Management Discussion - SNPS

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following summary of our financial condition and results of operations is qualified in its entirety by the more complete discussion contained in this Item 7 and by the risk factors set forth in Item 1A of this Annual Report. Please also see the cautionary language at the beginning of Part I of this Annual Report regarding forward-looking statements.

Business Summary

Synopsys, Inc. provides software, intellectual property, and services used by designers across the entire silicon to

software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure

the security and quality of their applications. We are a global leader in supplying the electronic design automation

(EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. We also offer intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than design those circuits themselves. We provide software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, we provide technical services and support to help our customers develop advanced chips and electronic systems. We are also a leading provider of software tools and services that are used to improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials.

Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help these companies overcome the challenges of developing increasingly advanced electronics products while also helping them reduce their design and manufacturing costs. While our products are an important part of our customers' development process, their research and development budget and spending decisions may be affected by their business outlook and willingness to invest in new and increasingly complex chip designs. In addition, a number of consolidations have taken place in the semiconductor industry over the past several years. While we do not believe customer consolidations have had a material impact on our results, the future impact of ongoing consolidation is uncertain. For a discussion of potential risks, please see the risk factor titled "Consolidation among our customers and within the industries in which we operate, as well as our dependence on a relatively small number of large customers, may negatively impact our operating results" in Part I, Item 1A, Risk Factors.

Despite global economic uncertainty, we have consistently grown our revenue since 2005. We achieved these results not only because of our solid execution, leading technologies and strong customer relationships, but also because of our time-based revenue business model. Under this model, a substantial majority of our customers pay over time and we typically recognize this revenue over the life of the contract, which averages approximately three years. Time-based revenue consists of time-based products, maintenance and service revenue. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. Due to our business model, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.

Our growth strategy is based on building on our leadership in our EDA products, expanding and proliferating our IP offerings, and driving growth in the software security and quality market. As we continue to expand our product portfolio and our total addressable market, for instance in the software security and quality space, and as hardware product sales grow, we expect to experience increased variability in our total revenue, though we expect time-based revenue to continue to represent at least 90% of all revenue other than hardware revenue. Overall, our business outlook remains solid based on our leading technologies, customer relationships, business model, diligent expense management, and acquisition strategy. We believe that these factors will help us continue to execute our strategies successfully.

Fiscal Year End

Our fiscal year ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, we have a 53-week year. Fiscal 2017, 2016, and 2015 were 52-week years ending on October 28, 2017, October 29, 2016, and October 31, 2015, respectively. Fiscal 2018 will be a 53-week year.

For presentation purposes, this Form 10-K refers to the closest calendar month end.

Fiscal 2017 Financial Performance Summary

In fiscal 2017, compared to fiscal 2016, our financial performance reflects the following:

•

Revenues were $2.7 billion, an increase of $302.3 million or 12%, primarily driven by the overall growth in our business mainly due to higher TSL revenues, hardware sales, and professional services revenue.

•

Total cost of revenue and operating expenses were $2.4 billion, an increase of $272.2 million or 13%, primarily due to increases in headcount, including those from acquisitions.

•

Higher operating income of $347.6 million, an increase of $30.2 million or 10%.

During fiscal 2017, 88% of our revenue was time-based.

Effect of New Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)." This ASU requires an entity to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Since the issuance of Topic 606, the FASB has issued several amendments to the ASU, including deferral of the adoption date initially proposed, clarification on accounting for licenses of intellectual property, and identifying performance obligations.

Topic 606 will be effective for us beginning in fiscal 2019, including interim periods within that reporting period. The ASU permits two retrospective methods for adoption. We will adopt Topic 606 using the modified retrospective method under which the cumulative effect of initially applying the guidance is recognized at the date of initial application.

Under the modified retrospective transition method, we will evaluate each contract that is effective on the adoption date as if that contract had been accounted for under Topic 606 from contract inception. Some revenue that would have been recognized in future periods under Topic 605 will be recast under Topic 606 as if the revenue had been recognized in prior periods. As this transition method requires that we do not adjust historical reported revenue amounts, the revenue that would have been recognized under this method prior to the adoption date will be a cumulative catch up adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned. Because we expect that a slightly lower percentage of our revenue will be recognized over time under Topic 606, we expect to have a small percentage of our year-end backlog to be adjusted to retained earnings upon adoption.

We derive the majority of our total revenue from Technology Subscription License (TSL) contracts. We believe that the promised licenses of software (i.e., functional intellectual property) and the promise to provide substantive, timely, and technologically relevant updates and services in our TSL contracts reflect inputs to a combined item that represents a single overall promise to provide customer access to a suite of EDA software in an integrated solution that will evolve as our customers' industries evolve through rapid technology changes. Accordingly, we have concluded that this single overall promise will be recognized as revenue over the term of the contract period. Accordingly, we expect that there will be not be a material change in the nature and timing of revenue recognition for our TSL contracts under Topic 606.

The timing of revenue recognition for our upfront products, maintenance and professional services is expected to remain substantially unchanged.

We continue to assess all potential impacts of Topic 606 on other multiple element software arrangements that combine many software-related deliverables. As the requirement to have VSOE for undelivered elements is not necessary to separate revenue from delivered software licenses, which is an essential criterion for separation under the current revenue standard, revenue would no longer be recognized over the arrangement period for certain of our term licenses and IP licenses. We are currently in the process of evaluating the impact of these changes on the remainder of our arrangements.

Topic 606 also requires the deferral of incremental costs of obtaining a contract with a customer. This will require us to capitalize incremental costs such as commissions and other costs directly related to obtaining customer contracts and amortize those costs over the period the assets are expected to contribute future cash flows. As commissions paid for renewals are commensurate with the amounts paid for initial contracts, the deferred incremental costs will be recognized over the contract term. Under the existing rules, we expense commissions based on shipments.

