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 generally 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. Our revenue growth from period to period is expected to vary based on the mix of our time based and upfront products. 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 generally 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 to intelligently address software risks across the customer's portfolio and at all stages of the application lifecycle. The testing tools, services, and programs enable our customers to manage open source license compliance and detect, prioritize, and remediate security vulnerabilities and defects across their entire software development lifecycle. Our offerings include security and quality testing products, managed services, programs and professional services, and training.
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 2021, 2020 and 2019 were 52-week years ending on October 30, 2021, October 31, 2020 and November 2, 2019, respectively. Fiscal 2022 will be a 52-week year.
For presentation purposes, this Form 10-K refers to the closest calendar month end.
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.
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Revenue Recognition
Our contracts with customers often include promises to transfer multiple products and services to a customer. Arrangements with customers can involve multiple products and various license rights. Customers can negotiate for a broad portfolio of solutions, and favorable terms along with future purchase options to manage their overall costs. Analysis of the terms and conditions in these contracts and their effect on revenue recognition 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.
For our IP licensing arrangements, we have concluded that the licenses and support services are distinct from each other, and therefore treated as separate performance obligations. Revenues from IP licenses are recognized at a point in time upon transfer of control of the IP license, and support services are recognized over the support period as a stand ready obligation to the customer.
Valuation of 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;
•estimated obsolescence rates used in valuing technology related intangible assets;
•the expected use of the acquired assets; and
•discount rates used to discount expected future cash flows to present value, which are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks.
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.
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Changes from Prior Periodic Reports
In this Annual Report on Form 10-K, we have revised our disclosures to comply with SEC Release No. 33-10825, "Modernization of Regulation S-K Items 101, 103, and 105." In addition, we have adopted the changes in the disclosure standards included in SEC Release No. 33-10890, "Management's Discussion and Analysis, Selected Financial Data, Supplementary Financial Information."
Modernization of Regulation S-K Items 101, 103, and 105
The SEC issued Release No. 33-10825, "Modernization of Regulation S-K Items 101, 103, and 105," effective for annual periods beginning subsequent to November 2020. This release was adopted to simplify the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. Specifically, this release requires registrants to provide disclosures relating to their human capital resources and to restructure their risk factor disclosures. Additionally, the release increases the threshold for disclosure of environmental proceedings to which the government is a party.
Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information
The SEC issued Release No. 33-10890 "Management's Discussion and Analysis, Selected Financial Data, Supplementary Financial Information" which became fully effective on August 9, 2021. This release was adopted to simplify and enhance certain financial disclosure requirements in Regulation S-K. Specifically, the SEC eliminated the requirement for selected financial data, only requiring quarterly disclosure when there are retrospective changes affecting comprehensive income, and amending the matters required to be presented under Management's Discussion and Analysis (MD&A) to, among other things, eliminate the requirement to include the contractual obligations table.
With our adoption of this release, we have eliminated from this document the items discussed above that are no longer required. Information on our contractual obligations is still disclosed in narrative form within the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this Annual Report on Form 10-K.
Results of Operations
The discussion of our consolidated results of operations include year-over-year comparisons of fiscal 2021 changes compared to fiscal 2020. For a discussion of the fiscal 2020 changes compared to fiscal 2019, see the discussion in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, filed on December 15, 2020.
Fiscal 2021 Financial Performance Summary
Results of operations for fiscal 2021, compared to fiscal 2020, reflect the following:
•Revenues were $4,204.2 million, an increase of $518.9 million or 14%, primarily due to higher revenue resulting from growth across all products and geographies.
•Total cost of revenue and operating expenses were $3,469.4 million, an increase of $404.3 million or 13%, primarily due to increases of $342.2 million in employee-related costs resulting from headcount increases through organic growth and acquisitions.
•Operating income was $734.8 million, an increase of $114.6 million or 18%, as revenue growth exceeded the growth of costs and expenses.
Revenue
Our revenues are generated from two business segments: the Semiconductor & System Design segment and the Software Integrity segment. See Note 15 of 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 FPGA IC design software, verification products and
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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 duration of our TSL contracts is generally 3 years, though it may vary for specific arrangements. 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 and support 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. 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.
Our customer arrangements can involve multiple products and various license rights, and our customers negotiate with us over many aspects of these arrangements. For example, they may request 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.
