Management Discussion - SNPS

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

Overview

The following overview of our financial condition and results of operations is qualified in its entirety by the more complete discussion contained in this Item 7, the risk factors set forth in Item 1A of this Form 10-K and our consolidated financial statements and the notes thereto set forth in Item 8 of this Form 10-K. Please also see the cautionary language at the beginning of Part I of this Form 10-K regarding forward-looking statements.

Business Summary

Synopsys, Inc. provides products and services used across the entire Silicon to Software spectrum, from engineers creating advanced semiconductors to product teams developing advanced electronic systems to software developers seeking to ensure the security and quality of their code. We are a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. We also offer semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, we provide technical services and support to help our customers

develop advanced chips and electronic systems. These products and services are part of our Semiconductor & System Design segment.

We are also a leading provider of software tools and services that improve the security, quality and compliance of software in a wide variety of industries, including electronics, financial services, automotive, medicine, energy and industrials. These tools and services are part of our Software Integrity segment.

Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help these companies overcome the challenges of developing increasingly advanced electronics products while also helping them reduce their design and manufacturing costs. While our products are an important part of our customers' development process, our sales could be affected based on their research and development budgets, and our customers' spending decisions may be affected by their business outlook and willingness to invest in new and increasingly complex chip designs.

Our Software Integrity business delivers products and services that enable software developers to test their code - while it is being written - for known security vulnerabilities and quality defects, as well as testing for open source security vulnerabilities and license compliance. Our Software Integrity customers are software developers across many industries, including, but also well beyond, the semiconductor and systems industries. Our Software Integrity products and services form a platform that helps our customers build security into the software development lifecycle and across the entire cyber supply chain.

We have consistently grown our revenue since 2005, despite periods of global economic uncertainty. We achieved these results because of our solid execution, leading technologies and strong customer relationships, and because we recognize our revenue for software licenses over the arrangement period, which typically approximates three years. See Note 2 of Notes to Consolidated Financial Statements for discussion on our revenue recognition policy. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. As a result, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.

Our growth strategy is based on maintaining and building on our leadership in our EDA products, expanding and proliferating our IP offerings, driving growth in the software security and quality market, and continuing to expand our product portfolio and our total addressable market. In addition, due to our adoption of Accounting Standard Codification 606 (ASC 606), "Revenue from Contracts with Customers", in the beginning of fiscal 2019, the way in which we are required to account for certain types of arrangements has increased the variability in our total revenue from period to period. Nevertheless, the accounting impact has not affected the cash generated from our business. Based on our leading technologies, customer relationships, business model, diligent expense management, and acquisition strategy, we believe that we will continue to execute our strategies successfully.

COVID-19 Pandemic

While the COVID-19 pandemic has changed the physical working environment of the substantial majority of our workforce to working from home, it has otherwise caused only minor disruptions to our business operations with a limited impact on our operating results thus far. Given the unpredictable nature of the COVID-19 pandemic's impact on the global economy, our historical results may not be an indication of future performance.

The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors, including the duration and scope of the pandemic, its overall negative impact on the global economy generally and the semiconductor and electronics industries specifically, and continued responses by governments and businesses to COVID-19. We have not identified trends that we expect will materially impact our future operating results at this time. As we recognize our revenue for software licenses over the arrangement period, any potential impact related to COVID-19 may be delayed. We have not observed any changes in the design activity of customers, but we experienced a slowdown in customer commitments in our Software Integrity segment. We have not received any significant requests from our customers to either delay payments or modify arrangements due to COVID-19. However, this situation could change in future periods and the extent that these requests may impact our business is uncertain. We have also experienced minor disruptions in our hardware supply chain, which we have been able to address with minimal impact to our business operations to date.

We will continue to consider the potential impact of the COVID-19 pandemic on our business operations. Although no material impairment or other effects have been identified to date related to the COVID-19 pandemic, there is substantial uncertainty in the nature and degree of its continued effects over time. That uncertainty affects

management's accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known.

