Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2017
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: 0-14338
 
 
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-2819853
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
Identification No.)
 
 
 
111 McInnis Parkway,
San Rafael, California
 
94903
(Address of principal executive offices)
 
(Zip Code)
(415) 507-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
  
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 24, 2017, registrant had outstanding 219,192,248 shares of common stock.
 




AUTODESK, INC. FORM 10-Q
TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Maintenance
$
261.8

 
$
277.5

 
$
525.4

 
$
561.9

Subscription
196.1

 
101.8

 
369.5

 
187.3

Total maintenance and subscription revenue
457.9

 
379.3

 
894.9

 
749.2

License and other
43.9

 
171.4

 
92.6

 
313.4

Total net revenue
501.8

 
550.7


987.5

 
1,062.6

Cost of revenue:

 

 

 

Cost of maintenance and subscription revenue
52.8

 
46.8

 
107.7

 
93.4

Cost of license and other revenue
17.8

 
27.6

 
36.4

 
62.5

Amortization of developed technology
4.0

 
10.7

 
8.7

 
21.6

Total cost of revenue
74.6

 
85.1


152.8

 
177.5

Gross profit
427.2

 
465.6


834.7

 
885.1

Operating expenses:
 
 
 
 

 

Marketing and sales
257.6

 
243.1

 
513.3

 
483.9

Research and development
193.8

 
193.0

 
381.5

 
386.5

General and administrative
78.0

 
68.6

 
156.3

 
143.3

Amortization of purchased intangibles
4.9

 
7.8

 
10.6

 
15.7

Restructuring charges and other facility exit costs, net
0.5

 
16.0

 
0.2

 
68.3

Total operating expenses
534.8

 
528.5


1,061.9

 
1,097.7

Loss from operations
(107.6
)
 
(62.9
)

(227.2
)
 
(212.6
)
Interest and other expense, net
(18.8
)
 
(10.1
)
 
(20.6
)
 
(13.7
)
Loss before income taxes
(126.4
)
 
(73.0
)

(247.8
)
 
(226.3
)
Provision for income taxes
(17.6
)
 
(25.2
)
 
(25.8
)
 
(39.6
)
Net loss
$
(144.0
)
 
$
(98.2
)

$
(273.6
)
 
$
(265.9
)
Basic net loss per share
$
(0.66
)
 
$
(0.44
)
 
$
(1.25
)
 
$
(1.19
)
Diluted net loss per share
$
(0.66
)
 
$
(0.44
)
 
$
(1.25
)
 
$
(1.19
)
Weighted average shares used in computing basic net loss per share
219.5

 
223.2

 
219.7

 
223.8

Weighted average shares used in computing diluted net loss per share
219.5

 
223.2

 
219.7

 
223.8


See accompanying Notes to Condensed Consolidated Financial Statements.


3



AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In millions)
(Unaudited)

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(144.0
)
 
$
(98.2
)
 
$
(273.6
)
 
$
(265.9
)
Other comprehensive income (loss), net of reclassifications:
 
 
 
 
 
 
 
Net loss on derivative instruments (net of tax effect of $0.9, $1.1, $1.4 and ($0.8), respectively)
(11.6
)
 
(1.5
)
 
(13.0
)
 
(11.0
)
Change in net unrealized (loss) gain on available-for-sale securities (net of tax effect of $0.4, ($0.1), $0.1, and ($0.6), respectively)
(0.5
)
 
1.1

 
0.2

 
3.4

Change in defined benefit pension items (net of tax effect of $0.0, ($0.2), $0.0, and ($0.2), respectively)
0.3

 

 
(0.2
)
 
0.3

Net change in cumulative foreign currency translation gain (loss) (net of tax effect of ($0.6), $0.0, ($0.9) and $0.0, respectively)
25.2

 
(7.9
)
 
38.6

 
(1.4
)
Total other comprehensive income (loss)
13.4

 
(8.3
)
 
25.6

 
(8.7
)
Total comprehensive loss
$
(130.6
)
 
$
(106.5
)
 
$
(248.0
)
 
$
(274.6
)

 
See accompanying Notes to Condensed Consolidated Financial Statements.


4



AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
July 31, 2017
 
January 31, 2017
ASSETS
 
 
 
Current assets:



Cash and cash equivalents
$
1,174.1


$
1,213.1

Marketable securities
533.6


686.8

Accounts receivable, net
265.6


452.3

Prepaid expenses and other current assets
110.0


108.4

Total current assets
2,083.3


2,460.6

Marketable securities
236.0


306.2

Computer equipment, software, furniture and leasehold improvements, net
153.0


158.6

Developed technologies, net
34.0


45.7

Goodwill
1,588.6


1,561.1

Deferred income taxes, net
66.2


63.9

Other assets
192.9


202.0

Total assets
$
4,354.0


$
4,798.1

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:



Accounts payable
$
93.0


$
93.5

Accrued compensation
161.7


238.2

Accrued income taxes
21.3


50.0

Deferred revenue
1,308.5


1,270.1

Current portion of long-term notes payable, net

 
398.7

Other accrued liabilities
117.2


134.9

Total current liabilities
1,701.7


2,185.4

Long-term deferred revenue
467.5


517.9

Long-term income taxes payable
33.2


39.3

Long-term deferred income taxes
100.9

 
91.5

Long-term notes payable, net
1,584.9

 
1,092.0

Other liabilities
150.3


138.4

Stockholders’ equity:



Common stock and additional paid-in capital
1,934.8


1,876.3

Accumulated other comprehensive loss
(152.9
)

(178.5
)
Accumulated deficit
(1,466.4
)

(964.2
)
Total stockholders’ equity
315.5


733.6

Total liabilities and stockholders' equity
$
4,354.0


$
4,798.1


See accompanying Notes to Condensed Consolidated Financial Statements.


5



AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Six Months Ended July 31,
 
2017
 
2016
Operating activities:



Net loss
$
(273.6
)

$
(265.9
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:



Depreciation, amortization and accretion
56.8


70.4

Stock-based compensation expense
134.4


105.9

Deferred income taxes
5.8

 
(9.2
)
Restructuring charges and other facility exit costs, net
0.2


68.3

Other operating activities
7.7


(6.2
)
Changes in operating assets and liabilities, net of acquisitions:
 



Accounts receivable
185.5

 
346.9

Prepaid expenses and other current assets
(2.4
)
 
(23.3
)
Accounts payable and accrued liabilities
(95.8
)
 
(44.6
)
Deferred revenue
(9.9
)
 
(1.4
)
Accrued income taxes
(36.0
)
 
(94.5
)
Net cash (used in) provided by operating activities
(27.3
)

146.4

Investing activities:



Purchases of marketable securities
(299.7
)

(810.9
)
Sales of marketable securities
110.8


354.7

Maturities of marketable securities
420.3


791.3

Capital expenditures
(26.4
)

(42.6
)
Acquisitions, net of cash acquired


(85.2
)
Other investing activities
(4.3
)

(6.7
)
Net cash provided by investing activities
200.7


200.6

Financing activities:



Proceeds from issuance of common stock, net of issuance costs
55.9


54.2

Taxes paid related to net share settlement of equity awards
(49.8
)

(19.9
)
Repurchases of common stock
(315.2
)

(270.0
)
Proceeds from debt, net of discount
496.9



Repayment of debt
(400.0
)


Other financing activities
(5.8
)


Net cash used in financing activities
(218.0
)

(235.7
)
Effect of exchange rate changes on cash and cash equivalents
5.6


3.0

Net (decrease) increase in cash and cash equivalents
(39.0
)

114.3

Cash and cash equivalents at beginning of period
1,213.1


1,353.0

Cash and cash equivalents at end of period
$
1,174.1


$
1,467.3


See accompanying Notes to Condensed Consolidated Financial Statements.