In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)," which supersedes the lease requirements in "Leases (Topic 840)." This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the Consolidated Statement of Financial Position. This ASU also makes some changes to lessor accounting and aligns with the new revenue recognition guidance. This ASU will be effective for fiscal 2020, including interim periods within that reporting period, and earlier adoption is permitted. We are currently in the process of evaluating the impact of adoption on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory. This ASU will be effective for fiscal 2019, including interim periods within that reporting period, and earlier adoption is permitted. We are currently in the process of evaluating the impact of adoption on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities." This ASU requires expanded hedge accounting for risk components and refining the measurement of hedge results to better reflect an entity's hedging strategies. This ASU also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. This ASU will be

effective for fiscal 2020, including interim periods within that reporting period, and earlier adoption is permitted. We are currently in the process of evaluating the impact of adoption on our consolidated financial statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial results under Results of Operations below are based on our audited results of operations, which we have prepared in accordance with U.S. GAAP. In preparing these financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates. For further information on our significant accounting policies, see Note 2 of Notes to Consolidated Financial Statements.

The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, are:

•

Revenue recognition;

•

Valuation of business combinations;

•

Valuation of intangible assets; and

•

Income taxes.

Revenue Recognition

We generate our revenue from the sale of products that include software licenses, maintenance and services, and to a lesser extent, hardware products. Software license revenue consists of fees associated with the licensing of our software. Maintenance and service revenue consists of maintenance fees associated with perpetual licenses and hardware products, and professional services fees. Hardware revenue consists of sales of Field Programmable Gate Array (FPGA)-based emulation and prototyping products.

Most of our customer arrangements are complex, involving hundreds of products and various license rights, bundled with post-contract customer support and additional meaningful rights that provide a complete end-to-end solution to the customer. Throughout the contract, our customers are typically using a myriad of products to complete each phase of a chip design and are concurrently working on multiple chip designs, or projects, in different phases of the design. During this time, the customer looks to us to release state-of-the-art technology as we keep up with the pace of change, to address requested enhancements to our tools to meet customer specifications, to provide support at each stage of the customer's design, including the final manufacturing of the chip (the tape-out stage), and other important services.

With respect to software licenses, we primarily utilize two license types:

•

Technology Subscription Licenses (TSLs). TSLs are time-based licenses for a finite term, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. The majority of our arrangements are TSLs due to the nature of the business and customer requirements. In addition to the licenses, the arrangements also include: post-contract customer support, which includes providing frequent updates and upgrades to maintain the utility of the software due to rapid changes in technology; other intertwined services such as multiple copies of the tools; assisting our customers in applying our technology in their development environment; and rights to remix licenses for other licenses.

•

Perpetual licenses. Perpetual licenses continue as long as the customer renews maintenance plus an additional 20 years. Perpetual licenses do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually.

For the two software license types, we recognize revenue as follows:

•

TSLs. We typically recognize revenue from TSL fees ratably over the term of the license period, or as customer installments become due and payable, whichever is later. Revenue attributable to TSLs is reported as "time-based products revenue" in the consolidated statements of operations.

•

Perpetual licenses. We recognize revenue from perpetual licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee and 100% of the maintenance fee within one year from shipment and all other revenue recognition criteria are

met. Revenue attributable to these perpetual licenses is reported as "upfront products revenue" in the consolidated statements of operations. For perpetual licenses in which less than 75% of the license fee and 100% of the maintenance fee is payable within one year from shipment, we recognize revenue as customer installments become due and payable. Such revenue is reported as "time-based products revenue" in the consolidated statements of operations.

Our maintenance and service revenue consists of maintenance fees associated with perpetual licenses and hardware products, and professional services fees. We recognize revenue from maintenance arrangements ratably over the maintenance period to the extent cash has been received or fees become due and payable, and recognize revenue from professional services and training fees as such services are performed and accepted by the customers as needed. Revenue attributable to maintenance, professional services and training is reported as "maintenance and service revenue" in the consolidated statements of operations.

Hardware revenue consists of sales of FPGA-based emulation and prototyping products. We recognize revenue from sales of hardware products in full upon shipment if all other revenue recognition criteria are met. Revenue attributable to these sales is reported as "upfront products revenue" in the consolidated statements of operations.

We also enter into arrangements in which portions of revenue are contingent upon the occurrence of uncertain future events, for example, royalty arrangements. We refer to this revenue as "contingent revenue." Contingent revenue is recognized if and when the event that removes the contingency occurs. Such revenue is reported as "time-based products revenue" in the consolidated statements of operations. These arrangements are not material to our total revenue.

We infrequently enter into multiple-element arrangements that contain both software and non-software deliverables such as hardware. We have determined that the software and non-software deliverables in our contracts are separate units of accounting. We recognize revenue for the separate units of accounting when all revenue recognition criteria are met. Revenue allocated to hardware units of accounting is recognized upon shipment when all other revenue recognition criteria are met. Revenue allocated to software units of accounting is recognized depending on the software license type (TSL or perpetual license). Such arrangements have not had a material effect on our consolidated financial statements and are not expected to have a material effect in future periods.

We also enter into arrangements to deliver software products, either alone or together with other products or services, that require significant modification or customization of the software. We account for such arrangements using the percentage of completion method as we have the ability to make reasonably dependable estimates that relate to the extent of progress toward completion, contract revenues and costs. We measure the progress towards completion using the labor hours incurred to complete the project. Revenue attributable to these arrangements is reported as "maintenance and service revenue" in the consolidated statements of operations.