See Part I, Item 1A, Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business, operations and financial condition.

Business Segments

Semiconductor & System Design. This segment includes our advanced silicon design, verification products and services, and semiconductor IP portfolio, which encompasses products and services that serve companies primarily in the semiconductor and electronics industries. EDA includes digital, custom and Field Programmable Gate Array (FPGA) IC design software, verification products, and manufacturing software products. Designers use these products to automate the highly complex IC design process and to reduce defects that could lead to expensive design or manufacturing re-spins or suboptimal end products. For IP, we are a leading provider of high-quality, silicon-proven IP solutions for system-on-chips (SoCs). This includes IP that has been optimized to address specific application requirements for the mobile, automotive, digital home, internet of things, and cloud computing markets, enabling designers to quickly develop SoCs in these areas.

Software Integrity. This segment includes a broad portfolio of products and services such as leading quality testing technologies, automated analysis, and consulting experts. Beginning in fiscal 2019, we launched the Polaris Software Integrity Platform™, an integrated cloud-based solution that unites key elements to provide an even more valuable way for developers to better develop personalized approaches for open source license compliance and detect and remediate known security vulnerabilities and quality defects early in the development process, thereby minimizing risk and maximizing productivity.

Fiscal Year End

Our fiscal year ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, we have a 53-week year. When a 53-week year occurs, we include the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2018 was a 53-week year and ended on November 3, 2018. Fiscal 2020 and 2019 were 52-week years ending on October 31, 2020 and November 2, 2019, respectively. Fiscal 2021 will be a 52-week year.

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

Fiscal 2020 Financial Performance Summary

In fiscal 2020, compared to fiscal 2019, our financial performance reflects the following:

•

Revenues were $3.7 billion, an increase of $324.6 million or 10%, primarily due to our continued organic growth;

•

Total cost of revenue and operating expenses were $3.1 billion, an increase of $224.8 million or 8%, primarily due to increases in employee-related costs of $193.4 million, resulting from headcount increases through organic growth and acquisitions, partially offset by a decrease in restructuring costs of $11.1 million;

•

Operating income of $620.1 million, an increase of $99.9 million or 19%.

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. See Note 2 of Notes to Consolidated Financial Statements for further information on our significant accounting policies.

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; and

•

Income taxes.

Revenue Recognition

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We have concluded that our EDA software licenses in Time-based Subscription License (TSL) contracts are not distinct from our obligation to provide unspecified software updates to the licensed software throughout the license term, because those promises represent inputs to a single, combined performance obligation. Where unspecified additional software product rights are part of the contract with the customer, those rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support, because such rights are provided during the same period of time and have the same time-based pattern of transfer to the customer. In reaching this conclusion, we considered the nature of our obligation to customers which is to provide an ongoing right to use the most up to date and relevant software. As EDA customers operate in a rapidly changing and competitive environment, satisfying the obligation requires providing critical updates to the existing software products, including ongoing iterative interaction with customers to make the software relevant to the customers' ability to meet the time to go to market with advanced products.

Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include, but are not limited to:

•

future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;

•

historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

•

the expected use of the acquired assets; and

•

discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities.

Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service (IRS) and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from such examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Effect of New Accounting Pronouncements Not Yet Adopted

See Note 16 of Notes to Consolidated Financial Statements.

Results of Operations

We adopted new revenue guidance, ASC 606, at the beginning of fiscal 2019 under the modified retrospective method which has limited the comparability of prior year results in revenue and commission expense. The comparative information for periods prior to fiscal 2019 has not been restated.

Revenue

Our revenues are generated from two business segments: the Semiconductor & System Design segment and the Software Integrity segment. See Note 15 of the Notes to Consolidated Financial Statements for additional information about our reportable segments and revenue by geographic regions.

