2.	Recently Issued Accounting Standards

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Staff Position FSP No. 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141R-1”). FSP 141R-1 amends the provisions in Statement of Financial Accounting Standards No. 141 (revised 2007) “Business Combinations” (“SFAS 141R”) for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP 141R-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for Autodesk for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after February 1, 2009. Autodesk expects that FSP 141R-1 will have an impact on its consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”), (ii) FSP Statement of Financial Accounting Standard (SFAS) 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, (“FSP SFAS 115-2” and “SFAS 124-2”), and (iii) FSP SFAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments, (“FSP SFAS 107” and “APB 28-1”), each of which will be effective for Autodesk for interim and annual periods beginning with its second quarter of fiscal 2010. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 Fair Value Measurements, in the current economic environment and reemphasizes that the objective of a fair value measurement remains the determination of an exit price. If Autodesk were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP SFAS 115-2 and SFAS 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP SFAS 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. Autodesk does not believe the adoption of these Staff Positions will have a material effect on its consolidated financial position, results of operations or cash flows.

4.	Financial Instruments

Derivative Financial Instruments

On February 1, 2009, Autodesk adopted FASB Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement 133,” (“SFAS 161”). The adoption of SFAS 161 had no financial impact on Autodesk’s consolidated financial statements and only required additional financial statement disclosures. Autodesk has applied the requirements of SFAS 161 on a prospective basis. Accordingly, disclosures related to interim periods prior to the date of adoption have not been presented.

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 international business operations. Autodesk’s general practice is to use forward and option collar contracts to hedge a majority of transaction exposures denominated in euros, Japanese yen, Swiss francs, British pounds and Canadian dollars. These foreign currency instruments have maturities between one to 12 months in the future. Autodesk does not enter into any foreign exchange derivative instruments for trading or speculative purposes.

Cash Flow Hedges

Autodesk utilizes purchased foreign currency option collar contracts and forwards to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. These option collar and forward contracts, which are designated and documented as cash flow hedges, qualify for special hedge accounting treatment under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). The effectiveness of the cash flow hedge contracts is assessed quarterly using regression as well as other timing and probability criteria required by SFAS 133. For cash flow hedges designated for the quarter ending April 30, 2009 time value was excluded from the assessment of hedge effectiveness. Changes in the excluded time value component of hedges designated for the quarter ended April 30, 2009 were reported in “Interest and other income (expense), net” in the Company’s Condensed Consolidated Statements of Operations. For cash flow hedges designated for periods after April 30, 2009 time value is included in the assessment of hedge effectiveness and changes in the time value of these derivatives are recorded in “Accumulated other comprehensive income (loss)” in the Company’s Condensed Consolidated Balance Sheets. To receive special 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 gains and losses on these hedges are included in “Accumulated other comprehensive income (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 income (loss)” to “Interest and other income (expense), net” in the Company’s Condensed Consolidated Financial Statements at that time.

The notional amount of these contracts was $175.0 million at April 30, 2009 and $276.7 million at January 31, 2009. In accordance with SFAS 133, outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value.

Balance Sheet Hedges

In addition to the cash flow hedges described above, forward contracts which are not designated as hedging instruments under SFAS 133, are used to reduce the exchange rate risk associated primarily with receivables and payables. Forward contracts are marked-to-market at the end of each reporting period, with gains and losses recognized as other income or expense to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables. The notional amounts of foreign currency contracts were $68.3 million at April 30, 2009 and $28.3 million at January 31, 2009.

The bank counterparties in all contracts expose us 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 on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties.

The effects of derivative instruments on Autodesk’s condensed consolidated financial statements were as follows as of April 30, 2009 and for the three months then ended (amounts presented exclude any income tax effects):

Fair Value of Derivative Instruments in Condensed Consolidated Balance Sheet as of April 30, 2009

 

		Derivative Assets					Derivative Liabilities
		Balance Sheet Location		Fair Value			Balance Sheet Location		Fair Value
Foreign currency contracts designated as cash flow hedges under SFAS 133		Prepaid expenses and other current assets		$	3.4		Other accrued liabilities		$	0.1
Derivatives non-designated as hedging instruments under SFAS 133					—					—
Total derivatives				$	3.4				$	0.1

 

Effects of Derivative Instruments on Income and Other Comprehensive Income (OCI) Derivatives Designated as Hedging Instruments Under SFAS 133 for the Three Months Ended April 30, 2009

 

		Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)(1)			Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Amount and Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2)
Foreign exchange contracts		$	4.7		$	0.8			Net revenue		$	1.0		Interest and other income (expense), net
						(0.2	)		Operating expenses
Total		$	4.7		$	0.6					$	1.0

 

(1)	The entire remaining net gain as of April 30, 2009 is expected to be recognized into earnings within the next 12 months.