6



AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except share and per share data, or as otherwise noted)
 
1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Autodesk, Inc. (“Autodesk,” “we,” “us,” “our,” or the “Company”) as of July 31, 2017, and for the three and six months ended July 31, 2017 and 2016, have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information along with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In management’s opinion, Autodesk made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair statement of the financial position and operating results of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the results of operations for the three and six months ended July 31, 2017 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2018, or for any other period. Further, the balance sheet as of January 31, 2017 has been derived from the audited balance sheet as of this date. There have been no material changes, other than what is discussed herein, to Autodesk's significant accounting policies as compared to the significant accounting policies disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2017. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes, together with management’s discussion and analysis of financial position and results of operations contained in Autodesk’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017, filed on March 21, 2017.

Change in Presentation

During the first quarter of fiscal 2018, the Company changed its historical presentation of its revenue and cost of revenue categories.

Previously, the Company presented revenue and cost of revenue on two lines: subscription, and license and other. Included within subscription was maintenance revenue for all our software products and revenue for our cloud service offerings. License and other revenue included product license revenue, standalone consulting services, and other immaterial items. Also, included within license and other revenue was an allocation of the estimated value of the software license from our term-based product subscriptions and enterprise offerings, which contain a software license, maintenance and cloud services. For these arrangements, as there is no vendor-specific-objective evidence ("VSOE") for the related maintenance, the arrangement consideration was allocated between the license and maintenance deliverables based on best estimated selling prices in our condensed consolidated statements of operations. The Company performed the allocation because it provided a meaningful presentation to investors based on the Company's then current product mix.
 
As part of the Company's technological and business model transition, the Company discontinued the sale of most of its perpetual licenses, transitioning away from selling a mix of perpetual licenses and term-based product subscriptions to a single subscription model involving more highly interrelated software and cloud functionalities. Fiscal 2018 marks the first full year in the Company's history that it will sell substantially term-based product subscriptions. To better reflect this shift in our business, the Company adopted a revised presentation in the first quarter of fiscal 2018, including the separation of subscription revenue and maintenance revenue on distinct line items on the Company's condensed consolidated statement of operations.

Subscription revenue now consists of our full term-based product subscriptions, cloud service offerings, and flexible enterprise business arrangements. Note that with the change in our condensed consolidated statement of operations in the first quarter of fiscal 2018, our term-based product subscriptions and flexible enterprise business arrangements are classified and presented in a single line item.

Maintenance revenue is presented as a separate line item in the new presentation and consists of revenue from our existing maintenance plan agreements and related renewals.

License and other revenue will continue to be presented as a separate line item and include any residual perpetual licenses sold, standalone consulting services, and other immaterial items.


7



In connection with these revisions, the Company also revised its cost of revenue classification to present cost of subscription and maintenance revenue and amortization of developed technology separately. Cost of license and other revenue will continue to be presented as a separate line item.

This change in presentation does not affect our total net revenues, total cost of net revenues or overall gross margin. The following table shows reclassified amounts to conform to the current period presentation:

 
Three Months Ended July 31, 2016
 
Six Months Ended July 31, 2016
 
Previously Reported
 
Change in Presentation Reclassification
 
Current Presentation
 
Previously Reported
 
Change in Presentation Reclassification
 
Current Presentation
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
Maintenance (1)
N/A
 
$
277.5

 
$
277.5

 
N/A
 
$
561.9

 
$
561.9

Subscription
$
322.0

 
(220.2
)
 
101.8

 
$
648.0

 
(460.7
)
 
187.3

License and other
228.7

 
(57.3
)
 
171.4

 
414.6

 
(101.2
)
 
313.4

Total
$
550.7

 
$

 
$
550.7

 
$
1,062.6

 
$

 
$
1,062.6

 
 
 
 
 
 
 
 
 

 
 
Cost of revenue:
 
 
 
 
 
 
 
 

 
 
Maintenance and subscription (2)
$
38.2

 
$
8.6

 
$
46.8

 
$
78.0

 
$
15.4

 
$
93.4

License and other
46.9

 
(19.3
)
 
27.6

 
99.5

 
(37.0
)
 
62.5

Amortization of developed technology (1)
N/A
 
10.7

 
10.7
 
N/A
 
21.6

 
21.6
Total
$
85.1

 
$

 
$
85.1

 
$
177.5

 
$

 
$
177.5

 _______________
(1)
These lines were not previously reported in the Condensed Consolidated Statement of Operations.
(2)
Previously, titled "Subscription."

2. Recently Issued Accounting Standards

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the six months ended July 31, 2017, that are of significance, or potential significance, to the Company.

Accounting standard adopted in the current fiscal year

Autodesk adopted FASB's Accounting Standards Update No. 2017-04 ("ASU 2017-04"), "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" during the three months ended April 30, 2017. The ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new guidance is required to be applied on a prospective basis and as such, Autodesk will use the simplified test in its annual fourth fiscal quarter testing or more often if circumstances indicate a potential impairment may exist, or if events have affected the composition of reporting units. Autodesk does not believe ASU 2017-04 will have a material impact on its consolidated financial statements.

Recently issued accounting standards but not yet adopted

In August 2017, FASB issued Accounting Standards Update No. 2017-12 ("ASU 2017-12"), "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities."  The targeted amendments help simplify certain aspects of hedge accounting and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements.  For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The amendments are effective for Autodesk's fiscal year beginning February 1, 2019, with early adoption permitted.  Autodesk is currently

8



evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In February 2017, FASB issued Accounting Standards Update No. 2017-05 ("ASU 2017-05"), "Other Income– Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." The ASU, among other things, clarifies the scope of the derecognition of nonfinancial assets, the definition of in substance financial assets, and impacts the accounting for partial sales of nonfinancial assets by requiring full gain recognition upon the sale. The amendments are effective for Autodesk's fiscal year beginning February 1, 2018. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The effect of the implementation will depend upon the nature of the Company's future acquisitions or dispositions, if any. The adoption of the guidance would not have had a material impact on acquisitions prior to the current period and on the Company's consolidated statements of financial condition and results of operations.

In January 2017, FASB issued Accounting Standards Update No. 2017-01 ("ASU 2017-01"), "Business Combinations: Clarifying the Definition of a Business" which provides a more robust framework to use in determining when a set of assets and activities is considered a business. The amendments will be effective for Autodesk's fiscal year beginning February 1, 2018 unless Autodesk elects early adoption, which Autodesk is still evaluating. The new guidance is required to be applied on a prospective basis. The effect of the implementation will depend upon the nature of the Company's future acquisitions, if any.

In October 2016, FASB issued Accounting Standards Update No. 2016-16 ("ASU 2016-16"), “Income Taxes: Intra-Entity Transfers of Assets Other than Inventory” which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The amendments will be effective for Autodesk's fiscal year beginning February 1, 2018. The new guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Autodesk is currently evaluating the accounting and disclosure requirements of the standard. Furthermore, the actual impact of implementation will largely depend on future intra-entity asset transfers, if any.