Further disaggregation of the revenues into various products and services within these two segments is summarized as follows:

Semiconductor & System Design Segment

This segment is comprised of the following:

•

EDA software includes digital, custom and Field Programmable Gate Array (FPGA) IC design software, verification products and obligations to provide unspecified updates and support services. EDA products and services are typically sold through TSL arrangements that grant customers the right to access and use all of the licensed products at the outset of an arrangement and software updates are generally made available throughout the entire term of the arrangement. The weighted-average term of the TSLs we entered into in fiscal 2020, 2019, and 2018 were approximately three years, respectively. Under ASC 606, we have concluded that the software licenses in TSL contracts are not distinct from the obligation to provide unspecified software updates to the licensed software throughout the license term, because the multiple software licenses represent inputs to a single, combined offering, and timely, relevant software updates are integral to maintaining the utility of the software licenses. We recognize revenue for the combined performance obligation under TSL contracts ratably over the term of the license.

•

IP & System Integration includes our DesignWare® IP portfolio and system-level products and services. Under ASC 606, these arrangements generally have two performance obligations which consist of transferring of the licensed IP and providing related support, which includes rights to technical support and software updates that are provided over the support term and are transferred to the customer over time. Revenue allocated to the IP licenses is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support is recognized over the support term. Royalties are recognized as revenue in the quarter in which the applicable customer sells its products that incorporate our IP. Payments for IP contracts are generally received upon delivery of the IP. Revenue related to the customization of certain IP is recognized as "Professional Services."

•

In the case of arrangements involving the sale of Hardware products, we generally have two performance obligations. The first performance obligation is to transfer the hardware product, which includes software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, which includes rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at the time of shipment because the customer obtains control of the product at that point in time. We have concluded that control generally transfers at that point in time because the customer has the ability to direct the use of the asset and an obligation to pay for the hardware. The portion of the transaction price allocated to the maintenance obligation is recognized as revenue ratably over the maintenance term.

•

Revenue from Professional Service contracts is recognized over time, generally using costs incurred or hours expended to measure progress. We have a history of reasonably estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.

Software Integrity Segment

•

We sell Software Integrity products in arrangements that provide customers the right to software licenses, maintenance updates and technical support. Over the term of these arrangements, the customer expects us to provide integral maintenance updates to the software licenses, which help customers protect their own software from new critical quality defects and potential security vulnerabilities. The licenses and maintenance updates serve together to fulfill our commitment to the customer as both work together to provide functionality to the customer and represent a combined performance obligation. We recognize revenue for the combined performance obligation over the term of the arrangement.

Most of our customer arrangements involve 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 highly competitive markets. 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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Semiconductor & System Design Segment

3,327.2

3,026.1

2,840.6

301.1

185.5

Software Integrity Segment

358.1

334.6

280.5

23.5

54.1

Total

3,685.3

3,360.7

3,121.1

324.6

239.6

The overall growth of our business has been the primary driver of the increase in our revenue. Our revenues are subject to fluctuations, primarily due to customer requirements including the timing and value of contract renewals. For example, we experience fluctuations in our revenue due to factors such as the timing of IP product sales, consulting projects, Flexible Spending Account (FSA) drawdowns, royalties, and hardware sales. As revenue from IP products sales and hardware sales are recognized upfront, customer demand and timing requirements for such IP products and hardware have resulted in increased variability of our total revenue.

The increase in total revenue for fiscal 2020 compared to fiscal 2019 was primarily attributable to the continued organic growth of the business in time-based and upfront IP license products, and higher maintenance and service revenue.

The increase in total revenue for fiscal 2019 compared to fiscal 2018 was primarily attributable to the continued business growth in all product categories, and higher revenue of $102.5 million recognized under new revenue standard ASC 606 compared with revenue recognized under old revenue standard ASC 605. The increase was partially offset by approximately $46.0 million of additional revenue due to one extra week in fiscal 2018.

For a discussion of revenue by geographic areas, see Note 15 of Notes to Consolidated Financial Statements.

Time-Based Products Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

2,365.2

2,198.0

2,303.3

167.2

(105.3

)

Percentage of total revenue

The increase in time-based products revenue for fiscal 2020 compared to fiscal 2019 was primarily attributable to an increase in TSL license revenue from arrangements booked in prior periods.

