04.30.15 SNPS 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO
COMMISSION FILE NUMBER: 0-19807
 
 
 
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
DELAWARE
 
56-1546236
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
690 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices, including zip code)
(650) 584-5000
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of May 20, 2015, there were 155,086,820 shares of the registrant’s common stock outstanding.



Table of Contents

SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 30, 2015
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.



Table of Contents

PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
 
Financial Statements
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
 
April 30,
2015
 
 October 31,
2014*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
868,845

 
$
985,762

Short-term investments
136,579

 

      Total cash, cash equivalents and short-term investments
1,005,424

 
985,762

Accounts receivable, net
338,407

 
326,727

Deferred income taxes
81,303

 
111,449

Income taxes receivable and prepaid taxes
33,004

 
26,496

Prepaid and other current assets
86,837

 
54,301

Total current assets
1,544,975

 
1,504,735

Property and equipment, net
258,199

 
249,098

Goodwill
2,251,845

 
2,255,708

Intangible assets, net
302,656

 
365,030

Long-term prepaid taxes
3,789

 
17,645

Long-term deferred income taxes
210,373

 
208,156

Other long-term assets
184,330

 
175,127

Total assets
$
4,756,167

 
$
4,775,499

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
301,101

 
$
397,113

Accrued income taxes
6,361

 
31,404

Deferred revenue
827,576

 
928,242

Short-term debt
190,000

 
30,000

Total current liabilities
1,325,038

 
1,386,759

Long-term accrued income taxes
39,796

 
50,952

Long-term deferred revenue
98,806

 
77,646

Long-term debt
30,000

 
45,000

Other long-term liabilities
197,529

 
158,972

Total liabilities
1,691,169

 
1,719,329

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding

 

Common stock, $0.01 par value: 400,000 shares authorized; 155,054 and 155,965 shares outstanding, respectively
1,551

 
1,560

Capital in excess of par value
1,603,397

 
1,614,603

Retained earnings
1,643,207

 
1,551,592

Treasury stock, at cost: 2,210 and 1,299 shares, respectively
(94,627
)
 
(49,496
)
Accumulated other comprehensive income (loss)
(88,530
)
 
(62,089
)
Total stockholders’ equity
3,064,998

 
3,056,170

Total liabilities and stockholders’ equity
$
4,756,167

 
$
4,775,499

* Derived from audited financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Time-based license
$
447,844

 
$
424,185

 
$
878,870

 
$
824,331

Upfront license
44,313

 
36,297

 
90,793

 
70,269

Maintenance and service
65,047

 
57,215

 
129,584

 
102,048

Total revenue
557,204

 
517,697

 
1,099,247

 
996,648

Cost of revenue:
 
 
 
 
 
 
 
License
70,350

 
67,302

 
141,134

 
130,127

Maintenance and service
29,010

 
21,109

 
56,993

 
41,380

Amortization of intangible assets
25,612

 
25,674

 
51,478

 
48,427

Total cost of revenue
124,972

 
114,085

 
249,605

 
219,934

Gross margin
432,232

 
403,612

 
849,642

 
776,714

Operating expenses:
 
 
 
 
 
 
 
Research and development
188,315

 
178,043

 
369,925

 
345,586

Sales and marketing
120,579

 
114,784

 
226,748

 
220,576

General and administrative
40,975

 
40,575

 
77,329

 
74,808

Amortization of intangible assets
6,436

 
6,376

 
12,878

 
11,754

Restructuring charges

 

 
15,336

 

Total operating expenses
356,305

 
339,778

 
702,216

 
652,724

Operating income
75,927

 
63,834

 
147,426

 
123,990

Other income (expense), net
7,957

 
4,225

 
13,073

 
15,253

Income before provision for income taxes
83,884

 
68,059

 
160,499

 
139,243

Provision (benefit) for income taxes
28,288

 
4,742

 
39,714

 
8,230

Net income
$
55,596

 
$
63,317

 
$
120,785

 
$
131,013

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.41

 
$
0.78

 
$
0.85

Diluted
$
0.35

 
$
0.40

 
$
0.77

 
$
0.83

Shares used in computing per share amounts:
 
 
 
 
 
 
 
Basic
154,515

 
154,572

 
154,486

 
154,319

Diluted
157,483

 
157,082

 
157,409

 
156,986

See accompanying notes to unaudited condensed consolidated financial statements.


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SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
Net income
$
55,596

 
$
63,317

 
$
120,785

 
$
131,013

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
3,677

 
2,634

 
(19,778
)
 
(11,215
)
Changes in unrealized gains (losses) on available-for-sale securities, net of tax of $0 for periods presented
12

 

 
30

 

Cash flow hedges:
 
 
 
 
 
 
 
Deferred gains (losses), net of tax of $668 and $5,513, for the three and six months ended April 30, 2015, respectively, and of $(873) and $456 for each of the same periods in fiscal 2014, respectively
(1,345
)
 
3,064

 
(14,120
)
 
2,489

Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(3,018) and $(3,408), for the three and six months ended April 30, 2015, respectively, and of $(1,798) and $(1,504), for each of the same periods in fiscal 2014, respectively
6,371

 
874

 
7,427

 
(2,432
)
Other comprehensive income (loss), net of tax effects
8,715

 
6,572

 
(26,441
)
 
(11,158
)
Comprehensive income
$
64,311

 
$
69,889

 
$
94,344

 
$
119,855

See accompanying notes to unaudited condensed consolidated financial statements.


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Table of Contents

SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended 
 April 30,
 
2015
 
2014
Cash flow from operating activities:
 
 
 
Net income
$
120,785

 
$
131,013

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
102,051

 
91,585

Stock compensation
40,864

 
36,941

Allowance for doubtful accounts
600

 
(250
)
(Gain) loss on sale of investments
(17
)
 
(6,529
)
Deferred income taxes
27,636

 
9,266

Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(16,491
)
 
(59,577
)
Prepaid and other current assets
(34,584
)
 
(4,557
)
Other long-term assets
(13,359
)
 
(13,756
)
Accounts payable and accrued liabilities
(62,142
)
 
(83,135
)
Income taxes
(27,077
)
 
(15,021
)
Deferred revenue
(70,530
)
 
(48,069
)
Net cash provided by operating activities
67,736

 
37,911

Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of short-term investments
17,721

 

Purchases of short-term investments
(154,744
)
 

Proceeds from sales of long-term investments

 
7,304

Purchases of property and equipment
(43,979
)
 
(29,901
)
Cash paid for acquisitions and intangible assets, net of cash acquired
(2,303
)
 
(367,965
)
Capitalization of software development costs
(1,865
)
 
(1,875
)
Other
900

 

Net cash used in investing activities
(184,270
)
 
(392,437
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facility
250,000

 
200,000

Repayment of debt
(105,424
)
 
(15,497
)
Issuances of common stock
54,006

 
53,326

Purchase of equity forward contract
(36,000
)
 

Purchases of treasury stock
(144,000
)
 
(79,747
)
Other
(116
)
 
(706
)
Net cash provided by financing activities
18,466

 
157,376

Effect of exchange rate changes on cash and cash equivalents
(18,849
)
 
(3,658
)
Net change in cash and cash equivalents
(116,917
)
 
(200,808
)
Cash and cash equivalents, beginning of year
985,762

 
1,022,441

Cash and cash equivalents, end of period
$
868,845

 
$
821,633

See accompanying notes to unaudited condensed consolidated financial statements.