(2)	Includes $0.6 million recognized due to previously forecasted transactions that are no longer expected to occur within the originally specified time period or the additional period of time allowed under SFAS 133.

 

		Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives Not Designated as Hedging Instruments Under SFAS 133:
Foreign exchange contracts		$	1.6		Interest and other income (expense), net

Marketable Securities

At April 30, 2009, Autodesk’s short-term investment portfolio consisted of term deposits, money market funds and mutual funds with an estimated fair value of $78.4 million and a cost basis of $83.0 million. Of this amount, $22.8 million was invested in a defined set of mutual funds as directed by the participants in the Company’s Deferred Compensation Plan (see Note 8, “Deferred Compensation”), and $3.7 million was invested in bank term deposits with original maturities greater than 90 days and less than one year, and U.S. Government Agencies of $20.0 million. The remaining $31.9 million was invested in two money market funds: $30.9 million was invested in The Reserve International Liquidity Fund (the “International Fund”) and $1.0 million was invested in The Reserve Primary Fund (the “Primary Fund,” and together with the International Fund, “Reserve Funds”). In mid-September of 2008, the Reserve Funds ceased redemptions after net asset values of the funds decreased below $1 per share. This occurred as a result of the Reserve Funds revaluing their holdings of debt securities issued by Lehman Brothers Holdings, Inc. (“Lehman Brothers”), which filed for Chapter 11 bankruptcy on September 15, 2008, and the resulting unusually high redemption requests on the Reserve Funds. While Autodesk expects to recover substantially all of its current holdings, net of reserves, in the Reserve Funds, it cannot predict when this will occur or the amount the Company will receive.

The timing of future redemptions from the Reserve Funds currently is undetermined. The SEC is overseeing the administration, accounting and payout of the U.S.-based Primary Fund, and a third party court appointed supervisor is overseeing, but not managing, the accounting and payment administration of the non U.S.-based International Fund. At this time, these investments are not currently liquid, and in the event Autodesk needs to access these funds, the Company will not be able to do so. However, based on currently available information, Autodesk believes that any distributions from the Reserve Funds will occur within the next 12 months. Accordingly, the Reserve Funds are classified in current “Marketable Securities” on the Company’s Condensed Consolidated Balance Sheets.

 

At April 30, 2009, Autodesk owned two auction rate securities with an estimated fair value of $7.6 million and a cost basis of $9.0 million. Autodesk’s auction rate securities are variable rate debt instruments that have underlying securities with contractual maturities greater than ten years and interest rates that were structured to reset at auction every 28 days. The securities, which met Autodesk’s investment guidelines at the time the investments were made, have failed to settle in auctions since August 2007 and have earned a premium interest rate since that time. Due to the lack of liquidity of these investments, they are included in non-current “Marketable securities” on the accompanying Condensed Consolidated Balance Sheets. The Company will continue to evaluate its accounting for these investments quarterly.

Fair Value Measurements

Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”) clarifies that fair value is an exit price, representing the amount that would be received upon the sale of an asset, or the amount paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets; and (Level 3) unobservable inputs in which there is little or no market data, which require Autodesk to develop its own assumptions. SFAS 157 requires Autodesk to maximize its use of observable market data, and to minimize its use of unobservable inputs when determining fair value. On a recurring basis, Autodesk measures at fair value certain financial assets and liabilities, which consist of cash equivalents, marketable securities and foreign currency contracts.