In June 2016, FASB issued Accounting Standards Update No. 2016-13 ("ASU 2016-13") regarding ASC Topic 326, "Financial Instruments - Credit Losses," which modifies the measurement of expected credit losses of certain financial instruments. Autodesk plans to adopt ASU 2016-13 as of the effective date which represents Autodesk’s fiscal year beginning February 1, 2020. Autodesk does not believe the ASU will have a material impact on its consolidated financial statements.

In February 2016, FASB issued Accounting Standards Update No. 2016-02 ("ASU 2016-02") regarding ASC Topic 842, "Leases." The amendments in this ASU require balance sheet recognition of lease assets and lease liabilities by lessees for leases classified as operating leases, with an optional policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. The amendments also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Autodesk plans to adopt ASU 2016-02 in Autodesk’s fiscal year beginning February 1, 2019. The amendments require a modified retrospective approach with optional practical expedients. Autodesk is currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In January 2016, FASB issued Accounting Standards Update No. 2016-01 ("ASU 2016-01") regarding ASC Topic 825-10, "Financial Instruments - Overall." The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and require equity securities to be measured at fair value with changes in fair value recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment for impairment quarterly at each reporting period. The amendments in ASU 2016-01 will be effective for Autodesk's fiscal year beginning February 1, 2018. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with prospective adoption of the amendments related to equity securities without readily determinable fair values existing as of the date of adoption. Autodesk does not believe ASU 2016-01 will have a material impact on its consolidated financial statements.

In May 2014, FASB issued Accounting Standards Update No. 2014-09 (regarding ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2014-09 provides principles for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB issued Accounting Standards Update No. 2015-14 to defer the effective date by one year with early adoption permitted as of the original effective date. In addition, FASB issued Accounting Standards Update No. 2016-08, Accounting Standards Update No. 2016-10, Accounting Standards Update No. 2016-12, and Accounting

9



Standard Update No. 2016-20 in March 2016, April 2016, May 2016, and December 2016, respectively, to help provide interpretive clarifications on the new guidance in ASC Topic 606.

Autodesk currently plans to adopt ASU 2014-09 as of February 1, 2018, using the modified retrospective transition method.

In terms of Autodesk's evaluation efforts, the Company has assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. The Company's preliminary assessment is that there should be no material change in the timing and amount of the recognition of revenue for the majority of the Company's product subscription offerings and enterprise arrangements. This preliminary assessment is based on the Company's analysis that the related software and cloud services in a majority of the product subscription and enterprise arrangements are not distinct in the context of the contract as they are considered highly interrelated and represent a single combined performance obligation that should be recognized over time. Due to the complexity of certain contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and vary in some instances.

A limited number of Autodesk's product subscriptions do not incorporate substantial cloud services, and under ASU 2014-09 will be recognized as distinct license and service performance obligations. Revenue allocated to the licenses in these offerings will be recognized at a point in time instead of over the contract term. While we are still evaluating, Autodesk believes the impact of the change to timing of revenue recognition for these limited offerings, and other revenue streams that Autodesk is currently evaluating, may have a material balance sheet impact on the adoption date with the application of the modified retrospective transition method. It is not expected to have a material impact to reported revenue in subsequent reporting periods.

Another significant provision under ASU 2014-09 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commission. The Company expects there to be a material balance sheet impact at the period of adoption capturing the sales commission capitalization and is currently evaluating the magnitude at implementation.

Furthermore, the Company has made and will continue to make investments in systems and processes to enable timely and accurate reporting under the new standard. The Company currently expects that necessary operational and internal control structural changes will be implemented prior to the adoption date.

3. Concentration of Credit Risk
    
Autodesk places its cash, cash equivalents and marketable securities in highly liquid instruments with, and in the custody of, diversified financial institutions globally with high credit ratings and limits the amounts invested with any one institution, type of security and issuer. Autodesk’s primary commercial banking relationship is with Citigroup Inc. and its global affiliates. Citibank, N.A., an affiliate of Citigroup, is one of the lead lenders and an agent in the syndicate of Autodesk’s $400.0 million line of credit facility.

Total sales to the distributor Tech Data Corporation and its global affiliates (“Tech Data”) accounted for 31% of Autodesk’s total net revenue for both the three months ended July 31, 2017 and 2016 and 30% of Autodesk’s total net revenue for both the six months ended July 31, 2017 and 2016. The majority of the net revenue from sales to Tech Data is for sales made outside of the United States. In addition, Tech Data accounted for 30% and 20% of trade accounts receivable at July 31, 2017 and January 31, 2017, respectively.


10



4. Financial Instruments

The following tables summarize the Company's financial instruments' amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category as of July 31, 2017 and January 31, 2017:
 
 
 
 
July 31, 2017
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
$
7.0

 
$

 
$

 
$
7.0

 
$
7.0

 
$

 
$

 
Certificates of deposit
61.3

 

 

 
61.3

 
61.3

 

 

 
Corporate debt securities
23.0

 

 

 
23.0

 
23.0

 

 

 
Commercial paper
167.6

 

 

 
167.6

 

 
167.6

 

 
Custody cash deposit
42.8

 

 

 
42.8

 
42.8

 

 

 
Municipal bonds
15.0

 

 

 
15.0

 
15.0

 

 

 
Money market funds
348.5

 

 

 
348.5

 

 
348.5

 

 
Sovereign debt
5.0

 

 

 
5.0

 

 
5.0

 

 
U.S. government securities
100.0

 

 

 
100.0

 
100.0

 

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
7.5

 

 

 
7.5

 
7.5

 

 

 
 
Asset backed securities
30.2

 

 

 
30.2

 

 
30.2

 

 
 
Certificates of deposit
13.0

 

 

 
13.0

 
13.0

 

 

 
 
Commercial paper
98.9

 

 

 
98.9

 

 
98.9

 

 
 
Corporate debt securities
219.3

 
0.1

 

 
219.4

 
219.4

 

 

 
 
Municipal bonds
36.7

 
0.1

 

 
36.8

 
36.8

 

 

 
 
Sovereign debt
14.0

 

 

 
14.0

 

 
14.0

 

 
 
U.S. government securities
59.4

 

 

 
59.4

 
59.4

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
48.7

 
5.7

 

 
54.4

 
54.4

 

 

 
Long-term available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
7.5

 

 

 
7.5

 
7.5

 

 

 
 
Asset backed securities
57.6

 

 
(0.1
)
 
57.5

 

 
57.5

 

 
 
Corporate debt securities
126.3

 
0.3

 

 
126.6

 
126.6

 

 

 
 
Municipal bonds
5.0

 

 

 
5.0

 
5.0

 

 

 
 
Sovereign debt
1.6

 

 

 
1.6

 

 
1.6

 

 
 
U.S. government securities
37.8

 

 

 
37.8

 
37.8

 

 

Convertible debt securities (2)
10.7

 
3.4

 
(3.1
)
 
11.0

 

 

 
11.0

Derivative contract assets (3)
3.0

 
10.2

 
(2.2
)
 
11.0

 

 
9.0

 
2.0

Derivative contract liabilities (4)

 

 
(19.3
)
 
(19.3
)
 

 
(19.3
)
 

 
 
Total
$
1,547.4


$
19.8


$
(24.7
)

$
1,542.5


$
816.5


$
713.0


$
13.0

____________________ 
(1)
Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Considered “available-for-sale” and included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(3)
Included in “Prepaid expenses and other current assets” or “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)
Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.


