and Synopsys, Inc. regarding emulation technology.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | Change | | 2015 | | 2016 | | Change | | 2015 |
Income tax expense | $ | 9.7 |
| | 35 | % | | $ | 7.2 |
| | $ | 5.6 |
| | (43 | )% | | $ | 9.8 |
|
Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. The provision considers that a significant amount of our earnings are in certain foreign operations, including our Irish subsidiaries. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full fiscal year, and record adjustments in each quarter. Such adjustments consider period specific items and, when applicable, a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.
|
| | | | | | | | | | | | | | | |
| Three months ended October 31, | | Nine months ended October 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Effective tax rate | 19 | % | | 34 | % | | 15 | % | | 22 | % |
Net period specific items expense (benefit) | $ | — |
| | $ | 1.3 |
| | $ | (1.5 | ) | | $ | (0.3 | ) |
Effective tax rate without period specific items | 19 | % | | 28 | % | | 19 | % | | 23 | % |
For the nine months ended October 31, 2016, we have a 15% effective tax rate with period specific items. This current period effective tax rate differs from our effective tax rate for the nine months ended October 31, 2015 due to favorable period specific items generally increasing the tax rate in periods with losses and reducing the effective tax rate in periods with profit, as well as the variability in the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates.
For our full fiscal year forecast, we have projected an 18% effective tax rate. This rate is inclusive of period specific items recognized through October 31, 2016. Our projected rate differs from tax computed at the U.S. federal statutory rate of 35% primarily due to:
| |
• | The benefit of lower tax rates on earnings of foreign subsidiaries; and |
| |
• | Forecasted utilization of net operating loss carryforwards, foreign tax credit carryforwards, and research and experimentation credit carryforwards for which no tax benefit has been recognized. |
These differences are partially offset by:
| |
• | Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to account for the impact of future repatriations; |
| |
• | Net increase in liabilities for uncertain tax positions; and |
We adopted a new accounting standard related to the accounting for stock-based compensation during the nine months ended October 31, 2016 that required all income tax effects of stock-based awards to be recognized in our condensed consolidated statement of operations as the awards vest or are settled. For further discussion regarding new accounting standards, see Note 2. “Recent Accounting Pronouncements” in Part I, Item 1. “Financial Statements.”
We have not provided for U.S. income taxes on the undistributed earnings of our foreign subsidiaries to the extent they are considered permanently reinvested outside the U.S. Where the earnings of our foreign subsidiaries are not treated as permanently reinvested, we have accrued for U.S. income taxes on those earnings in our tax provision.
We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations varies from jurisdiction to jurisdiction. In some cases, it may be extended or be unlimited. Furthermore, net operating loss and tax credit carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such net operating losses and tax credits originated. Our larger jurisdictions generally provide for a statute of limitations from three to five years. For U.S. federal income tax purposes, the tax years which remain open for examination are fiscal years 2014 and forward, although net operating loss and tax credit carryforwards from all years are subject to examination and adjustment for three years following the year in which they were utilized. We are currently under examination in various jurisdictions. The examinations are in different stages and timing of their resolution is difficult to
predict. The statute of limitations remains open for years on or after fiscal year 2012 in Ireland and Israel, fiscal year 2011 in Japan, fiscal year 2013 in France, and fiscal year 2009 in India. However, in France and India, the statute of limitations has been extended two years and seven years, respectively, due to open audit processes.
We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities even though we believe that the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves quarterly and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarifications of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective tax rate.
Our tax position in the U.S. could be impacted by the U.S. Tax Court opinion issued on July 27, 2015 in Altera Corp. v. Commissioner which invalidates part of a Treasury Regulation requiring stock based compensation to be included in any qualified intercompany cost sharing arrangement. For the nine months ended October 31, 2016, no impact has been recorded due to the uncertainties with respect to the ultimate resolution of this case. This case has been appealed to the U.S. Court of Appeals. We are in the process of determining the impact, if any, the Altera ongoing dispute would have on our financial statements in future periods should there be a resolution of the Altera judicial process.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements applicable to us is discussed in Note 2 “Recent Accounting Pronouncements” in Part I, Item 1. “Financial Statements.”
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for product development, operating activities, capital expenditures, repurchases of common stock, dividends, debt service, and acquisition opportunities that may arise. Our primary sources of liquidity are cash generated from operations and borrowings on our revolving credit facility.
We currently have access to sufficient funds for domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings for use in U.S. operations. As of October 31, 2016, we have cash totaling $235.4 held by our foreign subsidiaries. A significant portion of our cash held by our foreign subsidiaries is accessible without a significant cash tax cost as the repatriation of foreign earnings will be sheltered from U.S. federal tax by tax credits. To the extent our foreign earnings are not permanently reinvested, we have provided for the tax consequences that would ensue upon their repatriation. In the event funds which are treated as permanently reinvested are repatriated, we will be required to accrue and pay additional taxes to repatriate these funds.
On February 23, 2016 we paid an intercompany dividend from foreign subsidiaries of $150,000. As the earnings associated with these funds were not treated as permanently reinvested, any U.S. tax consequences had already been included in our tax provision in prior periods.
To date, we have experienced no loss or lack of access to our invested cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.
At any point in time, we have significant balances in operating accounts that are with individual third-party financial institutions, which may exceed the Federal Deposit Insurance Corporation insurance limits or other regulatory insurance program limits. We monitor daily the cash balances in our operating accounts and adjust them as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.
We anticipate that the following will be sufficient to meet our working capital needs on a short-term (twelve months or less) and a long-term (more than twelve months) basis:
| |
• | Anticipated cash flows from operating activities, including the effects of selling and financing customer term receivables; |
| |
• | Amounts available under existing revolving credit facilities; and |
| |
• | Other available financing sources, such as the issuance of debt or equity securities. |
We have experienced no difficulties to date in raising debt. However, capital markets can be volatile, and we cannot assure that we will be able to raise debt or equity capital on acceptable terms, if at all.
Cash Flow Information
|
| | | | | | | |
| Nine months ended October 31, |
| 2016 | | 2015 |
Cash provided by operating activities | $ | 143.7 |
| | $ | 122.3 |
|
Cash used in investing activities | $ | (55.3 | ) | | $ | (38.0 | ) |
Cash used in financing activities | $ | (163.3 | ) | | $ | (34.6 | ) |
Operating Activities
Cash flows from operating activities consist of our net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities.