We determine the fair value of each element in multiple element software arrangements that only contain software and software-related deliverables based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE of fair value for each element to the price charged when such element is sold separately. We have analyzed all of the elements included in our multiple-element software arrangements and have determined that we have sufficient VSOE to allocate revenue to the maintenance components of our perpetual license products and to professional services. Accordingly, assuming all other revenue recognition criteria are met, we recognize license revenue from perpetual licenses upon delivery using the residual method, recognize revenue from maintenance ratably over the maintenance term, and recognize revenue from professional services as services are performed and accepted by the customer. With respect to TSL arrangements, due to the complexity of the tools, the complexity of the arrangement terms and intertwined services, the license, maintenance and other services are not separable and are considered as a combined unit. Additionally, we do not have sufficient VSOE of fair value to allocate the fee between these services. Therefore, we recognize revenue from TSLs ratably over the term of the license, assuming all other revenue recognition criteria are met.

Revenue recognition involves certain judgment; specifically, in connection with each transaction involving our products, we must evaluate whether: (1) persuasive evidence of an arrangement exists, (2) delivery of software or services has occurred, (3) the fee for such software or services is fixed or determinable, and (4) collectability of the full license or service fee is probable. All four of these criteria must be met in order for us to recognize revenue with respect to a particular arrangement. We apply these revenue recognition criteria as follows:

•

Persuasive Evidence of an Arrangement Exists. Prior to recognizing revenue on an arrangement, our customary policy is to have a written contract, signed by both the customer and by us, or a

purchase order from those customers that have previously negotiated a standard end-user license arrangement or purchase agreement.

•

Delivery Has Occurred. We deliver our products to our customers electronically or physically. For electronic deliveries, delivery occurs when we provide access to our customers to take immediate possession of the software through downloading it to the customer's hardware. For physical deliveries, the standard transfer terms are typically Freight on Board (FOB) shipping point. We generally ship our products or license keys promptly after acceptance of customer orders. However, a number of factors can affect the timing of product shipments and, as a result, timing of revenue recognition, including the delivery dates requested by customers and our operational capacity to fulfill product orders at the end of a fiscal quarter.

•

The Fee Is Fixed or Determinable. Our determination that an arrangement fee is fixed or determinable depends principally on the arrangement's payment terms. Our standard payment terms for perpetual licenses require 75% or more of the license fee and 100% of the maintenance fee to be paid within one year. If the arrangement includes these terms, we regard the fee as fixed or determinable, and recognize all license revenue under the arrangement in full upon delivery (assuming all other revenue recognition criteria are met). If the arrangement does not include these terms, we do not consider the fee to be fixed or determinable and generally recognize revenue when customer installments are due and payable. In the case of a TSL, because of the right to exchange products or receive unspecified future technology and because VSOE for maintenance services does not exist for a TSL, we recognize revenue ratably over the term of the license, but not in advance of when customers' installments become due and payable.

•

Collectability Is Probable. We judge collectability of the arrangement fees on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For a new customer, or when an existing customer substantially expands its commitments, we evaluate the customer's financial position and ability to pay and typically assign a credit limit based on that review. We increase the credit limit only after we have established a successful collection history with the customer. If we determine at any time that collectability is not probable under a particular arrangement based upon our credit review process or the customer's payment history, we recognize revenue under that arrangement as customer payments are actually received.

Valuation of Business Combinations

We are required to allocate the purchase price to tangible assets, liabilities and contingencies assumed, and intangible assets acquired in a business combination. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets which are amortized over various estimated useful lives. Our estimates may include, but are not limited to, future cash flows of an acquired business, the appropriate discounted rate, and the cost savings expected to be derived from an acquisition. These estimates are inherently difficult, subjective and unpredictable, and if different estimates were used, the purchase price allocation to the acquired assets and liabilities could be different. In addition, we make judgments and estimates when we assign useful lives to intangible assets identified as part of our acquisitions. These estimates are also inherently uncertain and if we used different estimates, the useful life over which we amortize intangible assets would be different. Therefore, our assessment of the estimated fair value of each of these assets and liabilities can have a material effect on our consolidated financial statements.

Valuation of Intangible Assets

We evaluate our intangible assets for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets consist of purchased technology, contract rights intangibles, customer relationships, trademarks and trade names, covenants not to compete, capitalized software development, and in-process research and development. Factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, we make an assessment of the recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the technology over the remaining useful life, we reduce the net carrying value of the related intangible asset to fair value. Any such impairment charge could be significant and could have a material

adverse effect on our reported financial results. We did not record any impairment charges on our intangible assets during fiscal 2017, 2016 or 2015.

Income Taxes

Our estimates and assumptions made in our tax provisions may differ from the actual results as reflected in our income tax returns and we record the required adjustments when they are identified or resolved.

We recognize deferred tax assets and liabilities for the temporary differences between the book and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse, and for tax loss and credit carryovers. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, our forecast of future taxable income on a jurisdiction by jurisdiction basis, as well as feasible and prudent tax planning strategies. These assumptions require judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. We believe that the net deferred tax assets of approximately $236.3 million, which are recorded on our balance sheet as of October 31, 2017 based on current tax law, will ultimately be realized. However, if we determine in the future that it is more likely than not we will not be able to realize a portion or the full amount of deferred tax assets, we would record an adjustment to the deferred tax asset or a valuation allowance as a charge to earnings in the period such determination is made.

We apply a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. An uncertain tax position is considered effectively settled on completion of an examination by a taxing authority if certain other conditions are satisfied.