11



 
 
 
 
January 31, 2017
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
$
6.0

 
$

 
$

 
$
6.0

 
$
6.0

 
$

 
$

 
Certificates of deposit
63.1

 

 

 
63.1

 
63.1

 

 

 
Commercial paper
207.4

 

 

 
207.4

 

 
207.4

 

 
Corporate debt securities
40.2

 

 

 
40.2

 
40.2

 

 

 
Custody cash deposit
3.2

 

 

 
3.2

 
3.2

 

 

 
Money Market funds
256.5

 

 

 
256.5

 

 
256.5

 

 
Municipal bonds
5.0

 

 

 
5.0

 
5.0

 

 

 
Sovereign debt
15.0

 

 

 
15.0

 

 
15.0

 

 
U.S. government securities
309.5

 

 

 
309.5

 
309.5

 

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
13.2

 

 

 
13.2

 
13.2

 

 

 
 
Asset backed securities
19.6

 

 

 
19.6

 

 
19.6

 

 
 
Certificates of deposit
157.3

 

 

 
157.3

 
157.3

 

 

 
 
Commercial paper
109.2

 

 

 
109.2

 

 
109.2

 

 
 
Corporate debt securities
234.7

 

 
(0.2
)
 
234.5

 
234.5

 

 

 
 
Municipal bonds
43.4

 

 

 
43.4

 
43.4

 

 

 
 
Sovereign debt
30.0

 

 

 
30.0

 

 
30.0

 

 
 
U.S. government securities
32.3

 

 

 
32.3

 
32.3

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
44.8

 
2.5

 

 
47.3

 
47.3

 

 

 
Long-term available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
7.1

 

 

 
7.1

 
7.1

 

 

 
 
Asset backed securities
65.8

 
0.1

 

 
65.9

 

 
65.9

 

 
 
Corporate debt securities
172.1

 
0.1

 
(0.1
)
 
172.1

 
172.1

 

 

 
 
Municipal bonds
10.7

 

 

 
10.7

 
10.7

 

 

 
 
Sovereign debt
1.5

 

 

 
1.5

 

 
1.5

 

 
 
U.S. government securities
48.8

 
0.1

 

 
48.9

 
48.9

 

 

Convertible debt securities (2)
4.9

 
2.3

 
(1.6
)
 
5.6

 

 

 
5.6

Derivative contract assets (3)
2.2

 
12.3

 
(1.3
)
 
13.2

 

 
11.9

 
1.3

Derivative contract liabilities (4)

 

 
(10.4
)
 
(10.4
)
 

 
(10.4
)
 

 
 
Total
$
1,903.5

 
$
17.4

 
$
(13.6
)
 
$
1,907.3

 
$
1,193.8

 
$
706.6

 
$
6.9

____________________ 
(1)
Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Considered “available-for-sale” and included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(3)
Included in “Prepaid expenses and other current assets,” “Other assets,” or “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
(4)
Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
    
Autodesk classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with remaining maturities of up to 12 months are classified as short-term and marketable securities with remaining maturities greater than 12 months are classified as long-term. Autodesk may sell certain of its marketable securities prior to their stated maturities for strategic purposes or in anticipation of credit deterioration.

Autodesk applies fair value accounting for certain financial assets and liabilities, which consist of cash equivalents, marketable securities and other financial instruments, that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer

12



a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and (Level 3) unobservable inputs for which there is little or no market data, which require Autodesk to develop its own assumptions. When determining fair value, Autodesk uses observable market data and relies on unobservable inputs only when observable market data is not available. There have been no transfers between fair value measurement levels during the six months ended July 31, 2017.

Autodesk's cash equivalents, marketable securities and financial instruments are primarily classified within Level 1 or Level 2 of the fair value hierarchy. Autodesk values its available-for-sale securities on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1) or inputs other than quoted prices that are observable either directly or indirectly in determining fair value (Level 2). Autodesk's Level 2 securities are valued primarily using observable inputs other than quoted prices in active markets for identical assets and liabilities. Autodesk's Level 3 securities consist of investments held in convertible debt securities and derivative contracts which are valued using probability weighted discounted cash flow models as some of the inputs to the models are unobservable in the market.

A reconciliation of the change in Autodesk’s Level 3 items for the six months ended July 31, 2017 follows:

 
Fair Value Measurements Using
Significant Unobservable Inputs
 
(Level 3)
 
 
Derivative Contracts
 
Convertible Debt Securities
 
Total
Balances, January 31, 2017
 
$
1.3

 
$
5.6

 
$
6.9

Purchases
 
1.1

 
5.9

 
7.0

Losses included in earnings
 
(0.4
)
 

 
(0.4
)
Losses included in OCI
 

 
(0.5
)
 
(0.5
)
Balances, July 31, 2017
 
$
2.0

 
$
11.0

 
$
13.0


The following table summarizes the estimated fair value of Autodesk's “available-for-sale securities” classified by the contractual maturity date of the security:

 
July 31, 2017
 
Cost
 
Fair Value
Due within 1 year
$
475.7

 
$
475.8

Due in 1 year through 5 years
243.3

 
244.0

Due in 5 years through 10 years
1.9

 
1.9

Due after 10 years
4.6

 
4.5

Total
$
725.5

 
$
726.2


As of July 31, 2017 and January 31, 2017, Autodesk had no securities, individually and in the aggregate, in a continuous unrealized loss position for greater than twelve months.

As of July 31, 2017 and January 31, 2017, Autodesk had $108.5 million and $117.2 million, respectively, in direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. Other than the amounts disclosed in the following paragraph, Autodesk does not intend to sell these cost method investments and it is not more likely than not that Autodesk will be required to sell the investment before recovery of the amortized cost bases, which may be maturity. Therefore, Autodesk does not consider those investments to be other-than-temporarily impaired at July 31, 2017. Autodesk estimates fair value of its cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data.


13



If Autodesk determines that an other-than-temporary impairment has occurred, Autodesk writes down the investment to its fair value. During the three and six months ended July 31, 2017, Autodesk recorded $3.6 million and $4.1 million, respectively, in other-than-temporary impairments on its privately held equity investments. During each of the three and six months ended July 31, 2016, Autodesk recorded $0.3 million in other-than-temporary impairments on its privately held equity investment.

There was no loss or gain for the sales or redemptions of “available-for-sale securities” during the six months ended July 31, 2017. The sales or redemptions of “available-for-sale securities” during the six months ended July 31, 2016 resulted in a gain of $0.4 million. Gains and losses resulting from the sale or redemption of "available-for-sale securities" are recorded in “Interest and other expense, net” on the Company's Condensed Consolidated Statements of Operations.

Proceeds from the sale and maturity of marketable securities for the six months ended July 31, 2017 and 2016 were $531.1 million and $1,146.0 million, respectively.

Derivative Financial Instruments

Under its risk management strategy, Autodesk uses derivative instruments to manage its short-term exposures to fluctuations in foreign currency exchange rates which exist as part of ongoing business operations. Autodesk's general practice is to hedge a portion of transaction exposures denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars and Australian dollars. These instruments have maturities between one and twelve months in the future. Autodesk does not enter into derivative instrument transactions for trading or speculative purposes.