Trade Accounts and Term Receivables
Our cash flows from operating activities are significantly influenced by the payment terms on our license agreements and by our sales of qualifying accounts receivable. Our customers’ inability to fulfill payment obligations could adversely affect our cash flow. We monitor our accounts receivable portfolio for customers with low or declining credit ratings and increase our collection efforts when necessary. Trade accounts and term receivables consisted of the following:
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Trade accounts receivable, net | $ | 429.5 |
| | $ | 493.2 |
|
Term receivables, short-term (included in trade accounts receivable on the balance sheet) | $ | 304.1 |
| | $ | 317.2 |
|
Term receivables, long-term | $ | 251.4 |
| | $ | 268.7 |
|
Average days sales outstanding, including the short-term portion of term receivables | 120 |
| | 132 |
|
Average days sales outstanding in trade accounts receivable, excluding the short-term portion of term receivables | 35 |
| | 47 |
|
The decrease in the average days sales outstanding, including the short-term portion of term receivables, as of October 31, 2016 was primarily due to a decrease in accounts receivable in the third quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016. The decrease in the average days sales outstanding, excluding the short-term portion of term receivables, as of October 31, 2016 was primarily due to a decrease in accounts receivable in the third quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016.
Term receivables are attributable to multi-year term license sales agreements. We include amounts for term agreements that are due within one year in trade accounts receivable, net, on our balance sheet and balances that are due in more than one year in term receivables, long-term. We use term agreements as a standard business practice and have a history of successfully collecting under the original payment terms without making concessions on payments, products, or services. Total term receivables were $555.5 as of October 31, 2016 compared to $585.8 as of January 31, 2016.
We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $45.1 for the nine months ended October 31, 2016 compared to $42.0 for the nine months ended October 31, 2015. We continue to have no difficulty in factoring receivables and continue to evaluate the economics of the sale of accounts receivable. We have not set a target for the sale of accounts receivables for the remainder of fiscal year 2017.
Accrued Payroll and Related Liabilities
|
| | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
Accrued payroll and related liabilities | $ | 68.2 |
| | $ | 73.4 |
|
The decrease in accrued payroll and related liabilities as of October 31, 2016 compared to January 31, 2016 was primarily due to incentive payments made during fiscal year 2017 on fiscal year 2016 year-end accruals. We generally experience higher accrued payroll and related liability balances at year-end primarily due to increased commission accruals associated with an increase in revenues in the fourth quarter. Additionally, we generally experience an increase in variable compensation at year-end due to the full year achievement of results.
Investing Activities
Cash used in investing activities for the nine months ended October 31, 2016 primarily consisted of cash paid for capital expenditures and business acquisitions.
Expenditures for property, plant, and equipment were $43.6 for the nine months ended October 31, 2016 compared to $28.3 for the nine months ended October 31, 2015. The expenditures for property, plant, and equipment for the nine months ended October 31, 2016 were primarily a result of spending on information technology and infrastructure improvements within facilities. We expect total capital expenditures for property, plant, and equipment for fiscal year 2017 to be approximately $73.0. We plan to finance these capital expenditures using cash on hand.
During the nine months ended October 31, 2016, we had $11.8 of expenditures for acquisitions of businesses and equity interests, compared to $11.7 during the nine months ended October 31, 2015. We plan to finance future business acquisitions through cash and possible common stock issuances. The cash expected to be utilized includes cash on hand, cash generated from operating activities, and borrowings on our revolving credit facility.
Financing Activities
For the nine months ended October 31, 2016, cash used in financing activities consisted primarily of the repurchase of common stock, the payment of dividends, a net decrease in short-term borrowings, repayments on the revolving credit facility, and payments related to tax withholding on vesting of share base awards partially offset by proceeds received from the employee stock purchase plan (ESPP) purchase and exercises of stock options.
During the nine months ended October 31, 2016, we paid quarterly dividends of $0.055 per share of outstanding common stock for a total of $17.8. On November 22, 2016, we announced a quarterly dividend of $0.055 per share of outstanding common stock, payable on January 3, 2017 to shareholders of record as of the close of business on December 8, 2016. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.
We currently have a share repurchase program, approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock. We did not repurchase any shares of common stock under the repurchase program during the nine months ended October 31, 2016. During the nine months ended October 31, 2015 we repurchased 0.4 shares of common stock for $10.0. As of October 31, 2016, $90.0 remained available for purchase under the program. During the nine months ended October 31, 2016, we repurchased 8.1 shares of common stock for $146.1 in a single transaction that was not part of our repurchase program.
The terms of our revolving credit facility limit the combination of the amount of our common stock we can repurchase and the amount of dividends we can pay over the term of the facility to $200.0 plus 70% of our cumulative consolidated net income (loss) for periods after February 1, 2016. An additional $58.4 is available for common stock purchases or dividend payments under this limit as of October 31, 2016.
During the nine months ended October 31, 2016 we paid $5.0 on our revolving credit facility. Repayments of other borrowings during the nine months ended October 31, 2016 consisted of deferred payments for consideration related to prior year acquisitions.
Other Factors Affecting Liquidity and Capital Resources
4.00% Convertible Subordinated Debentures due 2031
In April 2011, we issued $253.0 of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures). Interest on the 4.00% Debentures is payable semi-annually in April and October.
Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 50.4551 shares of our common stock (equivalent to a conversion price of $19.82 per share). The events that permit conversion are described in Note 6. “Notes Payable” in Part I, Item 1. “Financial Statements.”
Upon conversion of any 4.00% Debentures, a holder will receive:
| |
(i) | Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and |
| |
(ii) | Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount. |
If any one of the conversion events occurs, the 4.00% Debentures become convertible and the net balance of the 4.00% Debentures is classified as a current liability in our consolidated balance sheet. The classification of the 4.00% Debentures as current or long-term in the consolidated balance sheet is evaluated at each balance sheet date and may change from quarter to quarter depending on whether any of the conversion conditions are met.
During the fiscal quarter ended October 31, 2016, the market price of our common stock exceeded 120% of the conversion price for at least 20 of the last 30 trading days of the period. Accordingly, the 4.00% Debentures are convertible at the option of the holders through January 31, 2017. Therefore, the carrying value of the 4.00% Debentures is classified as a current liability. Additionally, the excess of the principal amount over the carrying amount of the 4.00% Debentures is reclassified from permanent equity to temporary equity in our condensed consolidated balance sheet as of October 31, 2016. If the market price of our common stock does not exceed 120% of the conversion price for at least 20 of the last 30 trading days for the fiscal quarter ended January 31, 2017, the 4.00% Debentures will be reclassified as a long-term liability and the temporary equity will be reclassified to permanent equity in our consolidated balance sheet.
If all of the holders of the 4.00% Debentures elect to convert their debentures, we would be required to make cash payments of at least $253.0 prior to the maturity of the 4.00% Debentures.
We believe that current cash balances, cash generated from our operating activities in future periods, access to our revolving credit facility, and additional financing arrangements will be sufficient to service any conversion of the 4.00% Debentures; however, future changes in our cash position; cash flows from operating, investing and financing activities; general business levels; and our access to additional financing, may impact our ability to settle the amount payable to the holders of any 4.00% Debentures that are converted.