The decrease in time-based products revenue for fiscal 2019 compared to fiscal 2018 was primarily attributable to the impact of lower revenue recognized under ASC 606 of $206.9 million offset by an increase in TSL license revenue from arrangements booked in prior periods.

Upfront Products Revenue

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

735.6

619.8

357.7

115.8

262.1

Percentage of total revenue

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

The increase in upfront products revenue for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in the sale of IP products driven by higher demand from customers.

The increase in upfront products revenue for fiscal 2019 compared to fiscal 2018 was primarily due to an increase in the sale of IP products driven by higher demand from customers and higher IP revenue recognized upfront under ASC 606 of $235.4 million.

Upfront products revenue as a percentage of total revenue will likely fluctuate based on the timing of IP products and hardware sales. 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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Maintenance revenue

177.4

179.0

100.4

(1.6

)

78.6

Professional service and other revenue

407.1

363.9

359.6

43.2

4.3

Total

584.5

542.9

460.0

41.6

82.9

Percentage of total revenue

Maintenance revenue for fiscal 2020 remained relatively flat compared to fiscal 2019, primarily due to a decrease in the volume and type of arrangements that include maintenance.

The increase in maintenance revenue for fiscal 2019 compared to fiscal 2018 was primarily due to higher revenue under ASC 606 of $74.0 million and an increase in the volume of arrangements that include maintenance.

The increase in professional services and other revenue for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in the volume of IP consulting projects and the timing of IP consulting projects.

The increase in professional services and other revenue for fiscal 2019 compared to fiscal 2018 was primarily due to the timing of IP consulting projects. The increase was offset by the impact of the extra week in fiscal 2018.

Cost of Revenue and Operating Expenses

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Cost of revenue

794.7

752.9

735.9

41.8

17.0

Operating expenses

2,270.5

2,087.5

2,024.9

183.0

62.6

Total

3,065.2

2,840.4

2,760.8

224.8

79.6

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; changes in hardware related direct costs; 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, and fixed charges including information technology (IT) and facilities.

Foreign currency fluctuations, net of hedging, did not have a significant impact on expenses during fiscal 2020 as compared to fiscal 2019, or fiscal 2019 as compared to fiscal 2018. See Note 6 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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Cost of products revenue

487.3

459.1

448.4

28.2

10.7

Cost of maintenance and service revenue

254.9

234.2

203.5

20.7

30.7

Amortization of intangible assets

52.5

59.6

84.0

(7.1

)

(12

(24.4

)

(29

Total

794.7

752.9

735.9

41.8

17.0

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, hardware related direct costs, 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 2020 compared to fiscal 2019 was primarily due to increases of $25.6 million in personnel-related costs as a result of headcount increases from organic hiring and acquisitions, $16.1

million in consulting costs primarily related to servicing IP consulting arrangements, $5.1 million in depreciation and maintenance expenses, and $2.8 million in hardware related direct costs, partially offset by a decrease of $7.1 million in amortization of intangible assets.

The increase in cost of revenue for fiscal 2019 compared to fiscal 2018 was primarily due to an increase of $21.5 million in personnel-related costs as a result of headcount increases from organic hiring, $11.3 million in consulting costs primarily related to servicing IP consulting arrangements, $10.1 million in IT and facility expenses, and $5.3 million in depreciation and maintenance expenses, partially offset by a decrease of $24.4 million in amortization of intangible assets and one additional week of expenses of approximately $4.5 million in fiscal 2018.

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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

1,279.0

1,136.9

1,084.8

142.1

52.1

Percentage of total revenue

The increase in research and development expenses for fiscal 2020 compared to fiscal 2019 was primarily due to increases of $124.5 million in personnel-related costs as a result of headcount increases, including those from acquisitions, $14.8 million in facility expenses, and $6.6 million in consultants and contractor costs, partially offset by lower deferred compensation expenses of $4.5 million.