The bank counterparties to the derivative contracts potentially expose Autodesk to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Autodesk only contracts with counterparties who meet the Company's minimum requirements under its counterparty risk assessment process. Autodesk monitors ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on Autodesk's ongoing assessment of counterparty risk, the Company will adjust its exposure to various counterparties. Autodesk generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty.  However, Autodesk does not have any master netting arrangements in place with collateral features.

Foreign currency contracts designated as cash flow hedges

Autodesk uses foreign currency contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. These contracts are designated and documented as cash flow hedges. The effectiveness of the cash flow hedge contracts is assessed quarterly using regression analysis as well as other timing and probability criteria. To receive cash flow hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges are expected to be highly effective in offsetting changes to future cash flows on hedged transactions. The gross gains and losses on these hedges are included in “Accumulated other comprehensive loss” and are reclassified into earnings at the time the forecasted revenue or expense is recognized. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, Autodesk reclassifies the gain or loss on the related cash flow hedge from “Accumulated other comprehensive loss” to “Interest and other expense, net” in the Company's Condensed Consolidated Financial Statements at that time.

The net notional amounts of these contracts are presented net settled and were $441.6 million at July 31, 2017 and $369.4 million at January 31, 2017. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The majority of the net gain of $1.6 million remaining in “Accumulated other comprehensive loss” as of July 31, 2017 is expected to be recognized into earnings within the next twelve months.

Derivatives not designated as hedging instruments

Autodesk uses foreign currency contracts that are not designated as hedging instruments to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. These forward contracts are marked-to-market at the end of each fiscal quarter with gains and losses recognized as “Interest and other expense, net.” These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivative instruments are intended to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables. The net notional amounts of these foreign currency contracts are presented net settled and were $175.4 million at July 31, 2017 and $270.6 million at January 31, 2017.


14



In addition to these foreign currency contracts, Autodesk holds derivative instruments issued by privately held companies, which are not designated as hedging instruments. These derivatives consist of certain conversion options on the convertible debt securities held by Autodesk and an option to acquire a privately held company. These derivatives are recorded at fair value as of each balance sheet date and are recorded in “Other assets.” Changes in the fair values of these instruments are recognized in income as “Interest and other expense, net.”

Fair Value of Derivative Instruments

The fair values of derivative instruments in Autodesk’s Condensed Consolidated Balance Sheets were as follows as of July 31, 2017 and January 31, 2017:

 
Balance Sheet Location
 
Fair Value at
 
July 31, 2017
 
January 31, 2017
Derivative Assets
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Prepaid expenses and other current assets
 
$
8.1

 
$
10.1

Derivatives not designated as hedging instruments
Prepaid expenses and other current assets and Other assets
 
2.9

 
3.2

Total derivative assets
 
 
$
11.0

 
$
13.3

Derivative Liabilities
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Other accrued liabilities
 
$
16.2

 
$
4.5

Derivatives not designated as hedging instruments
Other accrued liabilities
 
3.1

 
6.0

Total derivative liabilities
 
 
$
19.3

 
$
10.5


The effects of derivatives designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three and six months ended July 31, 2017 and 2016 (amounts presented include any income tax effects):

 
Foreign Currency Contracts
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Amount of (loss) gain recognized in accumulated other comprehensive (loss) income on derivatives (effective portion)
$
(9.3
)
 
$
1.5

 
$
(11.4
)
 
$
(4.9
)
Amount and location of gain (loss) reclassified from accumulated other comprehensive (loss) income into (loss) income (effective portion)
 
 
 
 
 
 
 
Net revenue
$
2.8

 
$
2.5

 
$
4.8

 
$
7.4

Operating expenses
(0.5
)
 
0.5

 
(3.2
)
 
(1.3
)
Total
$
2.3

 
$
3.0

 
$
1.6

 
$
6.1

Amount and location of gain (loss) recognized in (loss) income on derivatives (ineffective portion and amount excluded from effectiveness testing)
 
 
 
 
 
 
 
Interest and other expense, net
$
0.1

 
$
(0.2
)
 
$
(0.1
)
 
$
(0.4
)

The effects of derivatives not designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three and six months ended July 31, 2017 and 2016 (amounts presented include any income tax effects):

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Amount and location of loss recognized in (loss) income on derivatives
 
 
 
 
 
 
 
Interest and other expense, net
$
(6.5
)
 
$
(3.9
)
 
$
(8.3
)
 
$
(10.9
)


15



5. Stock-based Compensation Expense

Restricted Stock Units:

A summary of restricted stock activity for the six months ended July 31, 2017 is as follows:
 
 
Unvested
Restricted
Stock Units
 
Weighted
average grant
date fair value
per share
 
(in thousands)
 
 
Unvested restricted stock units at January 31, 2017
7,622.4

 
$
60.13

Granted
815.8

 
93.97

Vested
(1,269.2
)
 
58.17

Canceled/Forfeited
(331.4
)
 
61.31

        Performance Adjustment (1)
24.7

 
61.79

Unvested restricted stock units at July 31, 2017
6,862.3

 
$
65.30

 _______________
(1)
Based on Autodesk's financial results and relative total stockholder return for the fiscal 2017 performance period. The performance stock units were attained at rates ranging from 99.7% to 114.7% of the target award.

The fair value of the shares vested during the six months ended July 31, 2017 and 2016 was $116.9 million and $93.4 million, respectively.

During the six months ended July 31, 2017, Autodesk granted 0.5 million restricted stock units. Autodesk recorded stock-based compensation expense related to restricted stock units of $52.0 million and $41.5 million during the three months ended July 31, 2017 and 2016, respectively. Autodesk recorded stock-based compensation expense related to restricted stock units of $102.0 million and $80.3 million during the six months ended July 31, 2017 and 2016, respectively. The $52.0 million and $102.0 million of stock-based compensation expense for the three and six months ended July 31, 2017, respectively, includes $5.9 million and $9.1 million, respectively, related to the acceleration of eligible restricted stock awards in conjunction with the Company's CEO transition.

During the six months ended July 31, 2017, Autodesk granted 0.3 million performance stock units for which the ultimate number of shares earned is determined based on the achievement of performance criteria at the end of the stated service and performance period. During the period, we granted two different types of performance stock units.

The performance criteria for the first type of performance stock units were based on a mix of net subscription additions, Annualized Recurring Revenue ("ARR"), non-GAAP total spend, and total subscription renewal rate goals adopted by the Compensation and Human Resource Committee, as well as total stockholder return compared against companies in the S&P Computer Software Select Index or the S&P North American Technology Software Index (“Relative TSR”). These performance stock units vest over a three-year period and have the following vesting schedule:

Up to one third of the performance stock units may vest following year one, depending upon the achievement of the performance criteria for fiscal 2018 as well as 1-year Relative TSR (covering year one).

Up to one third of the performance stock units may vest following year two, depending upon the achievement of the performance criteria for year two as well as 2-year Relative TSR (covering years one and two).

Up to one third of the performance stock units may vest following year three, depending upon the achievement of the performance criteria for year three as well as 3-year Relative TSR (covering years one, two and three).

The performance criteria for the second type of performance stock units granted to our Chief Executive Officer during the six months ended July 31, 2017 were based on fiscal 2020 free cash flow per share and ARR goals adopted by the Compensation and Human Resource Committee.  These performance stock units vest in March 2020 based on the Company’s fiscal 2020 performance against the performance criteria.