Effective April 5, 2016, we may redeem some or all of the 4.00% Debentures for cash at the following redemption prices expressed as a percentage of principal, plus any accrued and unpaid interest:
|
| | |
Period | Redemption Price |
Beginning on April 5, 2016 and ending on March 31, 2017 | 101.143 | % |
Beginning on April 1, 2017 and ending on March 31, 2018 | 100.571 | % |
On April 1, 2018 and thereafter | 100.000 | % |
The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, the repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.
For further information on the 4.00% Debentures, see Note 6. “Notes Payable” in Part I, Item 1. “Financial Statements.”
Revolving Credit Facility
We have a syndicated, senior, unsecured, revolving credit facility with a maximum borrowing capacity of $125.0, which expires on January 9, 2020. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates. Additionally, commitment fees can vary as they are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40%.
We had borrowings of $20.0 against the revolving credit facility as of October 31, 2016 compared to $25.0 of borrowings as of January 31, 2016.
This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility.
We were in compliance with all financial covenants as of October 31, 2016. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.
For further information on our revolving credit facility, see Note 5. “Short-Term Borrowings” in Part I, Item 1. “Financial Statements.”
OUTLOOK FOR FISCAL YEAR 2017
On November 12, 2016, we entered into a definitive agreement to be acquired by Siemens Industry, Inc. (Siemens) and Meadowlark Subsidiary Corporation, a wholly-owned subsidiary of Siemens. As a result of the acquisition announcement, we will not provide an outlook for future financial results and have withdrawn all previously issued financial guidance.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Unless otherwise indicated, all numerical references in tables are in millions, except interest rates and contract rates.
Interest Rate Risk
We are exposed to interest rate risk primarily through our investment portfolio, short-term borrowings, and notes payable.
We place our investments in instruments that meet high quality credit standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issuer and type of instrument. We do not expect any material loss with respect to our investment portfolio.
The table below presents the carrying amount and related weighted-average fixed interest rates for our investment portfolio. The carrying amount approximates fair value as of October 31, 2016.
|
| | | | | |
Principal (notional) amounts in United States dollars | Carrying Amount | | Average Fixed Interest Rate |
Cash equivalents - fixed rate | $ | 151.0 |
| | 0.52% |
We have convertible subordinated debentures with a principal balance of $253.0 outstanding with a fixed interest rate of 4.00% as of October 31, 2016 and October 31, 2015. Generally, interest rate changes for fixed rate debt affect the fair value of the debt but do not affect future earnings or cash flow.
We have a syndicated, senior, unsecured, revolving credit facility, which expires on January 9, 2020. Borrowings under the revolving credit facility are permitted to a maximum of $125.0. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates. As of October 31, 2016 we had an outstanding balance of $20.0 against this revolving credit facility compared to no outstanding balance as of October 31, 2015. Generally, interest rate changes for variable interest rate debt do not affect fair value, but do affect future earnings and cash flow. For further information on our revolving credit facility, see Note 5. “Short-Term Borrowings” in Part I, Item 1. “Financial Statements.”
We had other short-term borrowings of $1.0 outstanding as of October 31, 2016 and October 31, 2015 with variable rates based on market indexes.
Foreign Currency Risk
We transact business in various foreign currencies and have established a program to hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Our derivative instruments consist of short-term foreign currency exchange contracts, with a duration period of a year or less. We enter into contracts with counterparties who are major financial institutions and, as such we do not expect material losses as a result of defaults by our counterparties. We do not hold or issue derivative financial instruments for speculative or trading purposes.
We enter into foreign currency forward contracts to protect against currency exchange risk associated with expected future cash flows. Our practice is to hedge a majority of our existing material foreign currency transaction exposures, which generally represent the excess of expected euro denominated expenses over expected euro denominated revenues, and the excess of expected Japanese yen denominated revenues over expected Japanese yen denominated expenses. We also enter into foreign currency forward contracts to protect against currency exchange risk associated with existing monetary assets and liabilities.
The following table provides volume information about our foreign currency forward program. The information is provided in United States dollar equivalent amounts. The table presents the gross notional amounts at contract exchange rates and the weighted average contractual foreign currency exchange rates. These forward contracts mature within the next twelve months.
|
| | | | | | | | | | | | | |
As of | October 31, 2016 | | January 31, 2016 |
| Gross Notional Amount | | Weighted Average Contract Rate | | Gross Notional Amount | | Weighted Average Contract Rate |
Forward Contracts: | | | | | | | |
Euro | $ | 44.6 |
| | 0.91 |
| | $ | 41.5 |
| | 0.92 |
|
Japanese yen | 35.2 |
| | 104.45 |
| | 28.6 |
| | 118.09 |
|
Indian rupee | 20.4 |
| | 67.03 |
| | 31.6 |
| | 67.96 |
|
Israeli shekel | 11.1 |
| | 3.82 |
| | 19.3 |
| | 3.95 |
|
Other (1) | 37.8 |
| | — |
| | 52.3 |
| | — |
|
Total forward contracts | $ | 149.1 |
| | | | $ | 173.3 |
| | |
| |
(1) | Other includes the Canadian dollar, British pound, Chinese yuan, Swiss franc, Armenian dram, Polish zloty, Danish krone, Russian ruble, Norwegian krone, Korean won, Taiwan dollar, Hungarian forint, Chilean peso, Romanian new leu, Singapore dollar, Swedish krona. |
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Item 4. | Controls and Procedures |
(1) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is accurately recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
(2) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Legal Proceedings
From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to intellectual property (IP) rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.
Synopsys, Inc. and Emulation and Verification Engineering S.A. and EVE-USA, Inc.
In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in the United States (U.S.) District Court for the Northern District of California, alleging that our Veloce® family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent and Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys appealed the decisions by both the district court and the U.S. Patent and Trademark Office. The Court of Appeals for the Federal Circuit has unanimously confirmed the invalidity of all four Synopsys patents.
In June 2013, Synopsys also filed a claim against us in the U.S. District Court for the District of Oregon, similarly alleging that our Veloce family of products infringed on two additional Synopsys U.S. patents. These claims have been dismissed, and have been appealed.
We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.
On October 10, 2014, the jury in our patent lawsuit filed in the U.S. District Court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36 million as well as certain royalties. As of October 31, 2016 nothing has been included in our financial results for this award. Synopsys has filed an appeal, and is currently seeking to have the infringed claims invalidated by the U.S. Patent and Trademark Office.
On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.
In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which sought compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. A Japanese appeals court has ratified that verdict.
We do not have sufficient information upon which to determine that a loss in connection with these matters is probable, reasonably possible, or estimable, and thus no liability has been established nor has a range of loss been disclosed.