The increase in research and development expenses for fiscal 2019 compared to fiscal 2018 was primarily due to increases of $41.5 million in personnel-related costs as a result of headcount increases, including organic hiring and those from prior year acquisitions, $22.8 million in IT and facility expenses, and $5.5 million in consultants and contractor costs, partially offset by an additional week of expenses of approximately $19.3 million in fiscal 2018.

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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

632.0

632.9

623.0

(0.9

)

9.9

Percentage of total revenue

Sales and marketing expenses remained relatively flat for fiscal 2020 compared to fiscal 2019, primarily due to a decrease of $19.5 million that included reduced travel and marketing expenses as a result of COVID-19 restrictions, partially offset by an increase in personnel-related costs of $19.1 million.

The increase in sales and marketing expenses for fiscal 2019 compared to fiscal 2018 was primarily due to increases of $11.3 million in personnel-related costs as a result of headcount increases and $4.3 million in IT and facility expenses, partially offset by an additional week of expenses of approximately $5.8 million in fiscal 2018. For fiscal 2019, commission expenses were $4.1 million lower compared to commission expenses for fiscal 2018 which was accounted for under ASC 605.

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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

284.5

229.2

262.6

55.3

(33.4

)

(13

Percentage of total revenue

The increase in general and administrative expenses for fiscal 2020 compared to fiscal 2019 was primarily due to an increase of $24.2 million in personnel-related expenses, a legal settlement of $18.3 million in our favor in the first quarter of fiscal 2019, and an increase of $13.1 million in depreciation and maintenance expenses, partially offset by a decrease of $1.6 million in professional service costs.

The decrease in general and administrative expenses for fiscal 2019 compared to fiscal 2018 was primarily due to a $26.0 million litigation settlement in the third quarter of fiscal 2018, a legal settlement of $18.3 million in our favor in the first quarter of fiscal 2019, and an additional week of expenses of approximately $4.1 million in fiscal 2018. The decreases were partially offset by a $7.1 million increase in personnel-related costs.

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 impact to our net income from the fair value changes in 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, 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

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Included in cost of revenue

52.5

59.6

84.0

(7.1

)

(12

(24.4

)

(29

Included in operating expenses

38.8

41.3

41.6

(2.5

)

(0.3

)

Total

91.3

100.9

125.6

(9.6

)

(10

(24.7

)

(20

Percentage of total revenue

The decrease in amortization of intangible assets for fiscal 2020 compared to fiscal 2019 was primarily due to intangible assets that were fully amortized, partially offset by additions of acquired intangible assets in fiscal 2020.

The decrease in amortization of intangible assets for fiscal 2019 compared to fiscal 2018 was primarily due to intangible assets that were fully amortized, partially offset by additions of acquired intangible assets in fiscal 2019.

Restructuring Charges

In the second quarter of fiscal 2019, our management approved, committed and initiated a restructuring plan (the Plan) as part of a business reorganization. Total charges under the Plan consisted primarily of severance, termination, and retirement benefits under the 2019 Voluntary Retirement Program (VRP).

The following is a summary of our restructuring activities:

Fiscal Year

Balance at Beginning of Period

Costs Incurred

Cash Payments

Balance at End of Period

(in millions)

2020

22.6

36.1

(57.4

)

1.3

2019

8.1

47.2

(32.7

)

22.6

2018

17.5

12.7

(22.1

)

8.1

See Note 2 of Notes to Consolidated Financial Statements for additional information.

Other Income (Expense), Net

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Interest income

3.6

6.9

5.3

(3.3

)

(48

1.6

Interest expense

(5.1

)

(11.7

)

(15.6

)

6.6

(56

3.9

(25

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

21.5

27.8

4.6

(6.3

)

(23

23.2

504

Foreign currency exchange gain (loss)

5.5

3.6

1.9

Other, net

(7.5

)

(1.3

)

5.4

(6.2

)

477

(6.7

)

(124

Total

18.0

25.3

3.3

(7.3

)

(29

22.0

667

The net decrease in other income (expense) for fiscal 2020 as compared to fiscal 2019 was primarily due to changes in the fair value of our executive deferred compensation plan assets, partially offset by lower interest expenses due to a lower debt balance.