The Company’s investments held in the Reserve Funds are designated as Level 3 securities. The Company conducted its fair value assessment of the Reserve Funds using Level 2 and Level 3 inputs. Management has reviewed the Reserve Funds’ underlying securities portfolio which is substantially comprised of term deposits, money market funds, U.S. treasury bills and commercial paper. These securities are issued by highly-rated institutions. Normally, the Company would classify such investments within Level 2 of the fair value hierarchy. Management evaluated the fair value of its unit interest in the Reserve Funds, considering risk of collection, timing and other factors. These assumptions are inherently subjective and involve significant management judgment. As a result, the Company has classified its holdings in the Reserve Funds within Level 3 of the fair value hierarchy. Autodesk’s investments in auction rate securities are classified within Level 3 because they are valued using a pricing model, and some of the inputs to this model are unobservable in the market.

 

The following table summarizes the valuation of Autodesk’s investments and financial instruments, which were determined by fair value hierarchy at April 30, 2009:

 

		Fair Value Measurements at April 30, 2009 Using
		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
		(Level 1)			(Level 2)			(Level 3)			Total
Assets
Cash equivalents(1):
Term deposits		$	—		$	177.7		$	—		$	177.7
Money market funds			—			3.0			—			3.0
U.S. Treasury bills			110.0			—			—			110.0
Commercial paper			—			377.2			—			377.2
Marketable securities:
Money market funds			—			—			31.9			31.9
Mutual funds			22.8			—			—			22.8
Term deposits			—			3.7			—			3.7
U.S. government agencies			—			20.0			—			20.0
Taxable auction-rate securities			—			—			7.6			7.6
Foreign currency derivative contracts(2)			—			3.4			—			3.4
Total		$	132.8		$	585.0		$	39.5		$	757.3
Liabilities
Foreign currency derivative contracts(3)			—			0.1			—			0.1
Total		$	—		$	0.1		$	—		$	0.1

 

(1)	Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.

(2)	Included in “Prepaid expenses and other current assets” in the accompanying Condensed Consolidated Balance Sheets.

(3)	Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.

 

The following table summarizes the valuation of Autodesk’s investments and financial instruments, which were determined by fair value hierarchy at January 31, 2009:

 

		Fair Value Measurements at January 31, 2009 Using
		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
		(Level 1)			(Level 2)			(Level 3)			Total
Assets
Cash equivalents(1):
Term deposits		$	—		$	340.0		$	—		$	340.0
Money market funds			—			63.5			—			63.5
U.S. Treasury bills			25.0			—						25.0
U.S. government agencies			55.0			—			—			55.0
Commercial paper			—			206.1			—			206.1
Marketable securities:
Money market funds			—			—			33.3			33.3
Mutual funds			19.9			—			—			19.9
Term deposits			—			10.3			—			10.3
Taxable auction-rate securities			—			—			7.6			7.6
Foreign currency derivative contracts(2)			—			2.1			—			2.1
Total		$	99.9		$	622.0		$	40.9		$	762.8

 

(1)	Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.

(2)	Included in “Prepaid expenses and other current assets” in the accompanying Condensed Consolidated Balance Sheets.

Autodesk’s cash equivalents and marketable securities are primarily classified within Level 1 or Level 2 of the fair value hierarchy because they are valued primarily using quoted market prices, or alternative pricing sources and models utilizing market observable inputs with reasonable levels of price transparency. A reconciliation of the change in Autodesk’s Level 3 items for the three months ended April 30, 2009 was as follows:

 

		Fair Value Measurments Using Significant Unobservable Inputs
		(Level 3)
		Money Market Funds				Taxable Auction-Rate Securities			Total
Balance at January 31, 2009		$	33.3			$	7.6		$	40.9
Transfers in to (out of) Level 3			(1.4	)			—			(1.4	)
Balance at April 30, 2009		$	31.9			$	7.6		$	39.5

 

6.	Income Taxes

Autodesk’s effective tax rate was negative 65% and 25% during the first quarter of fiscal 2010 and 2009, respectively. Autodesk’s effective tax rate during the first quarter of fiscal 2010 differs from the effective tax rate during the first quarter of fiscal 2009 primarily due to a $20.9 million discrete non-cash tax charge from recording a valuation allowance against certain California deferred tax assets partially offset by a discrete tax benefit of $7.7 million associated with the impairment of goodwill that were recorded during the first quarter of fiscal 2010. Excluding the impact of discrete tax items, the effective tax rate of negative 65% for the first quarter of fiscal 2010 is lower than the Federal statutory tax rate of 35% primarily due to foreign income taxes at lower rates and Federal and state research tax credits, partially offset by the impact of SFAS 123R.