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SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) is a global leader in providing software, intellectual property and services used to design integrated circuits and electronic systems. The Company supplies the electronic design automation (EDA) software that engineers use to design, create prototypes for and test integrated circuits, also known as chips. The Company also offers intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The Company provides software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. To complement these product offerings, the Company provides technical services to support these solutions and help its customers develop chips and electronic systems. The Company is also a leading provider of software tools that developers use to improve the quality, security and time-to-market of software code in a wide variety of industries, including electronics, financial services, energy, and industrials.
Note 2. Summary of Significant Accounting Policies
The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its unaudited condensed consolidated balance sheets, results of operations, comprehensive income and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in Synopsys’ Annual Report on Form 10-K for the fiscal year ended October 31, 2014 as filed with the SEC on December 15, 2014.
Use of Estimates. To prepare financial statements in conformity with GAAP, management must make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position.
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Year End. The Company’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2015 and 2014 are both 52-week years. The second fiscal quarters, and first six months, of fiscal 2015 and 2014 ended on May 2, 2015 and May 3, 2014, respectively, and the prior fiscal year ended on November 1, 2014. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Subsequent Events. The Company has evaluated subsequent events through the date that these unaudited condensed consolidated financial statements were issued.

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Note 3. Goodwill and Intangible Assets
Goodwill as of April 30, 2015 and October 31, 2014 consisted of the following:
 
 
 
(in thousands)
As of October 31, 2014
$
2,255,708

Additions

Adjustments(1)
684

Effect of foreign currency translation
(4,547
)
As of April 30, 2015
$
2,251,845


(1)    Adjustments relate to changes in estimates for acquisitions that closed in the prior fiscal year for which the purchase price allocation was finalized during the reporting period.

Intangible assets as of April 30, 2015 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
493,218

 
$
334,522

 
$
158,696

Customer relationships
209,975

 
103,540

 
106,435

Contract rights intangible
145,581

 
124,190

 
21,391

Covenants not to compete
2,530

 
2,530

 

Trademarks and trade names
18,779

 
9,163

 
9,616

In-process research and development (IPR&D)(1)
2,400

 

 
2,400

Capitalized software development costs
23,694

 
19,576

 
4,118

Total
$
896,177

 
$
593,521

 
$
302,656

 
Intangible assets as of October 31, 2014 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
490,242

 
$
298,705

 
$
191,537

Customer relationships
210,172

 
92,146

 
118,026

Contract rights intangible
146,364

 
109,067

 
37,297

Covenants not to compete
2,530

 
2,530

 

Trademarks and trade names
18,779

 
7,765

 
11,014

In-process research and development (IPR&D)(1)
3,086

 

 
3,086

Capitalized software development costs
21,829

 
17,759

 
4,070

Total
$
893,002

 
$
527,972

 
$
365,030

 
(1)
IPR&D is reclassified to core/developed technology upon completion or is written off upon abandonment.

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Amortization expense related to intangible assets consisted of the following:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Core/developed technology
$
17,808

 
$
17,989

 
$
35,817

 
$
33,611

Customer relationships
5,715

 
5,787

 
11,462

 
10,839

Contract rights intangible
7,826

 
7,680

 
15,678

 
14,807

Covenants not to compete

 
17

 

 
33

Trademarks and trade names
699

 
577

 
1,398

 
891

Capitalized software development costs(1)
911

 
885

 
1,817

 
1,749

Total
$
32,959

 
$
32,935

 
$
66,172

 
$
61,930

 
(1)
Amortization of capitalized software development costs is included in cost of license revenue in the unaudited condensed consolidated statements of operations.
The following table presents the estimated future amortization of intangible assets:
Fiscal Year
(in thousands)
Remainder of fiscal 2015
$
63,473

2016
93,294

2017
56,625

2018
40,552

2019
20,644

2020 and thereafter
25,668

IPR&D(1)
2,400

Total
$
302,656

 
(1)
IPR&D projects are estimated to be completed within one year as of April 30, 2015. Assets are amortized over their useful life upon completion of the project or are written off upon abandonment.

Note 4. Financial Assets and Liabilities
Cash equivalents and short-term investments. The Company classifies time deposits and other investments with maturities less than three months as cash equivalents. Debt securities and other investments with maturities longer than three months are classified as short-term investments. The Company’s investments generally have a term of less than three years and are classified as available-for-sale carried at fair value, with unrealized gains and losses included in the unaudited condensed consolidated balance sheet as a component of accumulated other comprehensive income (loss), net of tax. Those unrealized gains or losses deemed other than temporary are reflected in other income (expense), net. The cost of securities sold is based on the specific identification method and realized gains and losses are included in other income (expense), net.

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During the first fiscal quarter of 2015, the Company made investments in available-for-sale securities. As of April 30, 2015, the balances of these investments are:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Months
 
Gross
Unrealized
Losses 12 Months or Longer
 
Estimated
Fair Value(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
394,546

 
$

 
$

 
$

 
$
394,546

Commercial paper
3,399

 

 

 

 
3,399

Total:
397,945

 

 

 

 
397,945

Short-term investments:
 
 
 
 
 
 
 
 
 
U.S. government agency securities
24,907

 
6

 
(1
)
 

 
24,912

Municipal bonds
1,404

 
2

 

 

 
1,406

Certificates of deposit
5,950

 

 

 

 
5,950

Commercial paper
5,893

 

 

 

 
5,893

Corporate debt securities
67,829

 
25

 
(9
)
 

 
67,845

Asset-backed securities
30,566

 
10

 
(3
)
 

 
30,573

Total:
136,549

 
43

 
(13
)
 

 
136,579

(1)
See Note 5. Fair Value Measures for further discussion on fair values of cash equivalents and short-term investments.