The net increase in other income (expense) in fiscal 2019 as compared to fiscal 2018 was also primarily due to changes in the fair value of our executive deferred compensation plan assets.

Segment Operating Results

We do not allocate certain operating expenses managed at a consolidated level to our reportable segments. These unallocated expenses consist primarily of stock-based compensation expense, amortization of intangible assets, restructuring, litigation and acquisition-related costs. See Note 15 of the Notes to Consolidated Financial Statements for more information.

Semiconductor & System Design Segment

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Adjusted operating income

990.8

806.6

701.3

184.2

105.3

Adjusted operating margin

The increase in adjusted operating income for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in revenue from arrangements booked in prior periods.

The increase in adjusted operating income for fiscal 2019 compared to fiscal 2018 was primarily due to higher revenue recognized under ASC 606 of $97.5 million and an increase in revenue from arrangements booked in prior periods, partially offset by approximately $12.0 million due to an additional week of operating income in fiscal 2018.

Software Integrity Segment

Year Ended October 31,

$ Change

% Change

$ Change

% Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Adjusted operating income

40.8

32.2

(10.6

)

8.6

42.8

(404

Adjusted operating margin

(350

The increase in adjusted operating income for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in revenue from arrangements booked in prior periods.

The increase in adjusted operating income for fiscal 2019 compared to fiscal 2018 was primarily due to an increase in revenue from arrangements booked in prior periods and the impact of higher revenue recognized under ASC 606 of $5.0 million.

Income Taxes

The Tax Cuts and Jobs Act (the Tax Act), enacted on December 22, 2017, lowered the statutory federal corporate income tax rate from 35% to 21% effective on January 1, 2018. Beginning in fiscal 2019, our annual statutory federal corporate tax rate is 21%.

Our effective tax rate for fiscal 2020 was (4.0%), which included a tax benefit of $39.2 million of U.S. federal research tax credit, a foreign derived intangible income (FDII) deduction of $24.3 million, and excess tax benefits from stock-based compensation of $72.3 million.

Our effective tax rate for fiscal 2019 was 2.4%, which included a tax benefit of $28.1 million related to the realizability of U.S. foreign tax credits related to the transfer of intangibles associated with the tax restructuring in fiscal 2018, a U.S. federal research tax credit of $34.5 million, a FDII deduction of $26.6 million, and excess tax benefits from stock-based compensation of $40.5 million.

Our effective tax rate for fiscal 2018 was (19.0%), which included a tax benefit of $172.0 million relating to the restructuring of our foreign intellectual property rights, a U.S. federal research tax credit of $35.1 million, a tax benefit of $28.1 million arising from a settlement with the Internal Revenue Service (IRS) in fiscal 2017, and excess tax benefits from stock-based compensation of $31.0 million. These benefits were partially offset by tax expense of $63.1 million for a one-time transition tax on foreign earnings, $51.1 million due to re-measurement of U.S. deferred tax assets as a result of the Tax Act, and tax expense related to the integration of acquired technologies of $27.9 million.

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

The Tax Act required us to pay a one-time transition tax on previously untaxed earnings represented by foreign cash and certain other net current assets, and 8% on the remaining earnings. In fiscal 2018, we recorded a tax expense of $63.1 million. Based on subsequent judicial rulings in fiscal 2019 (including Altera Corp. et al. v. Commissioner and the Hungarian Administrative Court ruling), we recorded a tax benefit of $17.9 million related to the one-time transition tax. See Note 13 of Notes to Consolidated Financial Statements for further discussion.

The Tax Act includes certain new tax provisions listed below which apply to us beginning in fiscal 2019.