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Total Revenue
Year Ended October 31,$ Change % Change
202120202020 to 2021
(dollars in millions)
Semiconductor & System Design Segment$3,810.4 $3,327.2 $483.2 15 %
Software Integrity Segment393.8 358.1 35.7 10 %
Total$4,204.2 $3,685.3 $518.9 14 %
Our revenues are subject to fluctuations, primarily due to customer requirements including the timing and value of contract renewals. For example, we experience fluctuations in our revenues due to factors such as the timing of IP product sales, consulting projects, Flexible Spending Account (FSA) drawdowns, royalties, and hardware sales. As revenues from IP products sales and hardware sales are recognized upfront, customer demand and timing requirements for such IP products and hardware could result in increased variability of our total revenues.
For fiscal 2021 compared to fiscal 2020, revenues increased primarily due to the continued organic growth of our business in most product categories and regions as a result of increased investments by our customers in new, complex designs for their hardware and software products across a wide range of industries.
For a discussion of revenue by geographic areas, see Note 15 of Notes to Consolidated Financial Statements.
Time-Based Products Revenue
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Time-based products revenue$2,633.8 $2,365.2 $268.6 11 %
Percentage of total revenue63 %64 %
The increase in time-based products revenue for fiscal 2021 compared to fiscal 2020 was primarily attributable to an increase in TSL license revenue and higher renewals from arrangements booked in prior periods.
Upfront Products Revenue
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Upfront products revenue$861.1 $735.6 $125.5 17 %
Percentage of total revenue20 %20 %
Changes in upfront products revenue are generally attributable to normal fluctuations in the extent and timing of customer requirements, which can drive the amount of upfront orders and revenue in any particular period.
The increase in upfront products revenue for fiscal 2021 compared to fiscal 2020 was primarily due to an increase in the sale of IP products and hardware products driven by higher demands from customers.
Upfront products revenue as a percentage of total revenue will likely fluctuate based on the timing of IP products and hardware sales. Such fluctuations will continue to be impacted by the timing of shipments or FSA drawdowns due to customer requirements.
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Maintenance and Service Revenue
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Maintenance revenue$235.9 $177.4 $58.5 33 %
Professional service and other revenue473.5 407.1 66.4 16 %
Total$709.4 $584.5 $124.9 21 %
Percentage of total revenue17 %16 %
The increase in maintenance revenue for fiscal 2021 compared to fiscal 2020 was primarily due to an increase in the volume of hardware and IP arrangements that include maintenance.
The increase in professional services and other revenue for fiscal 2021 compared to fiscal 2020 was primarily due to an increase in the volume of IP consulting projects.
Cost of Revenue
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Cost of products revenue$542.1 $487.3 $54.8 11 %
Cost of maintenance and service revenue271.2 254.9 16.3 6 %
Amortization of intangible assets48.5 52.5 (4.0)(8)%
Total$861.8 $794.7 $67.1 8 %
Percentage of total revenue20 %22 %
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 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 software development costs.
Cost of maintenance and service revenue. Cost of maintenance and service revenue includes costs to deliver our maintenance and consulting services, such as hotline and on-site support, production services and documentation of maintenance updates.
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 and certain contract rights intangible.
The increase in cost of revenue for fiscal 2021 compared to fiscal 2020 was primarily due to increases of $54.8 million in personnel-related costs as a result of headcount increases from hiring and acquisitions, $20.0 million in hardware related costs, and higher deferred compensation expenses of $4.6 million. These increases were partially offset by a decrease of $5.3 million in depreciation and maintenance expense, a decrease of $4.0 million in servicing IP consulting arrangements expense and a reduction of $4.0 million in amortization of intangible assets as certain technology-related intangibles assets became fully amortized during 2021.
Changes in other cost of revenue categories for the above-mentioned periods were not individually material.
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Operating Expenses
Research and Development
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
$1,504.8 $1,279.0 $225.8 18 %
Percentage of total revenue36 %35 %
The increase in research and development expenses for fiscal 2021 compared to fiscal 2020 was primarily due to higher personnel-related costs of $176.0 million from headcount increases from hiring and acquisitions as we continue to expand and enhance our product portfolio, $9.7 million in consultant and contractor costs, $7.4 million in facility expenses, as well as higher deferred compensation expenses of $29.3 million.
Changes in other research and development expense categories for the above-mentioned periods were not individually material.
Sales and Marketing
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
$712.5 $632.0 $80.5 13 %
Percentage of total revenue17 %17 %
The increase in sales and marketing expenses for fiscal 2021 compared to fiscal 2020 was primarily due to an increase of $71.8 million in personnel-related costs due to headcount increases from hiring and higher sales commissions as well as higher deferred compensation expenses of $11.0 million, partially offset by a decrease of $4.8 million in travel costs as a result of COVID-19 restrictions.
Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material.
General and Administrative
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
$323.0 $284.5 $38.5 14 %
Percentage of total revenue8 %8 %
The increase in general and administrative expenses for fiscal 2021 compared to fiscal 2020 was primarily due to an increase of $39.6 million in personnel-related expenses from headcount increases from hiring and higher deferred compensation expenses of $5.0 million.
Changes in other general and administrative expense categories for the above-mentioned periods were not individually material.
Change in Fair Value of Deferred Compensation
The income or loss arising from the change in fair value of our non-qualified deferred compensation plan obligation is recorded in cost of sales and each functional operating expense, with the offsetting change in the fair value of the related assets recorded in other income (expense), net. These assets are classified as trading securities. There is no impact to our net income from the fair value changes in our deferred compensation plan obligation and asset.
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Amortization of Intangible Assets
Amortization of intangible assets includes the amortization of contract rights and the amortization of core/developed technology, trademarks, trade names, and customer relationships related to acquisitions completed in prior years. Amortization expense is included in the consolidated statements of income as follows:
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Included in cost of revenue$48.5 $52.5 $(4.0)(8)%
Included in operating expenses33.9 38.8 (4.9)(13)%
Total$82.4 $91.3 $(8.9)(10)%
Percentage of total revenue2 %2 %
The decrease in amortization of intangible assets for fiscal 2021 compared to fiscal 2020 was primarily due to certain intangible assets becoming fully amortized in fiscal 2021, partially offset by amortization expense related to acquired intangible assets in fiscal 2021.
Restructuring Charges
In the third quarter of fiscal 2021, our management approved, committed and initiated a restructuring plan (the 2021 Plan) as part of a business reorganization. Total charges under the 2021 Plan are expected to be in the range of $42 million to $53 million and consist primarily of severance, retirement benefits under the 2021 Voluntary Retirement Program (2021 VRP), and lease abandonment costs. Restructuring charges under the 2021 Plan are anticipated to be completed in the first quarter of fiscal 2022.
The following is a summary of our restructuring liabilities:
Fiscal YearBalance at Beginning of PeriodCosts IncurredCash PaymentsBalance at End of Period
(in millions)
2021$1.3 $33.4 $(20.5)$14.2
2020$22.6 $36.1 $(57.4)$1.3
2019$8.1 $47.2 $(32.7)$22.6
See Note 2 of Notes to Consolidated Financial Statements for additional information.
Interest and Other Income (Expense), Net
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Interest income$2.4 $3.6 $(1.2)(33)%
Interest expense(3.4)(5.1)1.7 (33)%
Gain (loss) on assets related to executive deferred compensation plan71.6 21.5 50.1 233 %
Foreign currency exchange gain (loss)5.3 5.5 (0.2)(4)%
Other, net(5.2)(7.5)2.3 (31)%
Total$70.7 $18.0 $52.7 293 %
The increase in other income (expense) for fiscal 2021 as compared to fiscal 2020 was primarily due to increase in the fair value of our executive deferred compensation plan assets.
Segment Operating Results
We do not allocate certain operating expenses managed at a consolidated level to our reportable segments. These unallocated expenses consist primarily of stock-based compensation expense, amortization of intangible assets, restructuring, litigation and acquisition-related costs. See Note 15 of Notes to Consolidated Financial Statements for more information.
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Semiconductor & System Design Segment
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Adjusted operating income$1,243.1 $990.8 $252.3 25 %
Adjusted operating margin33 %30 %3 %10 %
The increase in adjusted operating income for fiscal 2021 compared to fiscal 2020 was primarily due to an increase in revenue from arrangements booked in prior periods.
Software Integrity Segment
Year Ended October 31,$ Change% Change
202120202020 to 2021
(dollars in millions)
Adjusted operating income $38.3 $40.8 $(2.5)(6)%
Adjusted operating margin10 %11 %(1)%(9)%
The decrease in adjusted operating income for fiscal 2021 compared to fiscal 2020 was primarily due to an increase in operating expenses, partially offset by an increase in revenue from arrangements booked in prior periods.
Income Taxes
Our effective tax rate for fiscal 2021 was 6.1%, which included a tax benefit of $45.5 million of U.S. federal research tax credit, a foreign derived intangible income (FDII) deduction of $31.2 million, and excess tax benefits from stock-based compensation of $94.0 million.
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 FDII deduction of $24.3 million, and excess tax benefits from stock-based compensation of $72.3 million.
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.