Securities Class Action and Shareholder Derivative Lawsuits
On March 18, 2016, a purported securities class action lawsuit, Haroutunian v. Mentor Graphics, was filed in the U.S. District Court for the District of Oregon against the company and three executive officers alleging violations of federal securities
laws. The complaint alleges that the company and certain of our officers made material misstatements and omissions in press releases, Securities and Exchange Commission filings and analyst conference calls concerning the company's business prospects and financial projections that artificially inflated the price of the company’s stock. The lead plaintiff has been appointed and plaintiff's amended complaint was filed with the court on August 10, 2016. A class of plaintiffs has not been certified by the court. On April 22, 2016, a related shareholder derivative lawsuit was filed in Multnomah County Circuit Court in Oregon, Aransu v. Rhines, against the company’s board of directors at the time, certain executive officers and the company as a nominal defendant. The complaint alleges that the directors and officers breached their fiduciary duties to the company, were unjustly enriched, wasted corporate assets and committed insider selling. The shareholder derivative lawsuit generally alleges the same facts as the securities class action. The parties have agreed to stay proceedings in the Aransu lawsuit, pending the determination of certain issues or occurrence of certain events in the Haroutunian lawsuit. The complaints do not request a specific amount of damages and we are unable to predict the outcome of these suits.
The forward-looking statements contained in this report that are not statements of historical fact including without limitation statements containing the words “believes,” “expects,” “projections,” and words of similar meaning, constitute forward-looking statements that involve a number of risks and uncertainties that are difficult to predict. Moreover, from time to time, we may issue other forward-looking statements. Forward-looking statements regarding financial performance in future periods, do not reflect potential impacts of mergers or acquisitions or other significant transactions or events that have not been announced as of the time the statements are made. Actual outcomes and results may differ materially from what is expressed or forecast in forward-looking statements. We disclaim any obligation to update forward-looking statements to reflect future events or revised expectations. Our business faces many risks, and set forth below are some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors.
The announcement and pendency of our agreement to be acquired by United States-based entities affiliated with Siemens AG could adversely affect our business.
On November 14, 2016, we announced that we had entered into a definitive agreement for United States (U.S.)-based entities affiliated with Siemens AG (“Siemens”) to acquire us. Uncertainty about the effect of the proposed transaction on our customers, employees and other parties may adversely affect our business. Customers may refrain from doing business with us or delay placing orders because of uncertainty, which could adversely affect our business, results of operations and financial condition. Our employees may experience uncertainty about their roles or seniority following the transaction. There can be no assurance that our employees, including key personnel, can be retained to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could adversely affect our business and operations. In addition, we have diverted, and will continue to divert, significant management resources toward the completion of the transaction, which could adversely affect our business and operations. Parties with which we do business may experience uncertainty associated with the transaction and related transactions, including with respect to current or future business relationships with us.
The failure to complete the sale to entities affiliated with Siemens could adversely affect our business.
Completion of the sale is subject to conditions, which may or may not be within our control, that may prevent, delay, or otherwise adversely affect its completion. The consummation of the transaction is conditioned on (1) receipt of certain regulatory approvals, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain foreign antitrust laws, as well as the Committee on Foreign Investment in the U.S.; (2) the accuracy of the representations and warranties and compliance with the covenants contained in the definitive agreement; and (3) other customary conditions. If any of these conditions are not satisfied or waived, it is possible that the transaction will not be consummated in the expected time frame or that the definitive agreement may be terminated. If the proposed sale or a similar transaction is not completed, the share price of our common stock will drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the definitive agreement, we may be required to pay a termination fee of $134.45 million to Siemens. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruption to our business resulting from the announcement and pendency of the transaction and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, employees and other parties, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the transaction, if the transaction is not consummated.
While the acquisition by Siemens is pending, we are subject to business uncertainties and contractual restrictions that could harm our operations and the future of our business or result in a loss of employees.
The definitive agreement for our acquisition includes restrictions on the conduct of our business prior to the completion of the transaction, generally requiring us to conduct our businesses in the ordinary course, consistent with past practice, and subjecting us to a variety of specified limitations unless we obtain Siemens’s prior written consent. We may find that these and other contractual arrangements in the definitive agreement may delay, prevent or limit us from responding effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think that they may be advisable. In connection with the pending transaction, it is possible that some customers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the transaction. In addition, whether or not the transaction is completed, while it is pending we will continue to incur costs, fees, expenses and
charges related to the proposed transaction, which may materially and adversely affect our business results and financial condition.
Weakness in the United States and international economies may harm our business.
Our revenue levels are generally dependent on the level of technology capital spending, which includes worldwide expenditures for electronic design automation (EDA) software, hardware, and consulting services. Periods of economic uncertainty arising out of concerns such as weakness in the European Union relating to debt issues or political instability, slowing growth in China, and the continuing weakness of the Japanese economy can adversely affect our customers. In addition, an unusual consolidation has been occurring in the semiconductor industry worldwide. As a result, customers may postpone decisions to license or purchase our products, reduce their spending, or be less able or willing to fulfill payment obligations, any of which could adversely affect our business. In addition, significant customer payment defaults or bankruptcies could materially harm our business.
We are subject to the cyclical nature of the integrated circuit and electronics systems industries.
Purchases of our products and services are highly dependent upon new design projects initiated by customers in the integrated circuit (IC) and electronics systems industries. These industries are highly cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. The increasing complexity of ICs and resulting increase in costs to design and manufacture ICs have in recent years led to fewer design starts, which could reduce demand for our products. In addition, the IC and electronics systems industries regularly experience significant downturns, often connected with, or in anticipation of, maturing product cycles within such companies or a decline in general economic conditions. These downturns could cause diminished demand for our products and services. The current slowdown in smartphone and personal computer sales appears to be adversely affecting our semiconductor customers.
Our business could be negatively impacted as a result of merger and acquisition activity by our customers.
Like many industries, the semiconductor and electronics industries are subject to mergers, acquisitions and divestitures, and our customers or parts of their business may acquire or be acquired by other customers. Merger and acquisition activity in the semiconductor industry was unusually strong during 2015 and remained strong through the first half of 2016. This activity appears to be the result of semiconductor companies, experiencing slower sales in their existing market segments, desiring to broaden the scope of their businesses and to spread the rising costs of product development and use of advanced technologies across a larger organization. Increasing consolidation could result in fewer customers in these industries or the loss of some customers to competitors, or reduced customer spending on software and services due to redundancies or stronger customer negotiating power, which could have an adverse effect on our business and future revenues.
Our forecasts of our revenues and earnings outlook may be inaccurate.
Our revenues, particularly new hardware and software license revenues, are difficult to forecast. We use a “pipeline” system, a common industry practice, to forecast revenues and trends in our business. Sales personnel monitor the status of potential business and estimate when a customer will make a purchase decision, the dollar amount of the sale, and the products or services to be sold. These estimates are aggregated periodically to generate a sales pipeline. Our pipeline estimates may prove to be unreliable either in a particular quarter or over a longer period of time, in part because the “conversion rate” of the pipeline into contracts can be very difficult to estimate and requires management judgment. A variation in the conversion rate could cause us to plan or budget incorrectly and materially adversely impact our business or our planned results of operations. In particular, a slowdown in customer spending or weak economic conditions generally can reduce the conversion rate in a particular quarter as purchasing decisions are delayed, reduced in amount, or canceled. The conversion rate can also be affected by the tendency of some of our customers to postpone negotiating the terms of a transaction until the end of a fiscal quarter anticipating they will obtain more favorable terms. This may result in failure to agree to terms within the fiscal quarter and cause expected revenue to slip into a subsequent quarter.