Performance stock units are not considered outstanding stock at the time of grant, as the holders of these units are not entitled to any of the rights of a stockholder, including voting rights. Autodesk has determined the grant date fair value for these

16



awards using stock price on the date of grant or if the awards are also subject to a market condition, a Monte Carlo simulation model. The fair value of the performance stock units is expensed using the accelerated attribution over the vesting period. Autodesk recorded stock-based compensation expense related to performance stock units of $9.7 million and $5.9 million for the three months ended July 31, 2017 and 2016, respectively. Autodesk recorded stock-based compensation expense related to performance stock units of $20.6 million and $12.2 million for the six months ended July 31, 2017 and 2016, respectively. The $9.7 million and $20.6 million of stock-based compensation expense for the three and six months ended July 31, 2017, respectively, includes $2.8 million and $7.5 million, respectively, related to the acceleration of eligible performance stock awards in conjunction with the Company's CEO transition.

1998 Employee Qualified Stock Purchase Plan (“ESPP”)

Under Autodesk’s ESPP, which was approved by stockholders in 1998, eligible employees may purchase shares of Autodesk’s common stock at their discretion using up to 15% of their eligible compensation, subject to certain limitations, at 85% of the lower of Autodesk's closing price (fair market value) on the offering date or the exercise date. The offering period for ESPP awards consists of four, six-month exercise periods within a 24-month offering period.

Autodesk issued 1.1 million and 1.2 million shares under the ESPP during the six months ended July 31, 2017 and 2016, respectively, with an average price of $38.34 and $36.67 per share. The weighted average grant date fair value of awards granted under the ESPP was $25.13 and $17.88 during the six months ended July 31, 2017 and 2016, respectively, calculated as of the award grant date using the Black-Scholes Merton (“BSM") option pricing model.

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the six months ended July 31, 2017 and 2016, respectively, as follows:
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Cost of maintenance and subscription revenue (1)
$
2.9

 
$
2.0

 
$
5.7

 
$
4.0

Cost of license and other revenue (1)
1.0

 
1.4

 
2.1

 
2.8

Marketing and sales
26.0

 
23.3

 
52.4

 
44.8

Research and development
20.4

 
20.2

 
41.6

 
39.1

General and administrative
17.3

 
7.4

 
32.6

 
15.2

Stock-based compensation expense related to stock awards and ESPP purchases
67.6

 
54.3

 
134.4

 
105.9

Tax benefit
(0.3
)
 

 
(0.3
)
 

Stock-based compensation expense related to stock awards and ESPP purchases, net of tax
$
67.3

 
$
54.3

 
$
134.1

 
$
105.9

 _______________
(1)
Prior periods have been adjusted to conform with the current period's presentation. See Note 1, "Basis of Presentation," for additional information.


17



Stock-based Compensation Expense Assumptions

Autodesk determines the grant date fair value of its share-based payment awards using a BSM option pricing model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case Autodesk uses a binomial-lattice model (e.g., Monte Carlo simulation model). The Monte Carlo simulation model uses multiple input variables to estimate the probability that market conditions will be achieved. Autodesk uses the following assumptions to estimate the fair value of stock-based awards:
 
 
Three Months Ended July 31, 2017
 
Three Months Ended July 31, 2016
 
Performance Stock Unit
 
ESPP (1)
 
Performance Stock Unit (2)
 
ESPP (1)
Range of expected volatilities
31.8%
 
N/A
 
N/A
 
N/A
Range of expected lives (in years)
N/A
 
N/A
 
N/A
 
N/A
Expected dividends
—%
 
N/A
 
N/A
 
N/A
Range of risk-free interest rates
1.2%
 
N/A
 
N/A
 
N/A
 
Six Months Ended July 31, 2017

Six Months Ended July 31, 2016
 
Performance Stock Unit

ESPP

Performance Stock Unit

ESPP
Range of expected volatilities
31.8%
 
31.4 - 33.7%
 
38.4 - 38.6%
 
35.0 - 40.2%
Range of expected lives (in years)
N/A
 
0.5 - 2.0
 
N/A
 
0.5 - 2.0
Expected dividends
—%
 
—%
 
—%
 
—%
Range of risk-free interest rates
1.0 - 1.2%
 
0.9 - 1.3%
 
0.6 - 0.7%
 
0.5 - 0.9%
 _______________
(1)
Autodesk does not issue any shares under its ESPP in the second or fourth quarter.
(2)
Autodesk did not grant PSUs in the three months ended July 31, 2016 that were subject to market conditions.

Autodesk estimates expected volatility for stock-based awards based on the average of the following two measures: (1) a measure of historical volatility in the trading market for the Company’s common stock, and (2) the implied volatility of traded forward call options to purchase shares of the Company’s common stock. The expected volatility for performance stock units subject to market conditions includes the expected volatility of Autodesk's peer companies within the S&P Computer Software Select Index or S&P North American Technology Software Index with a market capitalization over $2.00 billion, depending on the award type.

The range of expected lives of ESPP awards are based upon the four, six-month exercise periods within a 24-month offering period.

Autodesk does not currently pay, and does not anticipate paying in the foreseeable future, any cash dividends. Consequently, an expected dividend yield of zero is used in the BSM option pricing model and the Monte Carlo simulation model.

The risk-free interest rate used in the BSM option pricing model and the Monte Carlo simulation model for stock-based awards is the historical yield on U.S. Treasury securities with equivalent remaining lives.

Autodesk recognizes expense only for the stock-based awards that ultimately vest. As permitted by ASU 2016-09, Autodesk accounts for forfeitures of our stock-based awards as those forfeitures occur.

6. Income Tax

 Autodesk's income tax expense was $17.6 million and $25.2 million for the three months ended July 31, 2017 and 2016, respectively, relative to a pre-tax losses of $126.4 million and $73.0 million, respectively, for the same periods. The decrease in income tax expense was primarily due to the settlement of the China audit which occurred during the three months ended July 31, 2016. Autodesk's income tax expense was $25.8 million and $39.6 million for the six months ended July 31, 2017 and 2016, respectively, relative to a pre-tax losses of $247.8 million and $226.3 million, respectively, for the same periods. The decrease in income tax expense was primarily due to the settlement of the China audit which occurred during the six months ended July 31, 2016, and the reversal of foreign withholding tax accruals during the six months ended July 31, 2017. Income tax expense consists primarily of foreign taxes, U.S. tax expense related to indefinite-lived intangibles, and withholding taxes.

18




Autodesk regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Autodesk considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Autodesk considered cumulative losses in the United States arising from the Company's business model transition as a significant piece of negative evidence and established a valuation allowance against the Company’s U.S. deferred tax assets in fiscal 2016. Based on the positive and negative evidence as of July 31, 2017, the Company's valuation allowance position established for the U.S. deferred tax assets has not changed.

As of July 31, 2017, the Company had $267.5 million of gross unrecognized tax benefits, excluding interest, of which approximately $253.6 million represents the amount of unrecognized tax benefits that would impact the effective tax rate, if recognized. However, this rate impact would be $32.8 million to the extent that recognition of unrecognized tax benefits currently presented as a reduction of deferred tax assets would increase the valuation allowance.  It is possible that the amount of unrecognized tax benefits will change in the next twelve months; however, an estimate of the range of the possible change cannot be made at this time.

The Internal Revenue Service has started an examination of the Company's U.S. consolidated federal income tax returns for fiscal years 2014 and 2015.  While it is possible that the Company's tax positions may be challenged, the Company believes its positions are consistent with the tax law, and the balance sheet reflects appropriate liabilities for uncertain federal tax positions for the years being examined.