•

A tax on global intangible low-tax income (GILTI), which is determined annually based on our aggregate foreign subsidiaries' income in excess of certain qualified business asset investment return. In fiscal 2019, we adopted an accounting policy to account for the tax effects of GILTI in the period that it is subject to such tax.

•

A base erosion and anti-abuse tax (BEAT), which functions as a minimum tax that partially disallows deductions for certain related party transactions and certain tax credits.

•

A special tax deduction for FDII, which, in general, allows a deduction of certain intangible income earned in the U.S. and derived from foreign sources.

The Tax Act also provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017 that were not subject to the one-time transition tax. We have provided for foreign withholding taxes on undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries.

In July 2017, the Hungarian Tax Authority (the HTA) issued a final assessment against our Hungarian subsidiary (Synopsys Hungary) for fiscal years 2011 through 2013. The HTA applied withholding taxes on certain payments made to affiliates, resulting in an aggregate tax assessment of approximately $25.0 million and interest and penalties of $11.0 million. We paid the tax assessments, penalties and interest in the first quarter of 2018 as required by law and recorded these amounts as prepaid taxes on our balance sheet. On April 30, 2019, the Hungarian Administrative Court ruled against Synopsys Hungary. We filed an appeal with the Hungarian Supreme Court on July 5, 2019. In the second quarter of 2019, as a result of the Court's decision, we recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits for the tax assessments. The Hungarian Supreme Court heard our appeal on November 12, 2020 and issued a ruling from the bench to remand the case to the Hungarian Administrative Court for further proceedings. We expect to receive the Hungarian Supreme Court's written decision in the first quarter of fiscal 2021.

See Note 13 of Notes to Consolidated Financial Statements for further discussion of the provision for income taxes, the impacts related to the Tax Act, and the Hungarian audit.

Liquidity and Capital Resources

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

We have considered the potential impact of the COVID-19 pandemic on our liquidity and capital resources. Although we have not observed any material effects on our liquidity, collections from customers or other working capital requirements due to the COVID-19 pandemic to date, there is substantial uncertainty that could result in greater variability as additional events and information become known. We believe that our existing balances of cash and cash equivalents will be sufficient to satisfy our working capital needs, capital asset purchases, share repurchases, acquisitions, debt repayments and other liquidity requirements associated with our existing operations. We are continuously evaluating the COVID-19 pandemic's effects and taking steps to mitigate known risks, including potential constraints on our liquidity and capital resources as a result of customers' reduced expenditures or disruptions to our supply chain. In light of that ongoing assessment, we may choose to temporarily defer certain expenditures due to the effects of the COVID-19 pandemic.

As of October 31, 2020, we held an aggregate of $590.0 million in cash and cash equivalents in the United States and an aggregate of $645.7 million in our foreign subsidiaries. The Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017 that were not subject to the one-time transition tax. We have provided for foreign withholding taxes on undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries.

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 2020.

Cash and Cash Equivalents

Year Ended October 31,

$ Change

% Change

2020

2019

(dollars in millions)

Cash and cash equivalents

1,235.7

728.6

507.1

Cash and cash equivalents increased primarily due to cash from our operations and net proceeds from our credit facilities. The increase in cash and cash equivalents was partially offset by stock repurchases, repayment of debt, cash used for acquisition, and purchases of property and equipment.

Cash Flows

Year Ended October 31,

$ Change

2020

2019

2018

2019 to 2020

2018 to 2019

(dollars in millions)

Cash provided by operating activities

991.3

800.5

424.4

190.8

376.1

Cash used in investing activities

(360.4

)

(235.9

)

(743.5

)

(124.5

)

507.6

Cash provided by (used in) financing activities

(140.6

)

(561.9

)

5.1

421.3

(567.0

)

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 2020 compared to fiscal 2019. The increase in cash provided by operating activities was primarily driven by higher net income, higher cash collections and lower disbursements in operations, including timing of vendor payments and other employee related expenses.