Our business could be impacted by fluctuations in quarterly results of operations due to customer seasonal purchasing patterns, the timing of significant orders, and the mix of licenses, products, and services purchased by our customers.
We have experienced, and may continue to experience, varied quarterly operating results. Various factors affect our quarterly operating results and some of these are not within our control, including customer demand and the timing of significant orders. We typically experience seasonality in demand for our products due to the purchasing cycles of our customers, with revenues in the fourth quarter generally being the highest. If planned contract renewals are delayed or the average size of renewed contracts is smaller than we anticipate, we could fail to meet our own and investors’ expectations, which could have a material adverse impact on our business and stock price.
Our revenues are also affected by the mix of transaction types in which we recognize revenues in different ways as required by accounting rules: as payments become due and payable, on a cash basis, ratably over the license term, or at the beginning of the license term. A shift in the license mix toward increased ratable, due and payable, and/or cash-based revenue recognition could result in increased deferral of revenues to future periods and would decrease current revenues, which could result in not meeting our near-term revenue expectations.
The gross margin on our software is greater than that for our hardware systems, software support, and professional services. Therefore, our gross margin may vary as a result of the mix of products and services sold. We also have a significant amount of fixed or relatively fixed costs, such as employee costs and purchased technology amortization, and costs which are committed in advance and can only be adjusted periodically. As a result, a small failure to reach planned revenues would likely have a relatively large negative effect on resulting earnings. If anticipated revenues do not materialize as expected, our gross margin and operating results could be materially adversely impacted.
We face intense price competition in the EDA industry.
Price competition in the EDA industry is intense, which can lead to, among other things, price reductions, longer selling cycles, lower product margins, loss of market share, and additional working capital requirements. If our competitors offer significant discounts on certain products, we may need to lower our prices or offer other favorable terms to compete successfully. Any such changes would likely reduce margins and could materially adversely impact our operating results. Any broad-based changes to our prices and pricing policies could cause new license and service revenues to decline or be delayed as the sales force implements and our customers adjust to the new pricing policies. Some of our competitors may bundle certain software or hardware products with other more desirable products at low prices or no marginal cost for promotional purposes as a long-term pricing strategy, or engage in predatory pricing. These practices could significantly reduce demand for our products or limit our pricing.
We currently compete primarily with two large companies: Synopsys, Inc. (Synopsys) and Cadence Design Systems, Inc. (Cadence). We also compete with smaller companies with focused product portfolios and manufacturers of electronic devices and semiconductor equipment that have acquired or internally developed their own EDA products.
Emulation technology is complex and difficult to develop; inaccurate forecasts of customer demand for existing and new emulation products may adversely affect our results.
Designing, developing, and introducing new emulation products is a complicated process. The development process for our emulation products requires a high level of innovation. After the development phase, we must be able to forecast customer demand and manufacture next generation products with features, capacity and performance desired by customers in sufficient volumes to meet this demand in a cost effective manner. Our manufacturing model, in which our emulation products generally are not built until after customer orders have been forecast, may from time to time experience delays in delivering products to customers in a timely manner. These delays could cause our customers to purchase emulation products from our competitors. Customers may also delay purchases of existing products in anticipation of our next generation product releases or those of our competitors. We may be unable to minimize this impact by anticipating and managing the addition of, and transition to, new generations of emulation hardware. Conversely, if we manufacture emulation products in anticipation of future sales which do not timely occur, we may hold excess inventory with associated risks of product obsolescence.
We may experience difficulty in manufacturing our emulation hardware.
We currently use one manufacturer to assemble our hardware emulation products and purchase some components from a single supplier. We may be exposed to delays in production and delivery of our emulation products due to delays in receiving components or manufacturing constraints; components rejected that do not meet our standards; components with latent defects; low yields of ICs, subassemblies, or printed circuit boards (PCBs); or other delays in the manufacturing process. For single source parts we purchase for our emulation products, there can be no assurance that if a supplier cannot deliver, a second source can be found on a timely basis. Our reliance on sole suppliers may also result in reduced control over product pricing and quality. Natural disasters such as weather or earthquakes may adversely affect the supply of components, sub-assemblies or shipment of final products.
Foreign currency fluctuations may have an adverse impact on our operating results.
We typically generate more than half of our revenues from customers outside the U.S. and we generate approximately 40% of our expenses outside the U.S. While most of our international sales are denominated in U.S. dollars, our international operating expenses are typically denominated in foreign currencies. Significant changes in currency exchange rates, particularly in the Japanese yen and the euro, could have an adverse impact on our operating results.
Our international operations involve risks that could increase our expenses, adversely affect our operating results, and require increased time and attention of our management.
Our international operations subject us to risks in addition to those we face in our domestic operations, including longer receivable collection periods; issues relating to complying with complex customs regulations and paying customs duties and value added taxes; changes in a specific country’s or region’s economic or political conditions; trade protection measures; trade sanctions, such as those imposed on Russia by the U.S. and the European Union; local labor laws; import or export licensing requirements; anti-corruption, anti-bribery, and other similar laws; loss or modification of exemptions for taxes and tariffs; limitations on repatriation of earnings; and difficulties with licensing and protecting our intellectual property (IP) rights. If we violate laws related to our business, we could be subject to penalties, fines, or other sanctions and could be prohibited or restricted from doing business in one or more countries.
Integrated circuit, printed circuit board and systems technology evolves rapidly.
The complexity of ICs, PCBs, and electrical systems continues to rapidly increase. In response to this increasing complexity, new design tools and methodologies must be invented or acquired quickly to remain competitive. If we fail to quickly respond to new technological developments, our products could become obsolete or uncompetitive, which could materially adversely impact our business.
We may have to replace emulation components under warranty or under support contracts.
Our emulation hardware products are complex and despite pre-shipment testing, some defects may only appear after the products are put into use under operating conditions, including longer-term, continuous use at high capacities. As a result, customers may experience failures requiring us to replace components under warranty or as part of our customer support obligations, thus increasing our costs and reducing availability of components for other sales.
Errors or defects in our products and services could expose us to liability.
Our customers use our products and services in designing and developing products that involve a high degree of technological complexity and have unique specifications. Due to the complexity of the systems and products with which we work, some of our products can be adequately tested only when put to full use in the marketplace. As a result, our customers or their end users may discover errors or defects in our software, or the products or systems designed with or manufactured using our software may not operate as expected. Errors or defects could result in:
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• | Loss of current customers and market share, and loss of or delay in revenue; |
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• | Failure to attract new customers or achieve market acceptance; |
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• | Diversion of development resources to resolve problems resulting from errors or defects; |
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• | Disputes with customers relating to such errors or defects, which could result in litigation or other concessions; and |
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• | Increased support or service costs. |
In addition, we include limited amounts of third-party technology in our products and we rely on those third parties to provide support services to us. Failure of those third parties to provide necessary support services could materially adversely impact our business.