The calculation of tax liabilities involves inherent uncertainty associated with the application of complex tax laws, significant assumptions, judgments and estimates including forward-looking financial projections and geographical mix of earnings. We are also subject to examination by various taxing authorities. We believe we have adequately provided in our financial statements for potential additional taxes. If we ultimately determine that these amounts are not owed, we would reverse the liability and recognize the tax benefit in the period in which we determine that the liability is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, we would record an additional charge to earnings.

Results of Operations

Revenue Background

We generate our revenue from the sale of products that include software licenses, maintenance and services, and to a lesser extent, hardware products. Under current accounting rules and policies, we recognize revenue from orders we receive for software licenses, services and hardware products at varying times.

•

In most instances, we recognize revenue on a TSL software license order over the license term and on a term or perpetual software license order in the quarter in which the license is delivered. The weighted-average term of the TSLs and term licenses is typically three years, but varies from quarter to quarter due to the nature and timing of the arrangements entered into during the quarter. The weighted-average term of the TSLs and term licenses we entered into in fiscal 2017, 2016, and 2015 was 2.7 years, 3.0 years and 2.7 years, respectively.

•

Revenue on contracts requiring significant modification or development is accounted for using the percentage of completion method over the period of the development.

•

Revenue on hardware product orders is generally recognized in full at the time the product is shipped and when title is transferred.

•

Contingent revenue is recognized if and when the event that removes the contingency occurs.

•

Revenue on maintenance orders is recognized ratably over the maintenance period (normally one year).

•

Revenue on professional services orders is generally recognized as the services are performed.

•

Infrequently, we enter into certain license arrangements wherein licenses are provided for a finite term without any other services or rights, including rights to receive, or to exchange licensed

software for, unspecified future technology. We recognize revenue from these term licenses in full upon shipment of the software and when all other revenue recognition criteria are met.

Our revenue in any period is equal to the sum of our time-based products, upfront products, and maintenance and services revenues for the period. We derive time-based products revenue largely from TSL orders received and delivered in prior quarters and to a smaller extent from contracts in which revenue is recognized as customer installments become due and payable and from contingent revenue arrangements. We derive upfront products revenue directly from term and perpetual license and hardware product orders mostly booked and shipped during the period. We derive maintenance revenue largely from maintenance orders received in prior periods since our maintenance orders generally yield revenue ratably over a term of one year. We also derive professional services revenue primarily from orders received in prior quarters, since we recognize revenue from professional services as those services are delivered and accepted or on percentage of completion for arrangements requiring significant modification of our software, and not when they are booked.

Our revenue is sensitive to the mix of TSLs and perpetual licenses delivered during a reporting period. A TSL order typically yields lower current quarter revenue but contributes to revenue in future periods. For example, a $120,000 order for a three-year TSL delivered on the last day of a quarter typically generates no revenue in that quarter, but $10,000 in each of the 12 succeeding quarters. Conversely, a $120,000 order for perpetual licenses with greater than 75% of the license fee due within one year from shipment typically generates $120,000 in revenue in the quarter the product is delivered, but no future revenue. Additionally, revenue in a particular quarter may also be impacted by perpetual licenses in which less than 75% of the license fees and 100% of the maintenance fees are payable within one year from shipment as the related revenue will be recognized as revenue in the period when customer payments become due and payable.

Most of our customer arrangements are complex, involving hundreds of products and various license rights, and our customers bargain with us over many aspects of these arrangements. For example, they often demand a broader portfolio of solutions, support and services and seek more favorable terms such as expanded license usage, future purchase rights and other unique rights at an overall lower total cost. No single factor typically drives our customers' buying decisions, and we compete on all fronts to serve customers in a highly competitive EDA market. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes.

Total Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

2,724.9

2,422.5

2,242.2

302.4

180.3

The overall growth of our business, including contributions from acquisitions, has been the primary driver of the increase in our revenue. Our revenues are subject to fluctuations, primarily due to customer requirements, including payment terms and the timing and value of contract renewals. For example, we experience variability in our revenue due to factors such as the timing of IP consulting projects, royalties, variability in hardware sales and due to certain contracts where revenue is recognized when customer installment payments are due. As revenue from hardware sales is recognized upfront, customer demand and timing requirements for such hardware may result in increased variability of our total revenue.

The increase in total revenue for fiscal 2017 compared to fiscal 2016 was primarily attributable to the overall growth in our business mainly due to higher TSL revenues, hardware sales, IP consulting projects and to a lesser extent due to revenue from acquired companies.

The increase in total revenue for fiscal 2016 compared to fiscal 2015 was primarily attributable to the overall growth of our business mainly due to higher TSL revenues and hardware sales.

Time-Based Products Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

2,021.8

1,910.9

1,792.2

110.9

118.7

Percentage of total revenue

The increase in time-based products revenue for fiscal 2017 compared to fiscal 2016 was primarily attributable to an increase in TSL license revenue due to arrangements booked in prior periods.

The increase in time-based products revenue for fiscal 2016 compared to fiscal 2015 was primarily attributable to an increase in TSL license revenue due to the overall growth in our business, including arrangements booked in prior periods and, to a lesser extent, contributions from acquisitions.

Upfront Products Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

338.2

248.1

197.3

90.1

50.8

Percentage of total revenue

Changes in upfront products revenue are generally attributable to normal fluctuations in customer requirements, which can drive the amount of upfront orders and revenue in any particular period.

The increase in upfront products revenue for fiscal 2017 compared to fiscal 2016, and for fiscal 2016 compared to fiscal 2015, was primarily attributable to an increase in the sale of hardware products driven by timing of customer requirements.

As our sales of hardware products grow, upfront products revenue as a percentage of total revenue will likely

fluctuate modestly. Such fluctuations will continue to be impacted by the timing of shipments due to customer

requirements.