As of April 30, 2015, the stated maturities of the Company's short-term investments are:
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due in 1 year or less
$
74,812

 
$
74,818

Due in 1-5 years
61,737

 
61,761

Total
$
136,549

 
$
136,579

Non-marketable equity securities. The Company’s strategic investment portfolio consists of non-marketable equity securities in privately-held companies. The securities accounted for under cost method investments are reported at cost net of impairment losses. Securities accounted for under equity method investments are recorded at cost plus the proportional share of the issuers’ income or loss, which is recorded in the Company’s other income (expense), net. The cost basis of securities sold is based on the specific identification method. Refer to Note 5. Fair Value Measures.
Derivatives. The Company recognizes derivative instruments as either assets or liabilities in the unaudited condensed consolidated financial statements at fair value and provides qualitative and quantitative disclosures about such derivatives. The Company operates internationally and is exposed to potentially adverse movements in foreign currency exchange rates. The Company enters into hedges in the form of foreign currency forward contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately one month, (3) future billings and revenue on previously shipped orders, and (4) certain future intercompany invoices denominated in foreign currencies.
The duration of forward contracts ranges from approximately one month to 22 months, the majority of which are short-term. The Company does not use foreign currency forward contracts for speculative or trading purposes. The Company enters into foreign exchange forward contracts with high credit quality financial institutions that are

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rated ‘A’ or above and to date has not experienced nonperformance by counterparties. Further, the Company anticipates continued performance by all counterparties to such agreements.
The assets or liabilities associated with the forward contracts are recorded at fair value in other current assets or accrued liabilities in the unaudited condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the foreign currency forward contract and whether it is designated and qualifies for hedge accounting.
Cash Flow Hedging Activities
Certain foreign exchange forward contracts are designated and qualify as cash flow hedges. These contracts have durations of approximately 22 months or less. Certain forward contracts are rolled over periodically to capture the full length of exposure to the Company’s foreign currency risk, which can be up to three years. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on the hedged transactions. The effective portion of gains or losses resulting from changes in fair value of these hedges is initially reported, net of tax, as a component of other comprehensive income (OCI), in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the hedged transactions affect earnings. The Company expects a majority of the hedge balance in OCI to be reclassified to the statements of operations within the next twelve months.
Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in other income (expense), net. The premium/discount component of the forward contracts is recorded to other income (expense), net, and is not included in evaluating hedging effectiveness.
Non-designated Hedging Activities
The Company’s foreign exchange forward contracts that are used to hedge non-functional currency denominated balance sheet assets and liabilities are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying assets and liabilities, which are also recorded in other income (expense), net. The duration of the forward contracts for hedging the Company’s balance sheet exposure is approximately one month.

The Company also has certain foreign exchange forward contracts for hedging certain international revenues and expenses that are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the foreign currency in operating income. The duration of these forward contracts is usually less than one year. The overall goal of the Company’s hedging program is to minimize the impact of currency fluctuations on its net income over its fiscal year.
The effects of the changes in the fair values of non-designated forward contracts are summarized as follows:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Gain (loss) recorded in other income (expense), net
$
(235
)
 
$
330

 
$
(2,993
)
 
$
(613
)
The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:
 
As of April 30, 2015
 
As of October 31, 2014
 
(in thousands)
Total gross notional amount
$
702,008

 
$
793,937

Net fair value
$
(5,436
)
 
$
(2,455
)
The notional amounts for derivative instruments do not represent the amount of the Company’s exposure to market gain or loss. The Company’s exposure to market gain or loss will vary over time as a function of currency exchange rates. The amounts ultimately realized upon settlement of these financial instruments, together with the

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gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The following represents the unaudited condensed consolidated balance sheet location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments:
 
Fair values of
derivative instruments
designated as hedging
instruments
 
Fair values of
derivative instruments
not designated as
hedging instruments
 
(in thousands)
As of April 30, 2015
 
 
 
Other current assets
$
12,586

 
$
1,081

Accrued liabilities
$
18,971

 
$
132

As of October 31, 2014
 
 
 
Other current assets
$
9,299

 
$
1

Accrued liabilities
$
11,656

 
$
99

The following table represents the unaudited condensed consolidated statement of operations location and amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax:
 
Location of gain (loss)
recognized in OCI on
derivatives
 
Amount of gain (loss)
recognized in OCI on
derivatives
(effective portion)
 
Location of
gain (loss)
reclassified from OCI
 
Amount of
gain (loss)
reclassified from
OCI
(effective portion)
 
(in thousands)
Three months ended 
 April 30, 2015
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
374

 
Revenue
 
$
26

Foreign exchange contracts
Operating expenses
 
(1,704
)
 
Operating expenses
 
(6,397
)
Total
 
 
$
(1,330
)
 
 
 
$
(6,371
)
Three months ended 
 April 30, 2014
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
176

 
Revenue
 
$
(1,083
)
Foreign exchange contracts
Operating expenses
 
2,890

 
Operating expenses
 
209

Total
 
 
$
3,066

 
 
 
$
(874
)
Six months ended 
 April 30, 2015
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
3,340

 
Revenue
 
$
2,406

Foreign exchange contracts
Operating expenses
 
(17,499
)
 
Operating expenses
 
(9,833
)
Total
 
 
$
(14,159
)
 
 
 
$
(7,427
)
Six months ended 
 April 30, 2014
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
3,364

 
Revenue
 
$
1,674

Foreign exchange contracts
Operating expenses
 
(892
)
 
Operating expenses
 
758

Total
 
 
$
2,472

 
 
 
$
2,432


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Table of Contents

The following table represents the ineffective portions and portions excluded from effectiveness testing of the hedge gains (losses) for derivative instruments designated as hedging instruments, which are recorded in other income (expense), net:
Foreign exchange contracts
Amount of
gain (loss) recognized
in income statement
on derivatives
(ineffective
portion)(1)
 
Amount of gain (loss)
recognized in income
statement on
derivatives
(excluded from
effectiveness testing)(2)
 
(in thousands)
For the three months ended April 30, 2015
$
(40
)
 
$
1,234

For the three months ended April 30, 2014
$
(85
)
 
$
808

For the six months ended April 30, 2015
$
700

 
$
2,306

For the six months ended April 30, 2014
$
34

 
$
2,402


(1)
The ineffective portion includes forecast inaccuracies.
(2)
The portion excluded from effectiveness testing includes the discount earned or premium paid for the contracts.

11

Table of Contents

Note 5. Fair Value Measures
Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes guidelines and enhances disclosure requirements for fair value measurements. The accounting guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance also establishes a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical instruments in active markets;
Level 2—Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
On a recurring basis, the Company measures the fair value of certain of its assets and liabilities, which include cash equivalents, short-term investments, non-qualified deferred compensation plan assets, and foreign currency derivative contracts.
The Company’s cash equivalents and short-term investments are classified within Level 1 or Level 2 because they are valued using quoted market prices in an active market or alternative independent pricing sources and models utilizing market observable inputs.
The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets and are therefore classified within Level 1.
The Company’s foreign currency derivative contracts are classified within Level 2 because these contracts are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments.
The Company’s borrowings under its credit and term loan facilities are classified within Level 2 because these borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. Refer to Note 7. Credit Facility.


12

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below as of April 30, 2015:
 
 
 
Fair Value Measurement Using
Description
Total
 
Quoted Prices in Active
Markets for  Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
394,546

 
$
394,546

 
$

 
$

Commercial paper
3,399

 

 
3,399

 

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
24,912

 

 
24,912

 

Municipal bonds
1,406

 

 
1,406

 

Certificates of deposit
5,950

 

 
5,950

 

Commercial paper
5,893

 

 
5,893

 

Corporate debt securities
67,845

 

 
67,845

 

Asset-backed securities
30,573

 

 
30,573

 

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
13,666

 

 
13,666

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
157,537

 
157,537

 

 

Total assets
$
705,727

 
$
552,083

 
$
153,644

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
19,103

 
$

 
$
19,103

 
$

Total liabilities
$
19,103

 
$

 
$
19,103

 
$



13

Table of Contents

Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2014:
 
 
 
Fair Value Measurement Using
Description
Total
 
Quoted Prices in Active
Markets for  Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
409,064

 
$
409,064

 
$

 
$

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
9,300

 

 
9,300

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
145,508

 
145,508

 

 

Total assets
$
563,872

 
$
554,572

 
$
9,300

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
11,755

 
$

 
$
11,755

 
$

Total liabilities
$
11,755

 
$

 
$
11,755

 
$


Assets/Liabilities Measured at Fair Value on a Non-Recurring Basis
Non-Marketable Equity Securities
Equity investments in privately-held companies, also called non-marketable equity securities are accounted for using either the cost or equity method of accounting.
The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred.  In such events, these equity investments would be classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity. The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred. The Company monitors these investments and generally uses the income approach to assess impairments based primarily on the financial conditions of these companies.
The Company did not recognize any impairment during the three and six months ended April 30, 2015 and 2014, respectively.
As of April 30, 2015, the fair value of the Company’s non-marketable securities was $10.9 million, of which $6.7 million and $4.2 million were accounted for under the cost method and equity method, respectively. As of October 31, 2014, the fair value of non-marketable securities was $10.9 million, of which $6.7 million and $4.2 million were accounted for under the cost method and equity method, respectively.
Note 6. Liabilities and Restructuring Charges
In November 2014, the Company initiated a restructuring program that included a voluntary retirement program (VRP) and a minimal headcount reduction program. The VRP was offered to certain eligible employees in the United States and enrollment for those employees was completed on November 21, 2014. The total cost of the restructuring program was $15.3 million, of which $1.7 million and $14.3 million were paid during the three and six months ended April 30, 2015, respectively. As of April 30, 2015, the remaining balance of $1.0 million is recorded in accounts payable and accrued liabilities in the unaudited condensed balance sheets and will be paid during fiscal 2015.

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Table of Contents

Accounts payable and accrued liabilities consist of:
 
April 30,
2015
 
October 31,
2014
 
(in thousands)
Payroll and related benefits
$
219,354

 
$
302,295

Other accrued liabilities
54,887

 
66,666

Accounts payable
26,860

 
28,152

Total
$
301,101

 
$
397,113

Other long-term liabilities consist of:
 
April 30,
2015
 
October 31,
2014
 
(in thousands)
Deferred compensation liability
$
157,537

 
$
145,508

Other long-term liabilities
39,992

 
13,464

Total
$
197,529

 
$
158,972

Note 7. Credit Facility
On February 17, 2012, the Company entered into an agreement with several lenders (the Credit Agreement) providing for (i) a $350.0 million senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0 million senior unsecured term loan facility (the Term Loan). Principal payments on a portion of the Term Loan are due in equal quarterly installments of $7.5 million, with the remainder due when the Credit Agreement expires in October 2016. The Company can elect to make prepayments on the Term Loan, in whole or in part, without premium or penalty. Subject to obtaining additional commitments from lenders, the principal amount of the loans provided under the Credit Agreement may be increased by the Company by up to an additional $150.0 million through October 13, 2015. The Credit Agreement contains financial covenants requiring the Company to operate within a maximum leverage ratio and maintain specified levels of cash, as well as other non-financial covenants.
In December 2014, the Company drew down $250.0 million under the Revolver, primarily to finance an accelerated share repurchase agreement. See Note 9. Stock Repurchase Program. During the six months ended April 30, 2015, the Company made a principal payment of $15.0 million under the Term Loan and $90.0 million under the Revolver. As of April 30, 2015, the Company had a $60.0 million outstanding balance under the Term Loan, of which $30.0 million is classified as long term, and a $160.0 million outstanding balance under the Revolver, which is all considered short term. As of October 31, 2014, the Company had a $75.0 million outstanding balance under the Term Loan, of which $45.0 million was classified as long term, and no outstanding balance under the Revolver. Borrowings bear interest at a floating rate based on a margin over the Company’s choice of market observable base rates as defined in the Credit Agreement. As of April 30, 2015, borrowings under the Term Loan bore interest at LIBOR +1.125% and the applicable interest rate for the Revolver was LIBOR +0.975%. In addition, commitment fees are payable on the Revolver at rates between 0.150% and 0.300% per year based on the Company’s leverage ratio on the daily amount of the revolving commitment.
The Credit Agreement was amended and restated on May 19, 2015. See Note 16. Subsequent Events for details.
The carrying amount of the short-term and long-term debt approximates the estimated fair value. These borrowings under the Credit Agreement have a variable interest rate structure and are classified within Level 2 of the fair value hierarchy.

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Table of Contents

Note 8. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
 
April 30,
2015
 
October 31,
2014
 
(in thousands)
Cumulative currency translation adjustments
$
(70,719
)
 
$
(50,941
)
Unrealized gain (loss) on derivative instruments, net of taxes
(17,841
)
 
(11,148
)
Unrealized gain (loss) on available-for-sale securities, net of taxes
30

 

Total accumulated other comprehensive income (loss)
$
(88,530
)
 
$
(62,089
)
The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income was as follows:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Reclassifications from accumulated other comprehensive income (loss) into unaudited condensed consolidated statement of operations:
 
 
 
 
 
 
 
Gain (loss) on cash flow hedges, net of taxes
 
 
 
 
 
 
 
Revenues
$
26

 
$
(1,083
)
 
$
2,406

 
$
1,674

Operating expenses
(6,397
)
 
209

 
(9,833
)
 
758

Gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
Other income (expense)
$
5

 

 
17

 
$

Total reclassifications into net income
$
(6,366
)
 
$
(874
)
 
$
(7,410
)
 
$
2,432

Note 9. Stock Repurchase Program
The Company’s Board of Directors (Board) previously approved a stock repurchase program pursuant to which the Company was authorized to purchase up to $500.0 million of its common stock, and has periodically replenished the stock repurchase program to such amount. The Board replenished the stock repurchase program up to $500.0 million on December 3, 2013, as announced on December 4, 2013. The program does not obligate Synopsys to acquire any particular amount of common stock, and the program may be suspended or terminated at any time by Synopsys’ Chief Financial Officer or the Board. The Company repurchases shares to offset dilution caused by ongoing stock issuances from existing equity plans for equity compensation awards and issuances related to acquisitions, and when management believes it is a good use of cash. Repurchases are transacted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the Exchange Act) and may be made through any means including, but not limited to, open market purchases, plans executed under Rule 10b5-1(c) of the Exchange Act and structured transactions. As of April 30, 2015, $200.3 million remained available for further repurchases under the program.
In December 2014, the Company entered into an accelerated share repurchase agreement (2015 ASR) to repurchase an aggregate of $180.0 million of the Company’s common stock. Pursuant to the 2015 ASR, the Company made a prepayment of $180.0 million and received an initial share delivery of shares valued at $144.0 million with an average purchase price of $43.77 per share. The remaining balance of $36.0 million will be settled within 6 months or earlier upon completion of the repurchase and is included within stockholders' equity as the forward instrument meets the criteria in the Financial Accounting Standards Board (FASB) authoritative guidance for equity treatment. Under the terms of the 2015 ASR, the specific number of shares that the Company ultimately repurchases will be based on the volume-weighted average share price of the Company’s common stock during the repurchase period, less a discount.

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Table of Contents

Stock repurchase activities are as follow:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share price)
Shares repurchased

 
628

 
3,290

 
2,050

Average purchase price per share
$

 
$
39.81

 
$
43.77

 
$
38.90

Aggregate purchase price (1)
$

 
$
25,000

 
$
144,000

 
$
79,747

Reissuance of treasury stock
1,597

 
1,281

 
2,379

 
2,587

(1)
Does not include $36.0 million equity forward contract related to the above-referenced 2015 ASR.
Note 10. Stock Compensation
The compensation cost recognized in the unaudited condensed consolidated statements of operations for the Company’s stock compensation arrangements was as follows:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Cost of license
$
2,092

 
$
1,915

 
$
4,210

 
$
3,776

Cost of maintenance and service
485

 
534

 
1,026

 
962

Research and development expense
10,277

 
8,997

 
20,477

 
17,912

Sales and marketing expense
4,058

 
3,967

 
8,306

 
7,698

General and administrative expense
3,371

 
3,411

 
6,845

 
6,593

Stock compensation expense before taxes
20,283

 
18,824

 
40,864

 
36,941

Income tax benefit
(4,667
)
 
(4,271
)
 
(9,403
)
 
(8,382
)
Stock compensation expense after taxes
$
15,616

 
$
14,553

 
$
31,461

 
$
28,559

As of April 30, 2015, there was $123.4 million of unamortized share-based compensation expense, which is expected to be amortized over a weighted-average period of approximately 2.5 years.
The intrinsic values of equity awards exercised during the periods are as follows:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Intrinsic value of awards exercised
$
13,114

 
$
3,648

 
$
24,631

 
$
19,847

Note 11. Net Income per Share
The Company computes basic net income per share by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the dilution from potential common shares outstanding, such as stock options and unvested restricted stock units and awards, during the period using the treasury stock method.

17

Table of Contents

The table below reconciles the weighted-average common shares used to calculate basic net income per share with the weighted-average common shares used to calculate diluted net income per share:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Numerator:
 
 
 
 
 
 
 
Net income
$
55,596

 
$
63,317

 
$
120,785

 
$
131,013

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares for basic net income per share
154,515

 
154,572

 
154,486

 
154,319

Dilutive effect of potential common shares from equity-based compensation
2,968

 
2,510

 
2,923

 
2,667

Weighted-average common shares for diluted net income per share
157,483

 
157,082

 
157,409

 
156,986

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.41

 
$
0.78

 
$
0.85

Diluted
$
0.35

 
$
0.40

 
$
0.77

 
$
0.83

Anti-dilutive employee stock-based awards excluded(1)
1,190

 
1,998

 
1,859

 
1,674


(1)
These stock options and unvested restricted stock units and restricted stock awards were anti-dilutive for the respective periods and are excluded in calculating diluted net income per share. While such awards were antidilutive for the respective periods, they could be dilutive in the future.
Note 12. Segment Disclosure
Certain disclosures are required for operating segments, products and services, geographic areas of operation and major customers. Segment reporting is based upon the “management approach,” i.e., how management organizes the Company’s operating segments for which separate financial information is (1) available and (2) evaluated regularly by the Chief Operating Decision Makers (CODMs) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are the Company’s two Co-Chief Executive Officers.
The Company operates in a single segment to provide software products and consulting services in the EDA software industry. In making operating decisions, the CODMs primarily consider consolidated financial information, accompanied by disaggregated information about revenues by geographic region. Specifically, the CODMs consider where individual “seats” or licenses to the Company’s products are located in allocating revenue to particular geographic areas. Revenue is defined as revenues from external customers. Goodwill is not allocated since the Company operates in one reportable operating segment. Revenues related to operations in the United States and other geographic areas were:
 
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
United States
$
286,113

 
$
243,603

 
$
563,700

 
$
477,230

Europe
75,025

 
71,110

 
146,908

 
137,764

Japan
53,242

 
58,382

 
114,094

 
122,702

Asia-Pacific and Other
142,824

 
144,602

 
274,545

 
258,952

Consolidated
$
557,204

 
$
517,697

 
$
1,099,247

 
$
996,648

Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and the Company’s methodology.

18

Table of Contents

One customer accounted for 12.3% and 10.0% of the Company’s unaudited condensed consolidated revenue in the three months ended April 30, 2015 and 2014, respectively, and accounted for 11.8% and 10.8% of the Company’s unaudited condensed consolidated revenue in the six months ended April 30, 2015 and 2014, respectively.

Note 13. Other Income (Expense), net
The following table presents the components of other income (expense), net:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Interest income
$
552

 
$
314

 
$
1,700

 
$
681

Interest expense
(804
)
 
(582
)
 
(1,457
)
 
(939
)
Gain (loss) on assets related to executive deferred compensation plan
5,973

 
3,419

 
5,276

 
4,460

Foreign currency exchange gain (loss)
511

 
(109
)
 
4,205

 
785

Other, net
1,725

 
1,183

 
3,349

 
10,266

Total
$
7,957

 
$
4,225

 
$
13,073

 
$
15,253

Note 14. Taxes
Effective Tax Rate
The Company estimates its annual effective tax rate at the end of each fiscal quarter. The Company’s estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and the Company’s interpretations of tax laws and possible outcomes of audits.
The following table presents the provision for income taxes and the effective tax rates:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Income before income taxes
$
83,884

 
$
68,059

 
$
160,499

 
$
139,243

Provision (benefit) for income tax
$
28,288

 
$
4,742

 
$
39,714

 
$
8,230

Effective tax rate
33.7
%
 
7.0
%
 
24.7
%
 
5.9
%
The Company’s effective tax rate for the three and six months ended April 30, 2015 is lower than the statutory federal income tax rate of 35% primarily due to the lower tax rates applicable to its non-U.S. operations and U.S. federal and California research tax credits, partially offset by state taxes, non-deductible stock compensation, and the integration of acquired technologies.
The Company's effective tax rate increased in the three and six months ended April 30, 2015, as compared to the same periods in fiscal 2014, primarily due to the integration of acquired technologies, partially offset by the reinstatement of the U.S. federal research tax credit in the first quarter of fiscal 2015. The effective tax rate for the three and six months ended April 30, 2014 was lower due to the tax benefits of settlements with the Taiwan tax authorities for fiscal 2010 and 2009 and with the IRS for fiscal 2012.
On December 19, 2014, the president signed into law the Tax Increase Prevention Act of 2014 which reinstated the research tax credit retroactive to January 1, 2014 and extended the credit through December 31, 2014. As a result of the new legislation, the Company recognized a benefit in the first quarter of fiscal 2015 related to ten months of fiscal 2014 as well as a benefit to the annual effective tax rate for two months of fiscal 2015. During fiscal 2015 the Company estimates the benefit of the reinstatement of the research tax credit to be approximately $12.4 million.
The Company’s total gross unrecognized tax benefits at April 30, 2015 are $129.9 million exclusive of interest and penalties. If the total gross unrecognized tax benefits at April 30, 2015 were recognized in the future, approximately $129.9 million would decrease the effective tax rate.

19

Table of Contents

The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming twelve months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $37 million.

IRS Examinations
In the first quarter of fiscal 2014, the Company reached final settlement with the Examination Division of the IRS on the remaining fiscal 2012 issues and recognized approximately $10.0 million in unrecognized tax benefits.
Non-U.S. Examinations
In the first quarter of fiscal 2015, the Company reached final settlement with the Taiwan tax authorities for fiscal 2012, with regard to certain transfer pricing issues. As a result of the settlement the Company recognized approximately $1.1 million in unrecognized tax benefits.
In the second quarter of fiscal 2014, the Company reached settlements with the Taiwan tax authorities for fiscal 2010 and 2009, with regard to certain transfer pricing issues. As a result of the settlements and the application of the settlements to other open fiscal years, the Company's unrecognized tax benefits decreased by $5.1 million. The net tax benefit resulting from the settlements and the application to other open fiscal years was $3.9 million.
Note 15. Effect of New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” This ASU requires an entity to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance will be effective for fiscal 2018 unless an extension of the effective date is granted by the FASB, including interim periods within that reporting period, using one of two prescribed retrospective methods. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.
Note 16. Subsequent Events
On May 19, 2015, the Company entered into an amended and restated credit agreement with several lenders (the Restated Credit Agreement) providing for a $500.0 million senior unsecured revolving credit facility and a $150 million senior unsecured term loan facility. The Restated Credit Agreement amends and restates the Company’s previous Credit Agreement referred to in Note 7, in order to increase the size of the revolving credit facility from $350.0 million to $500.0 million and to extend the termination date of the revolving credit facility from October 14, 2016 to May 19, 2020. The Restated Credit Agreement also replaces a financial covenant requiring the Company to maintain a minimum specified level of cash with a covenant requiring a minimum interest coverage ratio. Otherwise, the terms and conditions of the Restated Credit Agreement are substantially similar to the previous Credit Agreement. The Company's outstanding Revolver and Term Loan borrowings under the previous Credit Agreement, described in Note 7, are carried over under the Restated Credit Agreement. The Company expects its borrowings under the Restated Credit Agreement will fluctuate from quarter to quarter.

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Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the “safe harbor” created by those sections. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project” or “continue,” and the negatives of such terms are intended to identify forward-looking statements. Without limiting the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements concerning expected growth in the semiconductor industry, our business outlook, our growth strategy, the ability of our prior acquisitions (including our acquisition of Coverity, Inc.) to drive revenue growth, the sufficiency of our cash, cash equivalents and short-term investments and cash generated from operations, our future liquidity requirements, and other statements that involve certain known and unknown risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those identified below in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. The information included herein represents our estimates and assumptions as of the date of this filing. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. All subsequent written or oral forward-looking statements attributable to Synopsys or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that attempt to advise interested parties of the risks and factors that may affect our business.
The following summary of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report and with our audited consolidated financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014, as filed with the SEC on December 15, 2014.
Overview
Business Summary
Synopsys is a global leader in providing software, intellectual property and services used to design integrated circuits and electronic systems. We supply the electronic design automation (EDA) software that engineers use to design, create prototypes for and test integrated circuits, also known as chips. We also offer intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. To complement these product offerings, we provide technical services to support our solutions and help our customers develop chips and electronic systems. We are also a leading provider of software tools that developers use to improve the quality, security, and time-to-market of software code in a wide variety of industries, including electronics, financial services, energy, and industrials.
Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help them overcome the challenge of developing increasingly advanced electronics products while reducing their design and manufacturing costs. While our products are an important part of our customers’ development process, our customers’ research and development budget and spending decisions may be affected by their business outlook and their willingness to invest in new and increasingly complex chip designs.
Despite global economic uncertainty, we have maintained profitability and positive cash flow on an annual basis in recent years. We achieved these results not only because of our solid execution, leading technology and strong customer relationships, but also because of our time-based revenue business model. Under this model, a substantial majority of our customers pay for their licenses over time and we typically recognize this revenue over the life of the contract, which averages approximately three years. Time-based revenue, which consists of time-based license, maintenance and service revenue, generally represents approximately 90% of our total revenue. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the

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current period. Due to our business model, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.
Our growth strategy is based on building on our leadership in our EDA products, expanding and proliferating our IP offerings, and driving growth in the software quality and security market, which we entered with our acquisition of Coverity, Inc. (Coverity) as discussed below. As we continue to expand our product portfolio and our total addressable market, for instance in IP products, we may experience increased variability in our revenue, though we generally expect time-based revenue to continue to represent approximately 90% of our total revenue. Overall, our business outlook remains solid based on our leading technology, customer relationships, business model, diligent expense management, and acquisition strategy. We believe that these factors will help us continue to successfully execute our strategies.
Acquisition of Coverity
On March 24, 2014, we acquired Coverity, the leading provider of software quality, testing and security tools. We believe this acquisition has enabled us to enter into a new, growing market dedicated to helping companies deliver better software faster, by finding software code defects as the code is being developed rather than at the end of the process. Coverity’s customer base includes Synopsys’ semiconductor and systems customers, albeit different users and budgets, and extends well beyond to software developers such as independent software vendors and companies engaged in e-commerce. We believe the Coverity acquisition has expanded our total addressable market.
Financial Performance Summary
In the second quarter of fiscal 2015, compared to the same period of fiscal 2014:
Our operating income of $75.9 million was higher by $12.1 million or 19% reflecting the following:
Total revenue of $557.2 million, an increase of $39.5 million or 8%, primarily due to continued growth both organically and through our prior-year acquisitions.
Total cost of revenue and operating expenses of $481.3 million, an increase of $27.4 million or 6%, primarily due to our operational growth and prior-year acquisitions resulting in higher employee-related costs.
Our net income of $55.6 million was lower by $7.7 million or 12% as the increase in our operating income was more than offset by the increase in our tax provision resulting primarily from the integration of our acquired technologies in fiscal 2015.
We continued to derive more than 90% of our total revenue from time-based revenue.
New Accounting Pronouncements
See Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial results under the heading “Results of Operations” below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with 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.
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 stock compensation;
Valuation of intangible assets; and
Income taxes.
Our critical accounting policies and estimates are discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended October 31, 2014, filed with the SEC on December 15, 2014.

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Results of Operations
Revenue Background
We generate our revenue from the sale of software licenses, maintenance and professional services and to a small extent, hardware products. Software license revenue consists of fees associated with the licensing of our software. Maintenance and service revenue consists of maintenance fees associated with perpetual and term licenses and professional services fees. Hardware revenue consists of FPGA-based emulation and prototyping products.
With respect to software licenses, we utilize three license types:
Technology Subscription Licenses (TSLs). TSLs are time-based licenses for a finite term, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. We bundle and do not charge separately for post-contract customer support (maintenance) for the term of the license.
Term licenses. Term licenses are also for a finite term, but do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually for the balance of the term. The annual maintenance fee is typically calculated as a percentage of the net license fee.
Perpetual licenses. Perpetual licenses continue as long as the customer renews maintenance plus an additional 20 years. Perpetual licenses do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually.
For the three software license types, we recognize revenue as follows:
TSLs. We typically recognize revenue from TSL fees (which include bundled maintenance) ratably over the term of the license period, or as customer installments become due and payable, whichever is later. Revenue attributable to TSLs is reported as “time-based license revenue” in the unaudited condensed consolidated statements of operations.
Term licenses. We recognize revenue from term licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee and 100% of the maintenance fee within one year from shipment and all other revenue recognition criteria are met. Revenue attributable to these term licenses is reported as “upfront license revenue” in the unaudited condensed consolidated statements of operations. For term licenses in which less than 75% of the license fee and 100% of the maintenance fee is payable within one year from shipment, we recognize revenue as customer payments become due and payable. Such revenue is reported as “time-based license revenue” in the unaudited condensed consolidated statements of operations.
Perpetual licenses. We recognize revenue from perpetual licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee and 100% of the maintenance fee within one year from shipment and all other revenue recognition criteria are met. Revenue attributable to these perpetual licenses is reported as “upfront license revenue” in the unaudited condensed consolidated statements of operations. For perpetual licenses in which less than 75% of the license fee and 100% of the maintenance fee is payable within one year from shipment, we recognize revenue as customer installments become due and payable. Such revenue is reported as “time-based license revenue” in the unaudited condensed consolidated statements of operations.
Under current accounting rules and policies, we recognize revenue from orders we receive for software licenses, services and hardware products at varying times. In most instances, we recognize revenue on a TSL software license order over the license term and on a term or perpetual software license order in the quarter in which the license is delivered. The weighted-average license term of the TSLs and term licenses we entered into for the three months ended April 30, 2015 and 2014 was 2.5 and 2.8 years, respectively. Revenue on contracts requiring significant modification or development is accounted for using the percentage of completion method over the period of the development. Revenue on hardware product orders is generally recognized in full at the time the product is shipped. Contingent revenue is recognized if and when the applicable event occurs.
Revenue on maintenance orders is recognized ratably over the maintenance period (normally one year). Revenue on professional services orders is generally recognized after services are performed and accepted by the customer.

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Our revenue in any period is equal to the sum of our time-based license, upfront license, maintenance and professional services for the period. We derive time-based license revenue largely from TSL orders received and delivered in prior quarters and to a smaller extent due to contracts in which revenue is recognized as customer installments become due and payable and from contingent revenue arrangements. We derive upfront license revenue directly from term and perpetual license and hardware product orders mostly booked and shipped during the period. We derive maintenance revenue largely from maintenance orders received in prior periods since our maintenance orders generally yield revenue ratably over a term of one year. We also derive professional services revenue primarily from orders received in prior quarters, since we recognize revenue from professional services as those services are delivered and accepted or on percentage of completion for arrangements requiring significant modification of our software, and not when they are booked. Our license revenue is sensitive to the mix of TSLs and perpetual or term licenses delivered during a reporting period. A TSL order typically yields lower current quarter revenue but contributes to revenue in future periods. For example, a $120,000 order for a three-year TSL delivered on the last day of a quarter typically generates no revenue in that quarter, but $10,000 in each of the twelve succeeding quarters. Conversely, a $120,000 order for perpetual and term licenses with greater than 75% of the license fee due within one year from shipment typically generates $120,000 in revenue in the quarter the product is delivered, but no future revenue. Additionally, revenue in a particular quarter may also be impacted by perpetual and term licenses in which less than 75% of the license fees and 100% of the maintenance fees are payable within one year from shipment as the related revenue will be recognized as revenue in the period when customer payments become due and payable.
Our customer arrangements are complex, involving hundreds of products and various license rights, and our customers bargain with us over many aspects of these arrangements. For example, they often demand a broader portfolio of solutions, support and services and seek more favorable terms such as expanded license usage, future purchase rights and other unique rights at an overall lower total cost. No single factor typically drives our customers’ buying decisions, and we compete on all fronts to serve customers in a highly competitive EDA market. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes.
Total Revenue
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
557.2

 
$
517.7

 
$
39.5

 
8
%
Six months ended
$
1,099.2

 
$
996.6

 
$
102.6

 
10
%
Our revenues are subject to fluctuations, primarily due to customer requirements, including payment terms and the timing and value of contract renewals. For example, we experience variability in our quarterly revenue due to factors such as the timing of renewals of maintenance contracts, timing of IP consulting projects and royalties, and certain contracts where revenue is recognized when customer installment payments are due, as well as variability in hardware sales.
The increase in total revenue for the three and six months ended April 30, 2015 compared to the same periods in fiscal 2014 was due to our overall growth and contributions from acquired companies.
Time-Based License Revenue
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
447.8

 
$
424.2

 
$
23.6

 
6
%
Percentage of total revenue
80
%
 
82
%
 

 

Six months ended
$
878.9

 
$
824.3

 
$
54.6

 
7
%
Percentage of total revenue
80
%
 
83
%
 
 
 
 
The increase in time-based license revenue for the three and six months ended April 30, 2015 compared to the same periods in fiscal 2014 was primarily attributable to an increase in TSL license revenue due to our overall growth, including contributions of revenue from acquired companies.

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Upfront License Revenue
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
44.3

 
$
36.3

 
$
8.0

 
22
%
Percentage of total revenue
8
%
 
7
%
 

 

Six months ended
$
90.8

 
$
70.3

 
$
20.5

 
29
%
Percentage of total revenue
8
%
 
7
%
 

 

Changes in upfront license revenue are generally attributable to normal fluctuations in customer requirements, which can drive the amount of upfront orders and revenue in any particular period.
The increase in upfront license revenue for the three and six months ended April 30, 2015 compared to the same periods in fiscal 2014 was primarily attributable to an increase in the sale of hardware products and to a lesser extent the sale of perpetual licenses.
As our sales of hardware products grow, we expect upfront license revenue to increase as a percentage of total revenue but remain consistent with our business model in which approximately 90% of our total revenue consists of time-based revenue.

Maintenance and Service Revenue
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
 
 
 
 
 
 
 
Maintenance revenue
$
16.5

 
$
19.3

 
$
(2.8
)
 
(15
)%
Professional services and other revenue
48.5

 
37.9

 
10.6

 
28
 %
Total maintenance and service revenue
$
65.0

 
$
57.2

 
$
7.8

 
14
 %
Percentage of total revenue
12
%
 
11
%
 
 
 
 
Six months ended
 
 
 
 
 
 
 
Maintenance revenue
$
34.0

 
$
38.0

 
$
(4.0
)
 
(11
)%
Professional services and other revenue
95.6

 
64.0

 
31.6

 
49
 %
Total maintenance and service revenue
$
129.6

 
$
102.0

 
$
27.6

 
27
 %
Percentage of total revenue
12
%
 
10
%
 
 
 
 
Changes in maintenance revenue are generally attributable to timing of contract renewals and type of contracts that bundle maintenance.
The changes in professional services and other revenue for the three and six months ended April 30, 2015 compared to the same periods in fiscal 2014 were primarily due to the increase in, and timing of, IP consulting projects that are accounted for using the percentage of completion method.

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Cost of Revenue
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
 
 
 
 
 
 
 
Cost of license revenue
$
70.4

 
$
67.3

 
$
3.1

 
5
 %
Cost of maintenance and service revenue
29.0

 
21.1

 
7.9

 
37
 %
Amortization of intangible assets
25.6

 
25.7

 
(0.1
)
 
 %
Total
$
125.0

 
$
114.1

 
$
10.9

 
10
 %
Percentage of total revenue
22
%
 
22
%
 
 
 
 
Six months ended
 
 
 
 
 
 
 
Cost of license revenue
$
141.1

 
$
130.1

 
$
11.0

 
8
 %
Cost of maintenance and service revenue
57.0

 
41.4

 
15.6

 
38
 %
Amortization of intangible assets
51.5

 
48.4

 
3.1

 
6
 %
Total
$
249.6

 
$
219.9

 
$
29.7

 
14
 %
Percentage of total revenue
23
%
 
22
%
 
 
 
 
We divide cost of revenue into three categories: cost of license 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 license revenue associated with internal functions providing license delivery and post-customer contract support services. We then allocate these group costs between cost of license revenue and cost of maintenance and service revenue based on license and maintenance and service revenue reported.
Cost of license revenue. Cost of license revenue includes costs related to products sold and software licensed, allocated operating costs related to product support and distribution costs, royalties paid to third-party vendors, and the amortization of capitalized research and development costs associated with software products that have 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 training organization, and costs associated with the delivery of our 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, trademarks, trade names, customer relationships, covenants not to compete, and certain contract rights related to acquisitions.
The increase in cost of revenue for the three months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $7.8 million in costs related to our professional services revenue, $1.0 million in personnel-related costs driven by higher headcount, and $1.0 million in product costs due to increased sales.
The increase in cost of revenue for the six months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $14.1 million in costs related to our professional services revenue, $6.9 million in personnel-related costs driven by higher headcount, $2.6 million in product costs due to increased sales, and $3.1 million in amortization due to the additions of intangible assets from our fiscal 2014 acquisitions and in-process research and development (IPR&D) projects completed since the second quarter of fiscal 2014.
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
 
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
188.3

 
$
178.0

 
$
10.3

 
6
%
Percentage of total revenue
34
%
 
34
%
 
 
 
 
Six months ended
$
369.9

 
$
345.6

 
$
24.3

 
7
%
Percentage of total revenue
34
%
 
35
%
 
 
 
 
The increase in research and development expenses for the three months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to an increase of $5.6 million in personnel-related costs principally as a result of headcount increases, including those from acquisitions, and functionally allocated expenses that were higher by $4.1 million.
The increase in research and development expenses for the six months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to an increase of $15.2 million in personnel-related costs principally as a result of headcount increases, including those from acquisitions, and functionally allocated expenses that were higher by $8.0 million.
Changes in other research and development expense categories for the above-mentioned periods were not individually material.
Sales and Marketing
 
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
120.6

 
$
114.8

 
$
5.8

 
5
%
Percentage of total revenue
22
%
 
22
%
 
 
 
 
Six months ended
$
226.7

 
$
220.6

 
$
6.1

 
3
%
Percentage of total revenue
21
%
 
22
%
 
 
 
 
The increase in sales and marketing expenses for the three months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $1.8 million in variable compensation due to higher sales, $1.9 million in personnel-related costs as a result of headcount increases, and $1.1 million in marketing activities.
The increase in sales and marketing expenses for the six months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $6.9 million in personnel-related costs as a result of headcount increases and $1.0 million in variable compensation due to higher sales, which were partially offset by a $1.3 million decrease in consultant and contractor costs.
Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material.

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General and Administrative
 
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
41.0

 
$
40.6

 
$
0.4

 
1
%
Percentage of total revenue
7
%
 
8
%
 
 
 
 
Six months ended
$
77.3

 
$
74.8

 
$
2.5

 
3
%
Percentage of total revenue
7
%
 
8
%
 
 
 
 
General and administrative expenses remained flat for the three months ended April 30, 2015 compared to the same period in fiscal 2014. Increases of $6.5 million in facilities and depreciation expenses and $1.4 million in personnel-related costs primarily due to higher headcount were partially offset by higher allocations of $6.7 million in expenses to other functions and a $1.2 million decrease in professional service costs.
The increase in general and administrative expenses for the six months ended April 30, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $12.6 million in facilities and depreciation expenses, $4.0 million in personnel-related costs primarily due to higher headcount, and $4.3 million in other items that were not individually material. The increases were partially offset by higher allocations of $13.6 million in expenses to other functions compared to the same period in fiscal 2014, resulting from increased headcount in other functions and higher spending in allocated costs, and a $4.8 million decrease in professional service costs.
Amortization of Intangible Assets
 
 
April 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
 
 
 
 
 
 
 
Included in cost of revenue
$
25.6

 
$
25.7

 
$
(0.1
)
 
 %
Included in operating expenses
6.4

 
6.4

 

 
 %
Total
$
32.0

 
$
32.1

 
$
(0.1
)