During the first quarter of fiscal 2010, the State of California enacted significant California tax law changes. As a result of the enacted legislation, the Company expects that in fiscal years 2012 and beyond the Company’s income subject to tax in California will be less than under prior tax law and accordingly its California deferred tax assets are less likely to be realized. The Company recorded a net discrete tax charge of $20.9 million related to the re-measurement of the Company’s California deferred tax assets to account for this change in tax law, as well as an increase in the valuation allowance for the Company’s California deferred tax assets that existed as of January 31, 2009. The Company will continue to assess its valuation allowance on its California deferred tax assets in future periods.

At April 30, 2009, Autodesk had net deferred tax assets of $134.9 million. The Company believes that it will generate sufficient future taxable income in appropriate tax jurisdictions to realize these assets.

12.	Borrowing Arrangements

As of April 30, 2009, Autodesk had $2.1 million of outstanding borrowings, which were recorded in “Borrowings under line of credit” on the balance sheet. Autodesk has two lines of credit, a U.S. line of credit and a China line of credit.

Autodesk’s U.S. line of credit facility permits unsecured short-term borrowings of up to $250.0 million, and is available for working capital or other business needs. The credit agreement contains customary covenants, which could restrict liens, certain types of additional debt and dispositions of assets if Autodesk fails to maintain its financial covenants. The line of credit is syndicated with various financial institutions, including Citicorp USA, Inc., a Citibank affiliate, which is the primary lender and agent. Autodesk had no outstanding borrowings on this line at April 30, 2009. This facility expires in August 2012.

Autodesk’s China line of credit facility permits unsecured short-term borrowings of up to $5.0 million, and is available for working capital needs. At April 30, 2009, Autodesk had $2.1 million of outstanding borrowings on this line of credit, which contains customary covenants. Autodesk drew on this line of credit during the first quarter of fiscal 2009 for working capital purposes. This facility has no contractual expiration.

The weighted average interest rate on Autodesk’s line of credit facilities was 5.10% and 1.01% at April 30, 2009 and January 31, 2009, respectively.

14.	Stock Repurchase Program

Autodesk has a stock repurchase program that helps offset the dilution to net income per share caused by the issuance of stock under the Company’s employee stock plans and returns excess cash generated from its business to stockholders. During the first quarter of fiscal 2010 Autodesk did not repurchase or retire any shares of its common stock. As of April 30, 2009, 16.1 million shares remained available for repurchase under this program. The number of shares acquired and the timing of the purchases are based on several factors, including anticipated employee stock purchases during the period, the level of the Company’s cash balances, general business and market conditions, the market price of Autodesk stock, cash on hand and available in the U.S., Company defined trading windows and other investment opportunities.

16.	Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding for the period, including restricted stock awards and excluding unvested stock options and restricted stock units. Diluted net income (loss) per share is based upon the weighted average shares of common stock outstanding for the period and dilutive potential common shares, including the effect of unvested 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 income (loss) per share amounts:

 

		Three months Ended April 30,
		2009				2008
Numerator:
Net income (loss)		$	(32.1	)		$	94.6
Denominator:
Denominator for basic net income (loss) per share—weighted average shares			227.1				226.2
Effect of dilutive securities			—				6.4
Denominator for dilutive net income (loss) per share			227.1				232.6
Basic net income (loss) per share		$	(0.14	)		$	0.42
Diluted net income (loss) per share		$	(0.14	)		$	0.41

In accordance with the FASB’s Statement of Financial Accounting Standards No. 128, “Earnings per Share,” the computation of diluted net income (loss) per share does not include shares that are anti-dilutive under the treasury stock method because their exercise prices are higher than the average market value of Autodesk’s stock during the period. For the first quarter of fiscal 2010 and 2009, 31.2 million and 13.8 million potentially dilutive shares, respectively, were excluded from the computation of diluted net income per share.