7.     Acquisitions

During the six months ended July 31, 2017, Autodesk did not complete any business combinations or technology acquisitions.

For acquisitions accounted for as business combinations, Autodesk records the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair values assigned to the identifiable intangible assets acquired were based on estimates and assumptions determined by management. Autodesk records the excess of consideration transferred over the aggregate fair values as goodwill. The goodwill recorded is primarily attributable to synergies expected to arise after the acquisitions.

8. Other Intangible Assets, Net

Other intangible assets including developed technologies, customer relationships, trade names, patents, user lists and the related accumulated amortization were as follows:

 
July 31, 2017
 
January 31, 2017
Developed technologies, at cost
$
577.0

 
$
583.6

Customer relationships, trade names, patents, and user lists, at cost (1)
367.1

 
375.9

Other intangible assets, at cost (2)
944.1

 
959.5

Less: Accumulated amortization
(873.7
)
 
(862.0
)
Other intangible assets, net
$
70.4

 
$
97.5

_______________ 
(1)
Included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Includes the effects of foreign currency translation.

9. Goodwill

Goodwill consists of the excess of consideration transferred over the fair value of net assets acquired in business combinations. The following table summarizes the changes in the carrying amount of goodwill for the periods ended July 31, 2017 and January 31, 2017:

19



 
 
July 31, 2017
 
January 31, 2017
Goodwill, beginning of the period (as of February 1, 2017 and February 1, 2016, respectively)
$
1,710.3

 
$
1,684.2

Less: accumulated impairment losses, beginning of the period (as of February 1, 2017 and February 1, 2016, respectively)
(149.2
)
 
(149.2
)
Net goodwill, beginning of the period (as of February 1, 2017 and February 1, 2016, respectively)
1,561.1

 
1,535.0

Additions arising from acquisitions during the period

 
62.8

Effect of foreign currency translation, purchase accounting adjustments, and other
27.5

 
(36.7
)
Goodwill, end of the period
$
1,588.6

 
$
1,561.1


Autodesk operates as a single operating segment and single reporting unit. As such, when Autodesk tests goodwill for impairment annually in its fourth fiscal quarter, it is performed on the Company's single reporting unit. Autodesk performs impairment testing more often if circumstances indicate a potential impairment may exist, or if events have affected the composition of reporting units.

When goodwill is assessed for impairment, Autodesk has the option to perform an assessment of qualitative factors of impairment (“optional assessment”) prior to necessitating a quantitative impairment test. Should the optional assessment be used for any given fiscal year, qualitative factors to consider include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the quantitative impairment test is unnecessary.

The quantitative impairment test is necessary when either Autodesk does not use the optional assessment or, as a result of the optional assessment, it is not more likely than not that the fair value of the reporting unit is greater than its carrying value.

As described in Note 2, "Recently Issued Accounting Standards," Autodesk early adopted ASU 2017-04, which simplifies the subsequent measurement of goodwill to eliminate Step 2 from the goodwill impairment test, removing the need to determine the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, if any. In situations in which an entity's reporting unit is publicly traded, the fair value of the Company may be approximated by its market capitalization, in performing the quantitative impairment test.

Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. The value of Autodesk’s goodwill could also be impacted by future adverse changes such as: (i) declines in Autodesk’s actual financial results, (ii) a sustained decline in Autodesk’s market capitalization, (iii) a significant slowdown in the worldwide economy or the industries Autodesk serves, or (iv) changes in Autodesk’s business strategy.

There was no goodwill impairment during the three and six months July 31, 2017 and 2016.

10. Deferred Compensation

At July 31, 2017, Autodesk had marketable securities totaling $769.6 million, of which $54.4 million related to investments in debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability was $54.4 million at July 31, 2017, of which $3.0 million was classified as current and $51.4 million was classified as non-current liabilities. The total related deferred compensation liability at January 31, 2017 was $47.3 million, of which $3.1 million was classified as current and $44.2 million was classified as non-current liabilities. The securities are recorded in the Condensed Consolidated Balance Sheets under the current portion of "Marketable securities." The current and non-current portions of the liability are recorded in the Condensed Consolidated Balance Sheets under “Accrued compensation” and “Other liabilities,” respectively.


20



11. Computer Equipment, Software, Furniture and Leasehold Improvements, Net

Computer equipment, software, furniture, leasehold improvements and the related accumulated depreciation were as follows:
 
 
July 31, 2017
 
January 31, 2017
Computer hardware, at cost
$
217.0

 
$
206.1

Computer software, at cost
78.7

 
73.5

Leasehold improvements, land and buildings, at cost
218.5

 
206.3

Furniture and equipment, at cost
60.5

 
58.2

 
574.7


544.1

Less: Accumulated depreciation
(421.7
)
 
(385.5
)
Computer software, hardware, leasehold improvements, furniture and equipment, net
$
153.0

 
$
158.6


12. Borrowing Arrangements

In June 2017, Autodesk issued $500.0 million aggregate principal amount of 3.5% notes due June 15, 2027 (collectively, the “2017 Notes”). Net of a discount of $3.1 million and issuance costs of $4.9 million, Autodesk received net proceeds of $492.0 million from issuance of the 2017 Notes. Both the discount and issuance costs are being amortized to interest expense over the term of the 2017 Notes using the effective interest method. The proceeds of the 2017 Notes have been used for the repayment of $400.0 million of debt due December 15, 2017 and the remainder is available for general corporate purposes. Autodesk may redeem the 2017 Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Autodesk may be required to repurchase the 2017 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 2017 Notes contain restrictive covenants that limit Autodesk's ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of its assets, subject to important qualifications and exceptions. Based on quoted market prices, the fair value of the 2017 Notes was approximately $498.2 million as of July 31, 2017.

In June 2015, Autodesk issued $450.0 million aggregate principal amount of 3.125% notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% notes due June 15, 2025 (collectively, the “2015 Notes”). Net of a discount of $1.7 million and issuance costs of $6.3 million, Autodesk received net proceeds of $742.0 million from issuance of the 2015 Notes. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2015 Notes using the effective interest method. The proceeds of the 2015 Notes are available for general corporate purposes. Autodesk may redeem the 2015 Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Autodesk may be required to repurchase the 2015 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 2015 Notes contain restrictive covenants that limit Autodesk's ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of its assets, subject to important qualifications and exceptions. Based on quoted market prices, the fair value of the 2015 Notes was approximately $780.9 million as of July 31, 2017.

In December 2012, Autodesk issued $400.0 million aggregate principal amount of 1.95% notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% notes due December 15, 2022 (collectively, the “2012 Notes”). Autodesk received net proceeds of $739.3 million from issuance of the 2012 Notes, net of a discount of $4.5 million and issuance costs of $6.1 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2012 Notes using the effective interest method. The proceeds of the 2012 Notes are available for general corporate purposes. On July 27, 2017, Autodesk redeemed in full $400.0 million in aggregate principal amount of its outstanding 1.95% senior notes due December 15, 2017. The redemption was completed pursuant to the optional redemption provisions of the first supplemental indenture dated December 13, 2012. To redeem the notes, Autodesk used the proceeds of the 2017 Notes to pay a redemption price of approximately $400.9 million, plus accrued and unpaid interest. Total cash prepayment was $401.8 million. The Company did not incur any additional early termination penalties in connection with such redemption. Based on the quoted market price, the fair value of the remaining 2012 Notes was approximately $359.9 million as of July 31, 2017.