Fiscal 2019 compared to fiscal 2018. The increase in cash provided by operating activities was primarily driven by higher net income and higher cash collections, partially offset by higher disbursements for operations, including vendor payments.

Cash Used in Investing Activities

Fiscal 2020 compared to fiscal 2019. The increase in cash used in investing activities was primarily due to higher cash paid for acquisitions of $164.4 million.

Fiscal 2019 compared to fiscal 2018. The decrease in cash used in investing activities was primarily driven by higher cash paid for acquisitions in fiscal 2018 of $616.0 million.

Cash Provided by (Used in) Financing Activities

Fiscal 2020 compared to fiscal 2019. The decrease in cash used in financing activities was primarily due to lower debt repayments of $235.2 million and higher proceeds of $83.6 million from credit facilities drawdowns.

Fiscal 2019 compared to fiscal 2018. Cash used in financing activities was higher primarily due to higher debt repayments of $228.8 million and lower proceeds from credit facilities drawdowns of $427.7 million.

Accounts Receivable, net

Year Ended October 31,

2020

2019

$ Change

% Change

(dollars in millions)

Accounts receivable, net

780.7

553.9

226.8

Changes in our accounts receivable balance are primarily driven by the timing and volume of customer billing and collection activities.

Working Capital

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

Year Ended October 31,

2020

2019

$ Change

% Change

(dollars in millions)

Current assets

2,549.2

1,738.9

810.3

Current liabilities

2,139.9

1,752.5

387.4

Working capital (deficit)

409.3

(13.6

)

422.9

(3,110

Increases in our working capital were primarily due to an increase in cash and cash equivalents of $507.1 million and an increase in accounts receivable of $226.8 million, partially offset by an increase in deferred revenue of $175.8 million and an increase in accounts payable and accrued liabilities of $117.2 million. We did not see a significant impact on our working capital during this period from the COVID-19 pandemic.

Other Commitments - Credit and Term Loan Facilities

As of October 31, 2020, we had $102.1 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $75.0 million was classified as long-term liabilities. Outstanding principal payments under the Term Loan are due as follows:

Fiscal year

(in thousands)

2021

27,187

2022

75,000

Total

102,187

As of October 31, 2019, we had a $119.8 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $102.2 million was classified as long-term liabilities.

There was no outstanding balance under the Revolver as of October 31, 2020 and October 31, 2019. We expect our borrowings under the Revolver will fluctuate from quarter to quarter.

Our Term Loan and Revolver 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, 2020, 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.

In July 2018, we entered into a 12-year 220.0 million RMB (approximately $33.0 million) credit agreement with a lender in China to support our facilities expansion. Borrowings bear interest at a floating rate based on the 5 year Loan Prime Rate plus 0.74%. As of October 31, 2020, we had $25.8 million outstanding under the agreement.

See Note 6 of the Notes to Consolidated Financial Statements for additional information.

Other

As of October 31, 2020, 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 6 and 7 of Notes to Consolidated Financial Statements.

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

Contractual Obligations

Contractual obligations as of October 31, 2020 are as follows:

Total

Fiscal 2021

Fiscal 2022/ Fiscal 2023

Fiscal 2024/ Fiscal 2025

Thereafter

Other

(in thousands)

Lease Obligations:

Operating Leases(1)

659,559

87,592

155,057

125,958

290,952

Purchase Obligations(2)

420,585

273,101

147,484

Term Loan(3)

102,187

27,187

75,000

Other Obligations(4)

26,778

Long term accrued income taxes(5)

25,178

Total

1,234,287

414,658

377,541

125,958

290,952

25,178

(1)

See Note 8 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, 2020. 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)

These commitments relate to the principal of the Term Loan and a credit facility as discussed in Other Commitments above.

(4)

These other obligations include fees associated with our credit facility.

(5)

Long-term accrued income taxes represent uncertain tax benefits as of October 31, 2020. Currently, a reasonably reliable estimate of timing of payments related to uncertain tax benefits in individual years beyond fiscal 2020 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, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.