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 remanded the case to the Hungarian Administrative Court for further proceedings. We received the Hungarian Supreme Court's written decision in the first quarter of fiscal 2021. On April 27, 2021, the Administrative Court reheard the case and again ruled against Synopsys Hungary. We received the written opinion from the Administrative Court on May 19, 2021. We filed an appeal with the Hungarian Supreme Court on July 19, 2021. The hearing for the appeal is scheduled for January 27, 2022.
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 principal sources of liquidity are funds generated from our business operations and funds that may be drawn down under our revolving credit and term loan facilities.
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As of October 31, 2021, we held $1,580.8 million in cash, cash equivalents and short-term investments. Our cash equivalents consisted primarily of taxable money market mutual funds, time deposits and highly liquid investments with maturities of three months or less. Our short-term investments include U.S. government and municipal obligations, investment-grade available-for-sale debt and asset backed securities. We believe that 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.
As of October 31, 2021, approximately $799.1 million of our cash and cash equivalents were domiciled in various foreign jurisdictions. We have provided for foreign withholding taxes on the undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries.
We believe that our existing cash, cash equivalents and short-term investments and sources of liquidity will be sufficient to satisfy our cash requirements and capital return program over the next 12 months and beyond. Our future cash requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of our spending to support our research and development efforts. We also may invest in or acquire complementary businesses, applications or technologies, or may further expand our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing.
Cash Flows
Year Ended October 31,$ Change
202120202020 to 2021
(dollars in millions)
Cash provided by operating activities$1,492.6 $991.3 $501.3
Cash used in investing activities$(549.0)$(360.4)$(188.6)
Cash used in financing activities$(748.7)$(140.6)$(608.1)
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 2021 compared to fiscal 2020. The increase in cash provided by operating activities was primarily attributable to higher operating income and higher cash collections.
Cash Used in Investing Activities
Fiscal 2021 compared to fiscal 2020. The increase in cash used in investing activities was primarily due to purchase of short-term investments of $161.7 million and higher cash paid for acquisitions of $95.0 million, partially offset by lower purchases of property and equipment of $61.0 million.
Cash Used in Financing Activities
Fiscal 2021 compared to fiscal 2020. The increase in cash used in financing activities was primarily due to higher stock repurchases of $546.0 million and higher income taxes paid for net share settlements of $56.7 million.
Credit and Term Loan Facilities
On November 28, 2016, we entered into an amended and restated credit agreement with several lenders (as amended and restated, 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). On January 22, 2021, the Credit Agreement was amended (Credit Agreement) to extend the termination date of the existing $650 million senior unsecured revolving credit facility from November 28, 2021 to January 22, 2024, which may be further extended at our option. Further, the Credit Agreement was also amended to provide an uncommitted incremental loan facility of up to $150.0 million in the aggregate principal amount.
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Our outstanding term loan borrowings under the previous credit agreement carried over under the Credit Agreement. As of October 31, 2021, we had $75.0 million in aggregate principal amount in outstanding balance under the Term Loan. There was no outstanding balance under the Revolver as of October 31, 2021.
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, 2021, we had $25.1 million outstanding under the agreement. The remaining outstanding balance of $75.0 million was repaid in full on November 26, 2021.
Share Repurchase Program
Our Board of Directors previously approved a stock repurchase program up to $500.0 million of our common stock, and approved a replenishment of the stock repurchase program of up to $500.0 million in June 2021. During the fiscal year 2021, we repurchased 2.8 million shares of common stock at an average price of $270.84 per share for an aggregate purchase price of $753.1 million. As of October 31, 2021, $110.0 million remained available for future share repurchases. In December 2021, our Board approved a stock repurchase program with authorization to purchase up to $1.0 billion of our common stock. The pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions, our debt repayment obligations, our stock price, and economic and market conditions.
Contractual and Other Obligations
Our material cash requirements include the following contractual and other obligations.
Leases
We have operating lease arrangements for office space, data center, equipment and other corporate assets. As of October 31, 2021, we had lease payment obligations, net of immaterial sublease income, of $588.3 million, with $80.4 million payable within 12 months.
Purchase Obligations
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, 2021, we had $301.7 million of purchase obligations, with $151.8 million payable within 12 months. 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.
Term Loan
Refer to "Other Commitments - Credit and Term Loan Facilities" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K for more information.
Long Term Accrued Income Taxes
As of October 31, 2021, we had $27.9 million of long-term accrued income taxes which represent uncertain tax benefits. Currently, a reasonably reliable estimate of timing of payments related to uncertain tax benefits in individual years beyond fiscal 2021 cannot be made due to uncertainties in timing of the commencement and settlement of potential tax audits.