Long sales cycles and delay in customer completion of projects make the timing of our revenues difficult to predict.
Our products have long sales cycles. A lengthy customer evaluation and approval process is generally required due to the complexity and expense associated with our products and services. Consequently, we may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenues and may prevent us from pursuing other opportunities. Purchases of our products and services are sometimes discretionary and may be delayed if customers postpone approval or commencement of projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles, or timing of competitive evaluation processes. Long sales cycles for our hardware products may subject us to risks over which we have limited control, including insufficient, excess, or obsolete inventory, variations in inventory valuation, and fluctuations in quarterly operating results.
Any loss of our leadership position in certain categories of the EDA market could harm our business.
The industry in which we compete is characterized by very strong leadership positions in specific categories of the EDA market. For example, one company may have a large percentage of sales in the physical verification category of the market while another may have a similarly strong position in mixed-signal simulation. These strong leadership positions can be maintained for significant periods of time as the software is difficult to master and customers are disinclined to make changes
once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from niche areas in which we are the leader. Conversely, it is difficult for us to achieve significant profits in niche areas where other companies are the leaders. If for any reason we lose our leadership position in an important niche, our business could be materially adversely impacted.
Conflict minerals regulations may adversely impact our ability to conduct our business.
The Securities and Exchange Commission (SEC) has adopted disclosure rules for companies that use conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold) in their products, with substantial supply chain verification requirements if the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These requirements could affect the sourcing, availability, and pricing of materials used in our hardware products as well as the companies we use to manufacture our products and their components. As a result, there may only be a limited pool of suppliers who provide conflict-free metals, and we cannot provide assurance that we will be able to obtain products in sufficient quantities or at competitive prices. The costs of complying with these rules could adversely affect our current or future business.
Pre-announcing products may adversely impact current sales.
We or our competitors sometimes pre-announce or provide "road maps" of the expected availability of new hardware or software products or product features. Such pre-announcements, whether offered by the pre-announcing company or its competitors, can result in customers canceling or deferring orders for currently offered products anticipating that currently offered products may be uncompetitive or lacking in features or performance. In the case of hardware products, slowing sales may cause inventories to increase or become obsolete, resulting in the need to discount or reduce production of current products.
We derive a substantial portion of our revenues from relatively few product groups.
We derive a substantial portion of our revenues from sales of relatively few product groups and related support services. As a result, any factor adversely affecting sales of these products, including product release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could harm our operating results.
Accounting rules governing revenue recognition are complex and periodically change.
The accounting rules governing revenue recognition are complex and are revised periodically. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles (GAAP). This rule is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to receive for goods and services provided to customers. The rule defines a five step process for revenue recognition, making it possible for more judgment and estimation within the revenue recognition process than is required under existing U.S. GAAP. Currently, we will be required to implement this guidance in the first quarter of fiscal year 2019. The standard permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting. Implementation of this new standard could have a significant effect on our reported financial results.
We may have additional tax liabilities.
Significant judgments and estimates are required in determining the provision for income taxes including the determination of research and development incentives and other credits and other tax liabilities worldwide. Our tax expense may be impacted if our intercompany transactions, which are required to be computed on an arm’s-length basis, are successfully challenged by tax authorities. The application of transfer pricing involves subjectivity, with a variety of application between countries. Transfer pricing disputes are especially common in certain countries, and on specific types of transactions such as business and IP transfers and management fees, and are increasingly resulting in litigation. Additionally, our tax expense could be impacted if a tax authority successfully asserted that we, or one of our subsidiaries, has a taxable presence in a country where a member of our group is not currently filing. Increasingly, tax authorities are asserting that foreign companies have unreported taxable presences, and various authorities are either evaluating or adjusting their laws and practices to lower the threshold for a taxable presence in conjunction with the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project.
Our tax expense could be impacted by the applicability of withholding taxes on software licenses, services, and related intercompany transactions in certain jurisdictions. In determining the adequacy of income taxes, we assess the likelihood of
adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service (IRS) and other local or foreign tax authorities. The tax authorities in many of the countries where we do business regularly examine our income and other tax returns, and the ultimate outcome of these tax audits or other examinations cannot be predicted with certainty.
U.S. income taxes and foreign withholding taxes have not been provided for on undistributed earnings of certain of our non-U.S. subsidiaries to the extent that such earnings are considered to be indefinitely reinvested in the operations of those subsidiaries. A change in our decision concerning the amount of historical foreign earnings not considered indefinitely reinvested could increase our effective tax rate.
Forecasting our income tax rate is complex and subject to uncertainty.
The computation of income tax expense (benefit) is complex as it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under U.S. GAAP. Income tax expense (benefit) for interim quarters is based on a forecast of our global tax rate, including a separate determination for entities, if any, with losses for which no tax benefit is obtained. This forecast contains numerous assumptions and includes forward looking financial projections, such as the expectations of profit and loss by jurisdiction. Various items cannot be accurately forecast and future events may be treated as discrete to the period in which they occur. Our income tax rate can be materially impacted, for example, by the geographical mix of our profits and losses; changes in our business, such as internal restructuring and acquisitions; changes in tax laws and accounting guidance, and other regulatory, legislative or judicial developments; tax audit determinations; changes in our tax positions; changes in our intent and capacity to permanently reinvest foreign earnings; changes to our transfer pricing practices; tax deductions attributed to equity compensation; and changes in our valuation allowance for deferred tax assets. For these reasons, our overall global tax rate may be materially different from our forecast.
Certain tax policy efforts, including the OECD’s BEPS Project, the European Commission’s state aid investigations, and other initiatives could have a material effect on the taxation of international businesses, particularly companies with global IP and supply chain structures, and companies which publish software. Furthermore, many of the countries where we are subject to taxes, including the U.S., are independently evaluating their tax policies and we may see significant changes in legislation and regulations concerning taxation. Certain countries, such as the United Kingdom with its Diverted Profits Tax, have already enacted legislation which could affect international businesses, and other countries have become more aggressive in their approach to audits and enforcement of their applicable tax laws. Such changes, to the extent they are brought into tax legislation, regulations, policies, or practices, could increase our effective tax rates in various countries where we have operations and our overall tax rate could be materially affected, impacting our operating results, cash flows and financial condition.
There are limitations on the effectiveness of controls.
We do not expect that disclosure controls or internal control over financial reporting will prevent all errors and all fraud or that our policies and procedures can prevent all violations of the law by our employees, contractors, or agents. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that our control system will detect all errors and instances of fraud, if any, or prevent our employees, contractors, or agents from breaching or circumventing our policies or violating laws and regulations. Failure of our control systems to prevent error and fraud or violations of the law could materially adversely impact us.
We are subject to changing corporate governance regulations that impact compliance costs and risks of noncompliance.
Rules and regulations set out by various governmental and self-regulatory organizations in the U.S. such as the SEC, NASDAQ, the Financial Industry Regulatory Authority, and the FASB, as well as in other worldwide locations where we operate, are continually evolving in scope and complexity which makes compliance increasingly difficult and uncertain. The increase in costs to develop awareness and comply with such evolving rules and regulations as well as any risk of noncompliance could adversely impact us.
We may not realize revenues as a result of our investments in research and development.
We incur substantial expense to develop new products. Research and development activities are often performed over long periods of time. These efforts may not result in successful product offerings because of changes in market conditions, competitive product offerings, advancements in technology or our failure to successfully develop products based on that
research and development activity. As a result, we could realize little or no revenues related to our investment in research and development.
We may acquire other companies and may not successfully integrate them.
We have acquired numerous businesses and are frequently in discussions with potential acquisition candidates, and we may acquire other businesses in the future. While we generally analyze potential transactions before committing to them, we cannot provide assurance that any completed transaction will result in long-term benefits to us or our shareholders or that we will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after we acquire another business, it could materially adversely impact us:
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• | Difficulties in combining previously separate businesses into a single unit; |
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• | The substantial diversion of management’s attention from ongoing business when integrating the acquired business; |
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• | The failure to realize anticipated benefits, such as cost savings and increases in revenues; |
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• | The failure to retain key personnel of the acquired business; |
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• | Difficulties related to assimilating the products and services of an acquired business in, for example, distribution, engineering, and customer support areas; |
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• | Unanticipated liabilities or litigation in connection with or as a result of an acquisition, including claims from terminated employees, customers, or third parties; |
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• | Adverse impacts on existing relationships with suppliers and customers; and |
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• | Failure to understand and compete effectively in markets in which we have limited experience. |
Acquired businesses may not perform as projected, which could result in impairment of acquisition-related intangible assets. Additional challenges include integration of sales channels, training and education of the sales force for new product offerings, integration of product development efforts, integration of systems of internal controls, and integration of information systems. Accordingly, in any acquisition there will be uncertainty as to the achievement and timing of projected synergies, cost savings, and sales levels for acquired products. All of these factors could impair our ability to forecast, meet revenues and earnings targets, and effectively manage our business for long-term growth.
Our competitors may acquire technology or other companies that impact our business.
Our competitors may acquire technology or companies offering competing or complementary product offerings which could adversely impact our ability to compete. A competitor may be able to deliver better or broader product offerings, offer better pricing, or otherwise make it more desirable for our customers to buy more of the tools in their design flow after the acquisition. In addition, our competitors may purchase companies or technology that we had an interest in acquiring, which could limit our expansion into certain market segments. Similarly, our competitors may purchase companies or technology on which we have a dependency resulting from our having bundled the acquired software with our products for licensing to customers or our use of the acquired software in our research and development environment.
Customer payment defaults could adversely affect our timing of revenue recognition.
We use fixed-term license agreements as standard business practices with customers we believe are creditworthy. These multi-year, multi-element term license agreements have payments spread over the license term and are typically about three years in length for semiconductor companies and about four years in length for IC foundries and military and aerospace companies. The complexity of these agreements tends to increase the risk of non-collectibility from customers that can arise for a variety of reasons including ability to pay, product dissatisfaction, and disputes. If we are unable to collect under these agreements, our results of operations could be materially adversely impacted. We have a history of successfully collecting under the original payment terms of fixed-term license agreements without making concessions on payments, products, or services. If we no longer had a history of collecting without providing concessions on the terms of the agreements, U.S. GAAP would require revenue to be recognized as the payments become due and payable over the license term. This change could have a material adverse impact on our near-term results.
We may not adequately protect our proprietary rights or we may fail to obtain software or other intellectual property licenses.
Our success depends, in large part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks, trade secret laws, licenses, and restrictive agreements to establish and protect our proprietary rights in technology and products.
Despite precautions we take to protect our IP, we cannot provide assurance that third parties will not challenge, invalidate, or circumvent these protections. The companies in the EDA industry, as well as entities and persons outside the industry, continue to obtain patents at a rapid rate. We cannot predict if any of these patents will cover any of our products. In addition, many of these entities have substantially larger patent portfolios than we have. As a result, we may on occasion be forced to engage in costly patent litigation to protect our rights or defend our customers’ rights. We may also need to settle these claims on terms that are unfavorable; such settlements could result in the payment of significant damages or royalties, or force us to stop selling or redesign one or more products. We cannot provide assurance that the rights granted under our patents will provide us with a competitive advantage, that patents will be issued on any of our pending applications, or that future patents will be sufficiently broad to protect our technology. In addition, recent U.S. court decisions have weakened the enforceability of patents for software-related inventions, which make up a large portion of our patent portfolio. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent as U.S. law protects these rights in the U.S. In addition, despite the actions we take to limit piracy, other parties regularly illegally copy and use our products, which results in lost revenue.
Some of our products include software or other IP licensed from third parties, and we may have to seek new licenses or renew existing licenses for software and other IP in the future. Failure to obtain software or other IP licenses or rights from third parties on favorable terms could materially adversely impact us.
Alice court ruling could have a negative effect on the validity of some of our U.S. patents.
On June 19, 2014, the U.S. Supreme Court issued a significant decision in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, in which the Court tightened the standard for patentability of software inventions. The Court stated that if a person has an idea so abstract that it cannot be patented, simply tying it to a "generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention." Many commentators believe the Alice decision is another in a line of cases intended to limit the use of poor quality software patents. In any event, the Alice decision will provide accused infringers of software patents new arguments to challenge the validity of such patents. At this time, the effects of the Alice decision are still being assessed by patent holders, attorneys, the U.S. Patent and Trademark Office and courts. The Alice decision and related U.S. Supreme Court decisions could potentially have a negative effect on the validity of some of our U.S. patents.
Intellectual property infringement actions may harm our business.
Patent holders are making increasing efforts to monetize their patent portfolios. IP infringement claims against us directly, or where we contractually must defend our customers, could result in costly litigation and consume significant time of employees and management. In addition, IP litigation could harm our business, due to damage awards, payment of legal fees, an obligation to refund license fees to a customer or forgo receipt of future customer payments, the need to license technology on what might be unfavorable business terms, injunctions that could stop or delay future shipments, or the need to redesign our technology. For example, we are currently engaged in patent infringement litigation involving Emulation and Verification Engineering S.A., EVE-USA, Inc., and Synopsys. Further information regarding these lawsuits is contained in Part II, Item 1. "Legal Proceedings".
Our use of open source software could negatively impact our ability to sell our products and may subject us to unanticipated obligations.
The products, services or technologies we acquire, license, provide or develop may incorporate or use open source software. We monitor and restrict our use of open source software in an effort to avoid unintended consequences, such as reciprocal license grants, patent retaliation clauses, and the requirement to license our products at no cost. Nevertheless, we may be subject to unanticipated obligations regarding our products which incorporate open source software.
Our failure to attract and retain key employees may harm us.
We depend on the efforts and abilities of our senior management, our research and development staff, and a number of other key management, sales, support, technical, and services personnel. Competition for experienced, high-quality personnel is intense, and we cannot provide assurance that we can continue to recruit and retain such personnel. Our failure to hire and retain such personnel could impair our ability to develop new products and manage our business effectively.
We have global sales and research and development offices in parts of the world that are not as politically stable as the United States.
We have global sales and research and development offices, some of which are in parts of the world that are not as politically stable as the U.S. In particular, approximately 15% of our workforce, and a larger percentage of our engineers, are located in our offices in Armenia, Egypt, Israel, Morocco, Pakistan, and Russia which are subject to disruption or closure from time to
time. As a result, we may face a greater risk of business interruption as a result of potential unrest, terrorist acts, or military conflicts than businesses located domestically. This could have a material adverse effect on product delivery and our research and development operations.
Our business is subject to the risk of natural disasters.
We have sales and research and development offices worldwide which may be adversely affected by weather, earthquakes, or other natural disasters. If a natural disaster occurs at or near any of our offices, our operations may be interrupted, which could adversely impact our business and results of operations. In addition, if a natural disaster impacts a significant number of our customers, our business and results of operations could be adversely impacted.
If our information technology security measures are breached, our information systems may be perceived as being insecure, which could harm our business and reputation.
Our products and services involve the storage and transmission of proprietary information owned by us and our customers. We have sales and research and development offices throughout the world. Our operations are dependent upon the connectivity of our operations worldwide. Despite our security measures, our information technology and infrastructure may be vulnerable to breach by cyber-attacks, errors or malicious actions by employees or contractors, or other disruptions that could result in unauthorized disclosure of sensitive information and could significantly interfere with our business operations. Breaches of our security measures could expose us to a risk of loss or misuse of this information, adverse publicity, violations of privacy laws, and litigation. Because techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, with the use of "cloud" services in our business, despite our attempts to validate the security of such services, proprietary information may be misappropriated by third parties. If there is an actual or perceived breach of our security, or the security of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to our reputation or our business, lose existing customers or increase the difficulty of gaining new customers.
Our revolving credit facility has financial and non-financial covenants, and default of any covenant could materially adversely impact us.
Our bank revolving credit facility imposes operating restrictions on us in the form of financial and non-financial covenants. Financial covenants include adjusted quick ratio, tangible net worth, leverage ratio, senior leverage ratio, and minimum cash and accounts receivable ratio. If we were to fail to comply with the financial covenants and did not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility. The declaration of an event of default could have a material adverse effect on our financial condition. We could also find it difficult to obtain other bank lines or credit facilities on comparable terms.
We have a substantial level of indebtedness.
As of October 31, 2016, we had $279.6 million of outstanding indebtedness, which includes principal of $253.0 million of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures), $5.2 million in other notes payable, and $21.4 million in short-term borrowings. This level of indebtedness among other things could:
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• | Make it difficult for us to satisfy payment obligations on our debt; |
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• | Make it difficult for us to incur additional indebtedness or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions, or general corporate purposes; |
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• | Limit our flexibility in planning for or reacting to changes in our business; |
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• | Reduce funds available for use in our operations; |
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• | Make us more vulnerable in the event of a downturn in our business; and |
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• | Place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources. |
We may also be unable to borrow funds as a result of an inability of financial institutions to lend due to restrictive lending policies and/or institutional liquidity concerns.
Our 4.00% Debentures are convertible under certain circumstances at a conversion price as of October 31, 2016 of $19.82 per share (as adjusted for the effect of cash dividends and other applicable items). These circumstances include the market price of our common stock exceeding 120% of the conversion price, or $23.78 per share as of October 31, 2016, for at least 20 of the
last 30 trading days of the previous fiscal quarter. The 4.00% Debentures are currently convertible. If any of the holders elect to convert their debentures, we are required to pay cash for at least the principal amount of any converted debentures and cash or shares for the excess of the value of the converted shares over the principal amount. If holders of a significant amount of our 4.00% Debentures elect to convert, we could have difficulty paying the amount due upon conversion, which would have a material adverse impact on our liquidity and financial condition.
If we experience a decline in revenues, we could have difficulty paying amounts due on our indebtedness. Any default under our indebtedness could have a material adverse impact on our business, operating results, and financial condition.
Our stock price could become more volatile, and your investment could lose value.
All of the factors discussed in this “Risk Factors” section could affect our stock price. The timing of announcements in the public market regarding new products, product enhancements, or technological advances by our competitors or us, and any announcements by us or by our competitors of acquisitions, major transactions, or management changes could also affect our stock price. Our stock price is subject to speculation in the press and the analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock, our credit ratings, and market trends unrelated to our performance. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.
Our business could be negatively affected as a result of actions of activist shareholders.
Responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations, and diverting the attention of management and our employees. The perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners.
Ability to pay dividends.
We currently declare and pay quarterly cash dividends on our common stock. Any future payment of cash dividends will depend upon our financial condition, earnings, available cash, cash flow, and other factors our board of directors deems relevant. Our revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility of $200 million plus 70% of our cumulative net income (loss) for periods ending after February 1, 2016. In addition, our board may decrease or discontinue payment of dividends at any time, which could cause the market price of our stock to decline.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The table below sets forth information regarding repurchases of our common stock by us during the three months ended October 31, 2016:
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Period | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum dollar value of shares that may yet be purchased under the programs |
August 1 - August 31, 2016 | — |
| | $ | — |
| | — |
| | $ | 90,000,045 |
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September 1 - September 30, 2016 | — |
| | $ | — |
| | — |
| | $ | 90,000,045 |
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October 1 - October 31, 2016 | — |
| | $ | — |
| | — |
| | $ | 90,000,045 |
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| — |
| | $ | — |
| | — |
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On June 12, 2014, we announced a share repurchase program approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock over a three-year period. The repurchase that occurred in February 2016 was a single transaction that was excluded from our share repurchase program.
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2.A | | Agreement and Plan of Merger dated as of November 12, 2016 among Siemens Industry, Inc., Meadowlark Subsidiary Corporation and Mentor Graphics Corporation. Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on November 14, 2016. |
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10.A | | Form of Performance-Based Restricted Stock Unit Award Agreement Terms and Conditions containing standard terms of performance-based restricted stock units granted to executive officers in fiscal year 2017 under our 2010 Omnibus Incentive Plan. |
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31.1 | | Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | | Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 | | Certifications of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Dated: December 5, 2016 | | MENTOR GRAPHICS CORPORATION (Registrant) |
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| | | /S/ GREGORY K. HINCKLEY |
| | | Gregory K. Hinckley |
| | | President, Chief Financial Officer |