Maintenance and Service Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

Maintenance revenue

84.1

74.4

70.1

9.7

4.3

Professional service and other revenue

280.8

189.1

182.6

91.7

6.5

Total

364.9

263.5

252.7

101.4

10.8

Percentage of total revenue

The increase in maintenance revenue for fiscal 2017 compared to fiscal 2016, and for fiscal 2016 compared to fiscal 2015, was primarily due to an increase in the volume of arrangements that include maintenance.

The increase in professional services and other revenue for fiscal 2017 compared to fiscal 2016 was primarily due to the increase in, and timing of, IP consulting projects that are accounted for using the percentage of completion method and contributions from acquisitions.

The increase in professional services and other revenue for fiscal 2016 compared to fiscal 2015 was primarily due to the timing of IP consulting projects that are accounted for using the percentage of completion method.

We expect our professional services revenues to increase in future periods as a result of recent acquisitions, but we do not expect the impact to be material to our total revenue.

Cost of Revenue and Operating Expenses

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

Cost of revenue

654.2

543.0

518.9

111.2

24.1

Operating expenses

1,723.1

1,562.2

1,456.8

160.9

105.4

Total

2,377.3

2,105.2

1,975.7

272.1

129.5

Total expenses as a percentage of total revenue

Our expenses are generally impacted by changes in personnel-related costs including salaries, benefits, stock-based compensation and variable compensation; changes in amortization; and changes in selling and marketing expenses. The increase in our expenses compared to prior fiscal years was primarily due to an increase in personnel-related costs, driven by increased headcount from our overall growth, including those from acquisitions, and related fixed charges including facilities, as well as higher product costs due to increased hardware sales. We allocate certain human resource programs, information technology and facility expenses among our functional income statement categories based on headcount within each functional area. Annually, or upon a significant change in headcount (such as a workforce reduction, realignment or acquisition) or other factors, management reviews the allocation methodology and expenses included in the allocation pool.

Foreign currency fluctuations, net of hedging, did not have a significant impact on expenses during fiscal 2017 as compared to fiscal 2016, or fiscal 2016 as compared to fiscal 2015. See Note 5 of Notes to Consolidated Financial Statements for details on our foreign exchange hedging programs.

Cost of Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

Cost of products revenue

413.2

346.9

303.6

66.3

43.3

Cost of maintenance and service revenue

164.9

94.0

105.3

70.9

(11.3

)

(11

Amortization of intangible assets

76.1

102.1

110.0

(26.0

)

(25

(7.9

)

Total

654.2

543.0

518.9

111.2

24.1

Percentage of total revenue

We divide cost of revenue into three categories: cost of products revenue, cost of maintenance and service revenue, and amortization of intangible assets. We segregate expenses directly associated with consulting and training services from cost of products revenue associated with internal functions providing license delivery and post-customer contract support services. We then allocate these group costs between cost of products revenue and cost of maintenance and service revenue based on products and maintenance and service revenue reported.

Cost of products revenue. Cost of products revenue includes costs related to products sold and software licensed, allocated operating costs related to product support and distribution costs, royalties paid to third-party vendors, and the amortization of capitalized research and development costs associated with software products that had reached technological feasibility.

Cost of maintenance and service revenue. Cost of maintenance and service revenue includes operating costs related to maintaining the infrastructure necessary to operate our services and costs to deliver our consulting services, such as hotline and on-site support, production services and documentation of maintenance updates. We expect our cost of maintenance and service revenue to increase in future periods because of recent acquisitions, but we do not expect the impact to be material to our total cost of revenue.

Amortization of intangible assets. Amortization of intangible assets, which is recorded to cost of revenue and operating expenses, includes the amortization of core/developed technology, trademarks, trade names, customer relationships, covenants not to compete related to acquisitions and certain contract rights related to acquisitions.

The increase in cost of revenue for fiscal 2017 compared to fiscal 2016 was primarily due to increases of $62.4 million in personnel-related costs as a result of headcount increases, including those from acquisitions, $37.5 million in hardware product costs due to increases in, and timing of, shipments, $24.8 million in costs related to servicing IP consulting arrangements, and functionally allocated expenses that were higher by $8.6 million. The increases were partially offset by decreases of $26.0 million in amortization of intangible assets.

The increase in cost of revenue for fiscal 2016 compared to fiscal 2015 was primarily due to increases of $24.2 million in product costs due to increased sales, $19.7 million in personnel-related costs as a result of headcount increases, which were partially offset by decreases of $13.4 million in costs related to our professional services revenue and $7.9 million in amortization of intangible assets.

Changes in other cost of revenue categories for the above-mentioned periods were not individually material.

Operating Expenses

Research and Development

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

908.8

856.7

776.2

52.1

80.5

Percentage of total revenue

The increase in research and development expense in fiscal 2017 compared to fiscal 2016 was primarily due to increases of $47.4 million in personnel-related costs as a result of headcount increases, including those from acquisitions.

The increase in research and development expense in fiscal 2016 compared to fiscal 2015 was primarily due to increases of $64.3 million in personnel-related costs as a result of headcount increases, including those from acquisitions, $5.7 million in consultant and contractor costs, $5.1 million in research and development supplies, and functionally allocated expenses that were higher by $3.0 million.

Changes in other research and development expense categories for the above-mentioned periods were not individually material.

Sales and Marketing

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

549.2

502.4

474.4

46.8

28.0

Percentage of total revenue

The increase in sales and marketing expense for fiscal 2017 compared to fiscal 2016, and for fiscal 2016 compared to fiscal 2015, were primarily attributable to increases of $40.8 million and $26.7 million, respectively, in personnel costs as a result of higher headcount and higher variable compensation primarily based on timing of shipments.

Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material.

General and Administrative

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

196.8

166.0

165.1

30.8

0.9

Percentage of total revenue

The increase in general and administrative expenses for fiscal 2017 compared with fiscal 2016 was primarily due to increases of $38.0 million for accrued loss contingencies as a result of litigation, $18.8 million in personnel-related costs as a result of headcount increases and $5.5 million in facilities expenses, partially offset by a $30.4 million gain as a result of a legal settlement.

General and administrative expenses for fiscal 2016 compared with fiscal 2015 remained relatively flat as increases of $5.2 million in maintenance costs and $2.5 million in professional service costs were offset by $7.2 million of lower facilities expenses.

Changes in other general and administrative expense categories for the above-mentioned periods were not individually material.

Change in Fair Value of Deferred Compensation

The income or loss arising from the change in fair value of our non-qualified deferred compensation plan obligation is recorded in cost of sales and each functional operating expense, with the offsetting change in the fair value of the related assets recorded in other income (expense), net. These assets are classified as trading securities. There is no overall impact to our net income from the income or loss of our deferred compensation plan obligation and asset.

Amortization of Intangible Assets

Amortization of intangible assets includes the amortization of contract rights and the amortization of core/developed technology, trademarks, trade names, customer relationships, covenants not to compete, and in-process research and development related to acquisitions completed in prior years. Amortization expense is included in the consolidated statements of operations as follows:

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

Included in cost of revenue

76.1

102.1

110.0

(26.0

)

(25

(7.9

)

Included in operating expenses

31.6

27.5

26.0

4.1

1.5

Total

107.7

129.6

136.0

(21.9

)

(17

(6.4

)

Percentage of total revenue

The decrease in amortization of intangible assets for fiscal 2017 compared to fiscal 2016, and for fiscal 2016 compared to fiscal 2015, was primarily due to intangible assets that were fully amortized, partially offset by additions of acquired intangible assets.

Restructuring Charges

During fiscal 2017, we recorded $36.6 million of restructuring charges for severance and benefits due to involuntary and voluntary employee termination actions. The restructuring actions were undertaken to position us for future growth, reallocate resources to priority areas and, to a lesser extent, eliminate operational redundancy. These charges consisted primarily of severance and retirement benefits. Payments under the 2017 restructuring plans are expected to be completed by the end of the second quarter of fiscal 2018.

During fiscal 2016, we recorded $9.6 million of restructuring charges for severance and benefits due to involuntary employee terminations. As of October 31, 2016, there was a $5.7 million outstanding balance remaining in

accounts payable and accrued liabilities in the consolidated balance sheets. The remaining balance was paid in fiscal 2017.

During fiscal 2015, we recorded $15.1 million of restructuring charges pursuant to the fiscal 2015 restructuring program, which included a voluntary retirement program (VRP) and a minimal headcount reduction program. The fiscal 2015 restructuring program was completed as of October 31, 2015.

The following is a summary of our restructuring activities:

Fiscal Year

Balance at Beginning of Period

Costs Incurred (Reduced)

Cash Payments

Balance at End of Period

(in millions)

2017

5.7

36.6

(24.8

)

17.5

2016

9.6

(3.9

)

5.7

2015

15.1

(15.1

)

See Note 2 of Notes to Consolidated Financial Statements.

Other Income (Expense), Net

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

Interest income

7.2

3.7

2.8

3.5

0.9

Interest expense

(7.3

)

(3.8

)

(2.8

)

(3.5

)

(1.0

)

Gain (loss) on assets related to executive deferred compensation plan

29.6

4.4

3.7

25.2

573

0.7

Foreign currency exchange gain (loss)

3.4

0.2

6.3

3.2

1,600

(6.1

)

(97

Other, net

2.6

7.7

5.1

(5.1

)

(66

2.6

Total

35.5

12.2

15.1

23.3

191

(2.9

)

(19

The net increase in other income (expense) in fiscal 2017 as compared to fiscal 2016 was primarily due to higher gains in the market value of our executive deferred compensation plan assets.

The net decrease in other income (expense) in fiscal 2016 as compared to fiscal 2015 was primarily due to lower gains in foreign currency exchange as a result of the weakened U.S. dollar against the related foreign currencies, partially offset by increased income on foreign exchange hedging contracts that was recorded in Other, net.

Income Taxes

Our effective tax rate for fiscal 2017 was 64.4%, which included income tax expense of $166.2 million relating to a repatriation of foreign earnings of $825 million in anticipation of potential U.S. corporate tax reform, $30.5 million due to an increase in valuation allowance on state deferred tax assets, a settlement with the Korean National Tax Service for the audit of fiscal years 2012 to 2016 of $7.9 million, and tax expense related to the integration of acquired technologies of $36.4 million. These expenses were partially offset by excess tax benefits from stock-based compensation of $38.1 million, a U.S. federal research tax credit of $25.5 million, and a settlement with the Taiwanese tax authorities for fiscal 2014 of $10.9 million. Our effective tax rate for fiscal 2016 was 19.0%, which included tax benefits from a settlement with the Internal Revenue Service (IRS) of $20.7 million for fiscal 2015 and the permanent reinstatement of the U.S. federal research tax credit of approximately $37.1 million, partially offset by tax expense from the integration of acquired technologies of $37.5 million, the impact of undistributed foreign earnings of $9.6 million, and an increase in the valuation allowance on deferred tax assets of $14.0 million as a result of changes in the expected utilization of state tax credits. The reinstatement of the research tax credit resulted in an additional tax credit for ten months of fiscal 2015 and the full year of fiscal 2016, which was recorded in fiscal 2016. Our effective tax rate for fiscal 2015 was 19.8%, which included tax expense from the integration of acquired technologies of $33.0 million partially offset by tax benefits from the reinstatement of the U.S. federal research tax credit of approximately $12.4 million, a settlement with the IRS of $4.0 million for fiscal 2014, and a

settlement with the Taiwanese tax authorities of $2.3 million (net tax benefit resulting from fiscal years 2012 and 2013). The reinstatement of the research tax credit resulted in an additional tax credit for ten months of fiscal 2014 as well as two months of fiscal 2015, which was recorded in fiscal 2015.

The integration of acquired technologies represents the income tax effect resulting from the transfer of certain intangible assets among company-controlled entities. The income tax effect is generally recognized over five years. These intangible assets generally result from the acquisition of technology by a company-controlled entity as part of a business or asset acquisition.

The valuation allowance on state deferred tax assets increased in fiscal 2017 by $43.7 million primarily due to a change in the realizability of deferred tax assets related to the California research credit carryforwards. Most of the change relates to a significant increase in our share price in fiscal 2017, which resulted in a higher tax deduction that reduced the future California sourced taxable income and the amount of California research credits we expect to utilize. The remainder of the increase relates to an agreement that we reached with the California tax authorities in fiscal 2017, which resulted primarily in the recognition of unrecognized tax benefits offset by a corresponding increase in the valuation allowance of $13.2 million. For further discussion of the provision for income taxes, repatriation, and settlements, see Note 11 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Our sources of cash, cash equivalents and short-term investments are funds generated from our business operations and funds that may be drawn down under our revolving credit and term loan facilities.

As of October 31, 2017, we held an aggregate of $554.6 million in cash, cash equivalents and short-term investments in the United States and an aggregate of $493.8 million in our foreign subsidiaries. In fiscal 2017, we repatriated $825 million of undistributed foreign earnings in anticipation of U.S. corporate tax reform. Additional amounts held outside the U.S. could be repatriated to the U.S. (subject to local law restrictions), but under current U.S. tax law, would be subject to U.S. income taxes less applicable foreign tax credits. We have provided for the U.S. income and foreign withholding taxes on foreign earnings, except for foreign earnings that are considered indefinitely reinvested outside the U.S. However, in the event additional funds from foreign subsidiaries were needed to fund cash needs in the U.S. and if U.S. taxes have not already been previously accrued, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds.

The following sections discuss changes in our consolidated balance sheets and statements of cash flow, and other commitments of our liquidity and capital resources during fiscal 2017.

Cash, Cash Equivalents and Short-Term Investments

Year Ended October 31,

$ Change

% Change

2017

2016

(dollars in millions)

Cash and cash equivalents

1,048.4

976.6

71.8

Short-term investments

140.7

(140.7

)

(100

Total

1,048.4

1,117.3

(68.9

)

Cash, cash equivalents and short-term investments decreased primarily due to (1) stock repurchases under our accelerated stock repurchase agreements, (2) cash used for acquisitions and intangible assets, (3) purchases of property and equipment, (4) repayment of debt, net of proceeds, and (5) payments for taxes related to net share settlement of equity awards. Cash used was partially offset by cash generated from our operations and cash received from employee stock option exercises.

Cash Flows

Year Ended October 31,

$ Change

2017

2016

2015

2016 to 2017

2015 to 2016

(dollars in millions)

Cash provided by operating activities

634.6

586.6

495.2

48.0

91.4

Cash used in investing activities

(189.3

)

(142.7

)

(559.6

)

(46.6

)

416.9

Cash used in financing activities

(373.1

)

(306.9

)

(62.1

)

(66.2

)

(244.8

)

Cash Provided by Operating Activities

We expect cash from our operating activities to fluctuate as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing and amount of tax and other liability payments. Cash provided by our operations is dependent primarily upon the payment terms of our license agreements. We generally receive cash from upfront arrangements much sooner than from time-based products revenue, in which the license fee is typically paid either quarterly or annually over the term of the license.

Fiscal 2017 compared to fiscal 2016 and fiscal 2016 compared to fiscal 2015. The increase in cash provided by operating activities was primarily driven by higher cash collections, partially offset by higher disbursements for operations, including vendors.

Cash Used in Investing Activities

Fiscal 2017 compared to fiscal 2016. The increase in cash used in investing activities was primarily driven by higher cash paid for acquisitions and intangible assets of $199.1 million, partially offset by higher proceeds from the sales and maturities of short-term investments of $139.3 million.

Fiscal 2016 compared to fiscal 2015. The decrease in cash used in investing activities was primarily driven by lower cash paid for acquisitions and intangible assets of $280.1 million, lower purchases of short-term investments of $70.2 million, higher proceeds from the sales and maturities of short-term investments of $47.2 million, and lower purchases of property and equipment of $20.1 million.

Cash Used in Financing Activities

Fiscal 2017 compared to fiscal 2016. The increase in cash used in financing activities was primarily due to higher debt repayments of $195.6 million, partially offset by higher proceeds from the drawdown of our senior unsecured revolving credit facility of $135.0 million.

Fiscal 2016 compared to fiscal 2015. The increase in cash used in financing activities was primarily due to lower proceeds from the drawdown of our senior unsecured revolving credit facility of $275.0 million and higher stock repurchase activities of $120.0 million, partially offset by lower debt repayments of $145.4 million.

Accounts Receivable, net

Year Ended October 31,

2017

2016

$ Change

% Change

(dollars in millions)

$451.1

$438.9

$12.2

Our accounts receivable and days sales outstanding (DSO) are primarily driven by our billing and collections activities. Our DSO was 59 days at October 31, 2017 and 63 days at October 31, 2016. The decrease in DSO is primarily due to the increase in revenue.

Working Capital

Working capital is comprised of current assets less current liabilities, as shown on our consolidated balance sheets:

Year Ended October 31,

2017

2016

$ Change

% Change

(dollars in millions)

Current assets

1,682.6

1,716.9

(34.3

)

Current liabilities

1,614.1

1,714.9

(100.8

)

Working capital

68.5

2.0

66.5

3,325

Working capital at the end of fiscal 2017 was higher than at the end of fiscal 2016 primarily due to (1) a decrease of $195.1 million in short-term debt, (2) an increase of $30.2 million in prepaid and other current assets, and (3) a decrease of $21.3 million in deferred revenue. These changes in working capital were partially offset by an increase of $98.4 million in accounts payable and accrued liabilities and a decrease of $69.0 million of cash, cash equivalents and short-term investments as we sold our available-for-sale investment portfolio during the fourth quarter of fiscal 2017.

Other

As of October 31, 2017, our cash equivalents consisted of taxable money market mutual funds. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk.

We proactively manage our cash equivalents balances and closely monitor our capital and stock repurchase expenditures to ensure ample liquidity. Additionally, we believe the overall credit quality of our portfolio is strong, with our global excess cash, and our cash equivalents, invested in banks and securities with a weighted-average credit rating exceeding AA. The majority of our investments are classified as Level 1 or Level 2 investments, as measured under fair value guidance. See Notes 5 and 6 of the Notes to Consolidated Financial Statements.

We believe that our current cash and cash equivalents, cash generated from operations, and available credit under our Revolver (defined below) will satisfy our routine business requirements for at least the next 12 months and the foreseeable future.

Other Commitments - Credit and Term Loan Facilities

On November 28, 2016, we entered into an amended and restated credit agreement with several lenders (the Credit Agreement) providing for (i) a $650.0 million senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0 million senior unsecured term loan facility (the Term Loan). The Credit Agreement amended and restated our previous credit agreement dated May 19, 2015 (the 2015 Agreement), in order to increase the size of the revolving credit facility from $500.0 million to $650.0 million, provide a new $150.0 million senior unsecured term loan facility, and extend the termination date of the revolving credit facility from May 19, 2020 to November 28, 2021. Subject to obtaining additional commitments from lenders, the principal amount of the loans provided under the Credit Agreement may be increased by us by up to an additional $150.0 million. The Credit Agreement contains financial covenants requiring us to operate within a maximum leverage ratio and maintain a minimum interest coverage ratio, as well as other non-financial covenants. As of October 31, 2017, we were in compliance with all financial covenants.

During the first quarter of fiscal 2017, we received funding of $150.0 million under the Term Loan. As of October 31, 2017, we had a $144.0 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $134.1 million is classified as long-term liabilities, and no outstanding balance under the Revolver. Outstanding principal payments under the Term Loan are due as follows:

Fiscal year

(in thousands)

2018

10,313

2019

14,062

2020

17,813

2021

27,187

2022

75,000

Total

144,375

As of October 31, 2016, we had no outstanding balance under the previous term loan from the 2015 Agreement and a $205.0 million outstanding balance under the previous revolver from the 2015 Agreement, all of which are considered short-term liabilities. Borrowings bear interest at a floating rate based on a margin over our choice of market observable base rates as defined in the Credit Agreement. As of October 31, 2017, borrowings under the Term Loan bore interest at LIBOR +1.125% and the applicable interest rate for the Revolver was LIBOR +1.000%. In addition, commitment fees are payable on the Revolver at rates between 0.125% and 0.200% per year based on our leverage ratio on the daily amount of the revolving commitment.

Subsequent to fiscal year 2017, we drew down $450.0 million under the Revolver and the total outstanding balance of the Revolver as of December 13, 2017 is $450.0 million.

Acquisition of Black Duck Software. On November 2, 2017, we entered into a definitive agreement pursuant to which we have agreed to acquire privately held Black Duck Software, a leader in automated solutions for securing and managing open source software. The acquisition was completed on December 11, 2017 and under the terms of the definitive agreement, we paid approximately $547 million, net of cash acquired, and assumed certain unvested equity of Black Duck employees. The transaction was funded by U.S. cash.

Contractual Obligations

The following table summarizes our contractual obligations as of October 31, 2017:

Total

Fiscal 2018

Fiscal 2019/ Fiscal 2020

Fiscal 2021/ Fiscal 2022

Thereafter

Other

(in thousands)

Lease Obligations:

Operating Leases(1)

354,329

56,879

90,944

59,235

147,271

Purchase Obligations(2)

172,583

107,327

65,256

Term Loan(3)

144,375

10,312

31,875

102,188

Other Long-Term Obligations(4)

3,450

863

1,725

862

Long term accrued income taxes(5)

33,239

Total

707,976

175,381

189,800

162,285

147,271

33,239

(1)

See Note 7 of Notes to Consolidated Financial Statements.

(2)

Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services as of October 31, 2017. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

(3)

This commitment relates to the principal on the Term Loan as discussed in Other Commitments above.

(4)

These other obligations include fees associated with our Revolver.

(5)

Long-term accrued income taxes represent uncertain tax benefits as of October 31, 2017. Currently, a reasonably reliable estimate of timing of payments in individual years beyond fiscal 2017 cannot be made due to uncertainties in timing of the commencement and settlement of potential tax audits.

The expected timing of payments of the obligations discussed above is estimated based on current information. Timing of payment and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Off-Balance Sheet Arrangements

As of October 31, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.