Autodesk’s line of credit facility permits unsecured short-term borrowings of up to $400.0 million, with an option to request an increase in the amount of the credit facility by up to an additional $100.0 million, and is available for working capital or other business needs. This credit agreement contains customary covenants that could restrict the imposition of liens on Autodesk’s assets, and restrict the Company’s ability to incur additional indebtedness or make dispositions of assets if Autodesk fails to maintain the financial covenants. As the result of a forecasted inability to comply with the credit agreement's

21



minimum interest coverage ratio in the first quarter of fiscal 2018, the Company renegotiated the credit agreement's financial covenants in April 2017. The financial covenants now consist of a maximum debt to total cash ratio, a fixed charge coverage ratio through April 30, 2018, and after April 30, 2018, a minimum interest coverage ratio.

The line of credit is syndicated with various financial institutions, including Citibank, N.A., an affiliate of Citigroup, which is one of the lead lenders and an agent. The maturity date on the line of credit is May 2020. At July 31, 2017, Autodesk was in compliance with the credit facility's covenants and had no outstanding borrowings on this line of credit.

13. Restructuring charges and other facility exit costs, net     

In February 2016, the Board of Directors approved a world-wide restructuring plan (“Fiscal 2017 Plan”) in order to re-balance staffing levels and reduce operating expenses to better align them with the evolving needs of the business.   The Company paid substantially all of the employee termination benefits and facility related liabilities under the Fiscal 2017 Plan by the end of fiscal 2017.

The following table sets forth the restructuring charges and other lease termination exit costs during the six months ended July 31, 2017:

 
Balances, January 31, 2017
 
Additions
 
Payments
 
Adjustments (1)
 
Balances, July 31, 2017
Fiscal 2017 Plan
 
 
 
 
 
 
 
 
 
Employee termination costs
$
1.1

 
$
0.1

 
$
(1.4
)
 
$
0.2

 
$

Lease termination and other exit costs
1.9

 
0.1

 
(1.1
)
 
(0.3
)
 
0.6

Other Lease Termination Costs
 
 
 
 
 
 
 
 
 
Lease termination costs
4.5

 
0.3

 
(1.4
)
 

 
3.4

Total
$
7.5

 
$
0.5

 
$
(3.9
)
 
$
(0.1
)
 
$
4.0

Current portion (2)
$
5.9

 
 
 
 
 
 
 
$
3.6

Non-current portion (2)
1.6

 
 
 
 
 
 
 
0.4

Total
$
7.5

 
 
 
 
 
 
 
$
4.0

____________________
(1)
Adjustments primarily include the impact from a change in sublease assumptions related to certain lease terminations.
(2)
The current and non-current portions of the reserve are recorded in the Condensed Consolidated Balance Sheets under “Other accrued liabilities” and “Other liabilities,” respectively.


22



14. Commitments and Contingencies

Guarantees and Indemnifications

In the normal course of business, Autodesk provides indemnifications of varying scopes, including limited product warranties and indemnification of customers against claims of intellectual property infringement made by third parties arising from the use of its products or services. Autodesk accrues for known indemnification issues if a loss is probable and can be reasonably estimated. Historically, costs related to these indemnifications have not been significant, and because potential future costs are highly variable, Autodesk is unable to estimate the maximum potential impact of these indemnifications on its future results of operations.

In connection with the purchase, sale or license of assets or businesses with third parties, Autodesk has entered into or assumed customary indemnification agreements related to the assets or businesses purchased, sold or licensed. Historically, costs related to these indemnifications have not been significant, and because potential future costs are highly variable, Autodesk is unable to estimate the maximum potential impact of these indemnifications on its future results of operations.

As permitted under Delaware law, Autodesk has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at Autodesk’s request in such capacity. The maximum potential amount of future payments Autodesk could be required to make under these indemnification agreements is unlimited; however, Autodesk has directors’ and officers’ liability insurance coverage that is intended to reduce its financial exposure and may enable Autodesk to recover a portion of any future amounts paid. Autodesk believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Legal Proceedings

Autodesk is involved in a variety of claims, suits, investigations, and proceedings in the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment, piracy prosecution, business practices, and other matters. Autodesk routinely reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, Autodesk records a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, Autodesk bases its loss accruals on the best information available at the time. As additional information becomes available, Autodesk reassesses its potential liability and may revise its estimates. In the Company's opinion, resolution of pending matters is not expected to have a material adverse impact on its consolidated results of operations, cash flows, or its financial position. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the Company's results of operations, cash flows, or financial position in a particular period, however, based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company's financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.

15. Common Stock Repurchase Program

Autodesk has a stock repurchase program that is used to offset dilution from the issuance of stock under the Company’s employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders. Stock repurchases have the effect of returning excess cash generated from the Company’s business to stockholders. During the three and six months ended July 31, 2017, Autodesk repurchased and retired 1.2 million and 3.4 million shares at an average repurchase price of $102.71 and $91.33 per share, respectively. Common stock and additional paid-in capital and accumulated deficit were reduced by $20.8 million and $97.8 million, respectively, during the three months ended July 31, 2017. Common stock and additional paid-in capital and accumulated deficit were reduced by $82.0 million and $228.6 million, respectively, during the six months ended July 31, 2017.

At July 31, 2017, 23.2 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. During the six months ended July 31, 2017, Autodesk repurchased its common stock through open market purchases. The number of shares acquired and the timing of the purchases are based on several factors, including general market and economic conditions, the number of employee stock option exercises and stock issuances, the trading price of Autodesk common stock, cash on hand and available in the United States, cash requirements for acquisitions, and Company defined trading windows.


23



16. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of taxes, consisted of the following at July 31, 2017:

 
Net Unrealized Gains (Losses) on Derivative Instruments
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities
 
Defined Benefit Pension Components
 
Foreign Currency Translation Adjustments
 
Total
Balances, January 31, 2017
$
14.6

 
$
1.5

 
$
(33.8
)
 
$
(160.8
)
 
$
(178.5
)
Other comprehensive (loss) income before reclassifications
(12.8
)
 
0.1

 
(0.1
)
 
39.4

 
26.6

Pre-tax (gains) losses reclassified from accumulated other comprehensive loss
(1.6
)
 

 
(0.1
)
 
0.1

 
(1.6
)
Tax effects
1.4

 
0.1

 

 
(0.9
)
 
0.6

Net current period other comprehensive (loss) income
(13.0
)
 
0.2

 
(0.2
)
 
38.6

 
25.6

Balances, July 31, 2017
$
1.6

 
$
1.7

 
$
(34.0
)
 
$
(122.2
)
 
$
(152.9
)

Reclassifications related to gains and losses on available-for-sale securities are included in "Interest and other expense, net." Refer to Note 4, "Financial Instruments," for the amount and location of reclassifications related to derivative instruments. Reclassifications of the defined benefit pension components are included in the computation of net periodic benefit cost. For further information, see the "Retirement Benefit Plans" note in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.
 
17. Net Loss Per Share

Basic net loss per share is computed using the weighted average number of shares of common stock outstanding for the period, excluding stock options and restricted stock units. Diluted net loss per share is based upon the weighted average number of shares of common stock outstanding for the period and potentially dilutive common shares, including the effect of stock options and restricted stock units under the treasury stock method. The following table sets forth the computation of the numerators and denominators used in the basic and diluted net loss per share amounts: