Form 10-Q
Table of Contents

 

 

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 October 31, 2011

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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 November 30, 2011, registrant had outstanding approximately 226,800,000 shares of common stock.

 

 

 


Table of Contents

AUTODESK, INC. FORM 10-Q

TABLE OF CONTENTS

 

          Page No.  
   PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements:   
  

Condensed Consolidated Statements of Operations
Three and Nine Months Ended October 31, 2011 and 2010

     3   
  

Condensed Consolidated Balance Sheets
October 31, 2011 and January 31, 2011

     4   
  

Condensed Consolidated Statements of Cash Flows
Nine Months Ended October 31, 2011 and 2010

     5   
   Notes to Condensed Consolidated Financial Statements      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      44   

Item 4.

   Controls and Procedures      44   
   PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      46   

Item 1A.

   Risk Factors      46   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      56   

Item 3.

   Defaults Upon Senior Securities      56   

Item 4.

   Removed and Reserved      56   

Item 5.

   Other Information      56   

Item 6.

   Exhibits      56   
   Signatures      58   


Table of Contents

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
October 31,
    Nine Months Ended
October 31,
 
     2011     2010     2011     2010  

Net revenue:

        

License and other

   $ 331.4      $ 282.0      $ 987.4      $ 842.5   

Maintenance

     217.2        194.7        635.8        581.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     548.6        476.7        1,623.2        1,424.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Cost of license and other revenue

     50.5        40.3        138.8        122.0   

Cost of maintenance revenue

     9.1        8.2        32.8        26.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     59.6        48.5        171.6        148.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     489.0        428.2        1,451.6        1,275.9   

Operating expenses:

        

Marketing and sales

     206.2        185.1        609.1        549.1   

Research and development

     141.2        122.8        417.0        369.3   

General and administrative

     51.4        51.1        163.0        148.7   

Restructuring

     —          —          (1.3     9.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     398.8        359.0        1,187.8        1,076.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     90.2        69.2        263.8        199.8   

Interest and other income (expense), net

     1.1        2.5        6.2        (0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     91.3        71.7        270.0        199.0   

Provision for income taxes

     (18.5     (18.1     (56.7     (48.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 72.8      $ 53.6      $ 213.3      $ 150.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 0.32      $ 0.24      $ 0.93      $ 0.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 0.32      $ 0.23      $ 0.91      $ 0.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing basic net income per share

     227.1        226.5        228.2        227.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing diluted net income per share

     230.7        232.4        233.7        233.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AUTODESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     October 31,
2011
     January 31,
2011
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 1,103.3       $ 1,075.1   

Marketable securities

     240.3         199.2   

Accounts receivable, net

     259.2         318.4   

Deferred income taxes

     34.2         56.8   

Prepaid expenses and other current assets

     61.6         64.8   
  

 

 

    

 

 

 

Total current assets

     1,698.6         1,714.3   

Marketable securities

     190.6         192.6   

Computer equipment, software, furniture and leasehold improvements, net

     102.1         84.5   

Purchased technologies, net

     90.4         57.2   

Goodwill

     653.9         554.1   

Deferred income taxes, net

     138.7         90.7   

Other assets

     130.7         94.2   
  

 

 

    

 

 

 
   $ 3,005.0       $ 2,787.6   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 81.9       $ 76.8   

Accrued compensation

     154.3         193.1   

Accrued income taxes

     22.3         28.6   

Deferred revenue

     499.9         496.2   

Other accrued liabilities

     55.2         75.1   
  

 

 

    

 

 

 

Total current liabilities

     813.6         869.8   

Deferred revenue

     120.0         91.7   

Long term income taxes payable

     161.3         139.1   

Other liabilities

     82.6         77.7   

Commitments and contingencies

     

Stockholders’ equity:

     

Preferred stock

     —           —     

Common stock and additional paid-in capital

     1,359.9         1,267.2   

Accumulated other comprehensive income (loss)

     3.4         (0.6

Retained earnings

     464.2         342.7   
  

 

 

    

 

 

 

Total stockholders’ equity

     1,827.5         1,609.3   
  

 

 

    

 

 

 
   $ 3,005.0       $ 2,787.6   
  

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AUTODESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Nine Months Ended
October 31,
 
     2011     2010  

Operating activities:

    

Net income

   $ 213.3      $ 150.4   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     85.2        79.6   

Stock-based compensation expense

     78.8        62.3   

Excess tax benefits from stock-based compensation

     (33.0     —     

Restructuring (benefits) charges, net

     (1.3     9.0   

Changes in operating assets and liabilities, net of business combinations

     55.3        63.6   
  

 

 

   

 

 

 

Net cash provided by operating activities

     398.3        364.9   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of marketable securities

     (456.0     (425.8

Sales of marketable securities

     110.8        85.9   

Maturities of marketable securities

     307.0        201.3   

Capital expenditures, including developed technologies

     (88.8     (18.1

Business combinations, net of cash acquired

     (142.6     (8.5

Other investing activities

     (23.5     (4.0
  

 

 

   

 

 

 

Net cash used in investing activities

     (293.1     (169.2
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of common stock, net of issuance costs

     156.3        76.4   

Repurchases of common stock

     (263.7     (204.1

Excess tax benefits from stock-based compensation

     33.0        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (74.4     (127.7
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (2.6     (2.4
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     28.2        65.6   

Cash and cash equivalents at beginning of fiscal year

     1,075.1        838.7   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,103.3      $ 904.3   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

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” or the “Company”) as of October 31, 2011, and for the three and nine months ended October 31, 2011, have been prepared in accordance with accounting principles generally accepted in the U.S. 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 generally accepted accounting principles (“GAAP”) for annual financial statements. In management’s opinion, Autodesk has made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair presentation 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 nine months ended October 31, 2011 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2012, or for any other period. 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, 2011, filed on March 18, 2011.

 

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 nine months ended October 31, 2011, that are of significance, or potential significance, to the Company.

Accounting Standards Adopted

In December 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-29 regarding Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations.” This ASU updates accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. The new accounting guidance is effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Autodesk adopted the new disclosures under ASU 2010-29 effective February 1, 2011. The adoption of this ASU did not have a material impact on its consolidated statements of financial position, results of operations or cash flows. The impact of ASU 2010-29 on Autodesk’s future quarterly disclosures will be dependent on the size of the business combinations that it consummates in future periods.

In December 2010, the FASB issued ASU 2010-28 regarding ASC Topic 350 “Intangibles – Goodwill and Other.” This ASU updates accounting guidance related to the calculation of the carrying amount of a reporting unit when performing the first step of a goodwill impairment test. More specifically, this update requires an entity to use an equity premise when performing the first step of a goodwill impairment test and if a reporting unit has a zero or negative carrying amount, the entity must assess and consider qualitative factors and whether it is more likely than not that a goodwill impairment exists. The new accounting guidance is effective for public entities, for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Autodesk adopted the changes under ASU 2010-28 effective February 1, 2011. The adoption of this ASU did not have a material impact on its consolidated statements of financial position, results of operations or cash flows.

In January 2010, the FASB issued ASU 2010-06 regarding ASC Topic 820 “Fair Value Measurements and Disclosures.” This ASU requires additional disclosure regarding significant transfers in and out of Levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, this ASU requires the Company to separately present information about purchases, sales, issuances, and settlements (on a gross basis rather than as one net number) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 clarifies existing disclosures regarding fair value measurement for each class of assets and liabilities and the valuation techniques and inputs used to measure fair value for recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. This update also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan asset (Subtopic 715-20). The changes under ASU 2010-06 were effective for Autodesk’s fiscal year beginning February 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which Autodesk adopted February 1, 2011. The adoption of this ASU did not have a material impact on its consolidated statements of financial position, results of operations or cash flows.

 

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Table of Contents

In October 2009, the FASB issued ASU 2009-13 regarding ASC Subtopic 605-25 “Revenue Recognition—Multiple-element Arrangements.” This ASU addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 requires companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. In October 2009, the FASB also issued ASU 2009-14 regarding ASC Topic 985 “Software: Certain Revenue Arrangements That Include Software Elements.” This ASU modifies the scope of ASC Subtopic 985-605, “Software Revenue Recognition,” to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. The changes under ASU 2009-13 and 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Autodesk adopted the changes under ASU 2009-13 and 2009-14 effective February 1, 2011. The adoption of this ASU did not have a material impact on its consolidated statements of financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In September 2011, the FASB issued ASU 2011-08 regarding ASC Topic 350 “Intangibles – Goodwill and Other.” This ASU allows for the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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 two-step impairment test is unnecessary. This ASU will be effective for Autodesk’s fiscal year beginning February 1, 2012. Early adoption is permitted. Autodesk believes that the adoption of this ASU will not have a material impact on its consolidated statements of financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-05 regarding ASC Topic 220 “Comprehensive Income.” This ASU eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires the presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU will be effective for Autodesk’s fiscal year beginning February 1, 2012. Autodesk currently believes that this new accounting pronouncement will impact the presentation of other comprehensive income but will not impact its consolidated financial position, results of operations or cash flow.

In May 2011, FASB issued ASU 2011-04 regarding ASC Topic 820 “Fair Value Measurement.” This ASU updates accounting guidance to clarify how to measure fair value to align the guidance surrounding Fair Value Measurement within GAAP and International Financial Reporting Standards. In addition, the ASU updates certain requirements for measuring fair value and for disclosure around fair value measurement. It does not require additional fair value measurements and the ASU was not intended to establish valuation standards or affect valuation practices outside of financial reporting. This ASU will be effective for Autodesk’s fiscal year beginning February 1, 2012. Early adoption is not permitted. Autodesk believes that the adoption of this ASU will not have a material impact on its consolidated statements of financial position, results of operations or cash flows.

 

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 Citibank and its global affiliates (“Citibank”). Citicorp USA, Inc., an affiliate of Citibank, is one of the lead lenders and agent in the syndicate of Autodesk’s $400.0 million line of credit facility. It is Autodesk’s policy to limit the amounts invested with any one institution by type of security and issuer.

 

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Total sales to the distributor Tech Data Corporation, and its global affiliates (“Tech Data”), accounted for 16% of Autodesk’s total net revenue for both the three and nine months ended October 31, 2011, and 15% and 16% of Autodesk’s total net revenue for the three and nine months periods ended October 31, 2010, respectively. The majority of the net revenue from sales to Tech Data relates to Autodesk’s Platform Solutions and Emerging Business segment and is for sales made outside of the United States. In addition, Tech Data accounted for 17% and 16% of trade accounts receivable at October 31, 2011 and January 31, 2011, respectively. On October 27, 2011, Tech Data purchased certain assets of Mensch und Maschine Software (“MuM”), which has been a distributor of Autodesk products in Europe. Autodesk believes its business is not substantially dependent on Tech Data, including following the acquisition of certain assets of MuM. Autodesk’s customers through Tech Data are the resellers and end users who purchase Autodesk’s software licenses and services. Should any of the agreements between Autodesk and Tech Data be terminated for any reason, Autodesk believes the resellers and end users who currently purchase Autodesk’s products through Tech Data would be able to continue to do so under substantially the same terms from one of the many other distributors of Autodesk without substantial disruption to Autodesk revenue.

 

4. Financial Instruments and Hedging Activities

Financial Instruments

Market values were determined for each individual security in the investment portfolio. The cost and fair value of Autodesk’s financial instruments are as follows:

 

     October 31, 2011      January 31, 2011  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Cash and cash equivalents

   $ 1,103.3       $ 1,103.3       $ 1,075.1       $ 1,075.1   

Marketable securities - short-term

     239.3         240.3         197.5         199.2   

Marketable securities - long-term

     189.9         190.6         190.8         192.6   

Convertible debt securities

     12.4         12.4         —           —     

Derivative financial instruments

     10.9         9.4         3.9         3.9   

Autodesk classifies its marketable securities and financial instruments as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities and financial instruments with remaining maturities of less than 12 months are classified as short-term and marketable securities and financial instruments with remaining maturities greater than 12 months are classified as long-term. Autodesk may sell certain of its marketable securities and financial instruments prior to their stated maturities for strategic purposes or in anticipation of credit deterioration.

Autodesk has marketable securities and financial instruments that are classified as either “available-for-sale securities” or “trading securities.” At October 31, 2011 and January 31, 2011, Autodesk’s short-term investment portfolio included $32.7 million and $31.3 million, respectively, of “trading securities” invested in a defined set of mutual funds directed by the participants in the Company’s Deferred Compensation Plan. At October 31, 2011, these securities had net unrealized gains of $0.9 million and a cost basis of $31.8 million. At January 31, 2011, these securities had net unrealized gains of $1.6 million and a cost basis of $29.7 million (see Note 11, “Deferred Compensation”).

 

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Marketable securities and financial instruments classified as “available-for-sale securities” include the following securities at October 31, 2011 and January 31, 2011:

 

     October 31, 2011  
     Amortized
Cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Estimated
Fair Value
 

Short-term available-for-sale securities:

          

Commercial paper and corporate securities

   $ 126.9       $ 0.1       $ —        $ 127.0   

U.S. treasury securities

     15.4         —           —          15.4   

Certificates of deposit and time deposits

     4.8         —           —          4.8   

U.S. government agency securities

     50.1         —           —          50.1   

Municipal securities

     10.0         —           —          10.0   

Other

     0.3         —           —          0.3   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 207.5       $ 0.1       $ —        $ 207.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

Long-term available-for-sale securities:

          

Corporate debt securities

   $ 131.1       $ 1.0       $ (0.6   $ 131.5   

U.S. government agency securities

     27.2         —           (0.1     27.1   

Taxable auction-rate securities

     4.2         —           —          4.2   

Convertible debt securities

     12.4         —           —          12.4   

Municipal securities

     3.0         0.1         —          3.1   

U.S. treasury securities

     24.4         0.3         —          24.7   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 202.3       $ 1.4       $ (0.7   $ 203.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     January 31, 2011  
     Amortized
Cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Estimated
Fair Value
 

Short-term available-for-sale securities:

          

Commercial paper and corporate securities

   $ 47.6       $ 0.1       $ —        $ 47.7   

U.S. treasury securities

     26.0         —           —          26.0   

Certificates of deposit and time deposits

     29.0         —           —          29.0   

U.S. government agency securities

     47.2         —           —          47.2   

Sovereign debt

     9.1         —           —          9.1   

Municipal securities

     8.6         —           —          8.6   

Other

     0.3         —           —          0.3   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 167.8       $ 0.1       $ —        $ 167.9   
  

 

 

    

 

 

    

 

 

   

 

 

 

Long-term available-for-sale securities:

          

Corporate debt securities

   $ 152.6       $ 1.5       $ (0.1   $ 154.0   

U.S. government agency securities

     12.7         0.2         —          12.9   

Taxable auction-rate securities

     4.2         —           —          4.2   

Municipal securities

     4.7         —           —          4.7   

U.S. treasury securities

     12.7         0.1         —          12.8   

Sovereign debt

     3.9         0.1         —          4.0   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 190.8       $ 1.9       $ (0.1   $ 192.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

The sales or redemptions of “available-for-sale securities” resulted in no gross gains or losses during the three and nine month periods ended October 31, 2011 and 2010. The cost of securities sold is based on the specific identification method.

At October 31, 2011 and January 31, 2011, Autodesk owned an auction rate security with an estimated fair value of $4.2 million. Autodesk’s auction rate security is a variable rate debt instrument that has underlying securities with contractual maturities greater than ten years and interest rates that were structured to reset at auction every twenty-eight days. The security, which met Autodesk’s investment guidelines at the time the investment was made, has failed to settle in auction since August 2007 and has earned a premium interest rate since that time. While Autodesk expects to recover substantially all of its current holdings, net of reserves, in the auction rate security, it cannot predict when this will occur or the amount the Company will receive. Due to the lack of liquidity of this investment in an active market, it is included in non-current “marketable securities” on the accompanying Condensed Consolidated Balance Sheets. The Company will continue on a quarterly basis to evaluate its accounting for this investment.

 

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

 

     October 31, 2011  
     Cost      Fair Value  

Due in less than 1 year

   $ 207.5       $ 207.6   

Due in 1 year through 5 years

     198.1         198.8   

Due in 5 years through 10 years

     —           —     

Due after 10 years

     4.2         4.2   
  

 

 

    

 

 

 

Total

   $ 409.8       $ 410.6   
  

 

 

    

 

 

 

As of October 31, 2011 and January 31, 2011, Autodesk did not have any securities in a continuous unrealized loss position for greater than twelve months.

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 and market price risk which exist as part of ongoing business operations. Autodesk’s general practice is to hedge a majority of transaction exposures denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars and Australian dollars. These instruments have maturities between one to twelve months in the future. Autodesk does not enter into derivative instrument transactions for trading or speculative purposes.

The bank counterparties in all contracts 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 on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties. Autodesk does not have any master netting arrangements in place with collateral features.

Foreign currency contracts designated as cash flow hedges

Autodesk utilizes 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 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 $401.9 million at October 31, 2011 and $345.5 million at January 31, 2011. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The entire net loss of $3.6 million remaining in “Accumulated other comprehensive income (loss)” as of October 31, 2011 is expected to be recognized into earnings within the next twelve months.

Derivatives not designated as hedging instruments

Autodesk uses foreign currency contracts which are not designated as hedging instruments to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. Forward contracts are marked-to-market at the end of each fiscal quarter with gains and losses recognized as “Interest and other income (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 notional amounts of foreign currency contracts were $24.1 million at October 31, 2011 and $56.1 million at January 31, 2011.

 

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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 income (expense), net.”

Fair Value of Derivative Instruments:

The fair value of derivative instruments in Autodesk’s Condensed Consolidated Balance Sheets was as follows as of October 31, 2011 and January 31, 2011:

 

          Fair Value at  
     Balance Sheet Location    October 31,
2011
     January 31,
2011
 

Derivative Assets

        

Foreign currency contracts designated as cash flow hedges

   Prepaid expenses and other
current assets
   $ 7.4       $ 5.1   

Derivatives not designated as hedging instruments

   Other assets      5.1         —     
     

 

 

    

 

 

 

Total derivative assets

      $ 12.5       $ 5.1   
     

 

 

    

 

 

 
        

Derivative Liabilities

        

Foreign currency contracts designated as cash flow hedges

   Other accrued liabilities    $ 3.1       $ 1.2   

Derivatives not designated as hedging instruments

        —           —     
     

 

 

    

 

 

 

Total derivative liabilities

      $ 3.1       $ 1.2   
     

 

 

    

 

 

 

The effects of derivatives designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three and nine months ended October 31, 2011 and 2010, respectively (amounts presented include any income tax effects):

 

     Foreign Currency Contracts  
     Three Months Ended October 31,     Nine Months Ended October 31,  
     2011     2010     2011     2010  

Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)

   $ (1.0   $ (10.2   $ (3.6   $ 2.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

        

Net revenue

   $ 0.8      $ 2.2      $ (6.8   $ 11.7   

Operating expenses

     1.5        0.5        5.9        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.3      $ 2.7      $ (0.9   $ 12.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amount and Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)

        

Interest and other income (expense), net

   $ 0.1      $ (0.1   $ 0.1      $ 0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The effects of derivatives not designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three and nine months ended October 31, 2011 and 2010, respectively (amounts presented include any income tax effects):

 

     Foreign Currency Contracts  
     Three Months Ended October 31,      Nine Months Ended October 31,  
Amount and Location of Gain (Loss) Recognized in Income on Derivative    2011     2010      2011     2010  

Interest and other income (expense), net

   $ (2.6   $ 1.0       $ (0.6   $ 0.4   

 

5. Fair Value Measurements

On a recurring basis, Autodesk measures the fair value of certain financial assets and liabilities, which consist of cash equivalents, marketable securities and financial instruments. Autodesk uses a three-tier fair 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 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. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There have been no transfers between fair value measurement levels during the nine months ended October 31, 2011.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes Autodesk’s investments and financial instruments measured at fair value on a recurring basis as of October 31, 2011:

 

     Fair Value Measurements at October 31, 2011 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):

           

Certificates of deposit and time deposits

   $ 9.3       $ 454.3       $ —         $ 463.6   

Commercial paper

     —           305.2         —           305.2   

Money market funds

     —           32.0         —           32.0   

Marketable securities:

           

Commercial paper and corporate debt securities

     258.5         —           —           258.5   

U.S. government agency securities

     77.2         —           —           77.2   

U.S. treasury securities

     40.1         —           —           40.1   

Certificates of deposit and time deposits

     —           4.8         —           4.8   

Mutual funds

     32.7         —           —           32.7   

Municipal securities

     13.1         —           —           13.1   

Taxable auction-rate securities

     —           —           4.2         4.2   

Other

     0.3         —           —           0.3   

Convertible debt securities (2)

     —           —           12.4         12.4   

Derivative contracts (3)

     —           7.4         5.1         12.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 431.2       $ 803.7       $ 21.7       $ 1,256.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative contracts (4)

   $ —         $ 3.1       $ —         $ 3.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 3.1       $ —         $ 3.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

(2) 

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.

 

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The following table summarizes Autodesk’s investments and financial instruments measured at fair value on a recurring basis as of January 31, 2011:

 

     Fair Value Measurements at January 31, 2011 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):

           

Certificates of deposit and time deposits

   $ 97.9       $ 285.4       $ —         $ 383.3   

Commercial paper

     —           331.0         —           331.0   

Money market funds

     —           43.8         —           43.8   

Marketable securities:

           

Commercial paper and corporate debt securities

     191.6         10.0         —           201.6   

U.S. government agency securities

     60.1         —           —           60.1   

U.S. treasury securities

     38.8         —           —           38.8   

Certificates of deposit and time deposits

     25.0         4.0         —           29.0   

Mutual funds

     31.3         —           —           31.3   

Sovereign debt

     —           13.1         —           13.1   

Municipal securities

     13.4         —           —           13.4   

Taxable auction-rate securities

     —           —           4.2         4.2   

Other

     0.3         —           —           0.3   

Foreign currency derivative contracts (2)

     —           5.1         —           5.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 458.4       $ 692.4       $ 4.2       $ 1,155.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Foreign currency derivative contracts (3)

   $ —         $ 1.2       $ —         $ 1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 1.2       $ —         $ 1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

Autodesk’s cash equivalents and marketable securities are primarily classified within Level 1 or Level 2 of the fair value hierarchy. Autodesk’s Level 1 securities are valued primarily using quoted market prices. Level 2 securities are valued primarily using alternative pricing sources and models utilizing market observable inputs with reasonable levels of price transparency. The Company’s investments held in auction rate and convertible debt securities at October 31, 2011 and January 31, 2011 are designated as Level 3 because they are valued using probability weighted discounted cash flow models and some of the inputs to the models are unobservable in the market.

 

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A reconciliation of the change in Autodesk’s Level 3 items for the nine months ended October 31, 2011 was as follows:

 

     Fair Value Measurements Using Significant
Unobservable Inputs
 
     (Level 3)  
     Taxable
Auction-Rate
Securities
     Convertible
Debt
Securities
     Derivative
Contracts
     Total  

Balance at January 31, 2011

   $ 4.2       $ —         $ —         $ 4.2   

Purchases

     —           12.4         5.1         17.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at October 31, 2011

   $ 4.2       $ 12.4       $ 5.1       $ 21.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended October 31, 2011, there were no transfers in or out, issuances, settlements, sales or realized/unrealized gains (losses) within Level 3 assets.

 

6. Stock-based Compensation Expense

Stock Plans

As of October 31, 2011, Autodesk maintained two active stock plans for the purpose of granting equity awards to employees and to non-employee members of Autodesk’s Board of Directors: the 2008 Employee Stock Plan, as amended and restated (“2008 Plan”), which is available only to employees, and the 2010 Outside Directors’ Option Plan, as amended (“2010 Plan”), which is available only to non-employee directors. The exercise price of all stock options granted under these plans was equal to the fair market value of the stock on the grant date. Additionally, there are seven expired or terminated plans with options outstanding.

The 2008 Plan was approved by Autodesk’s stockholders in November 2007 and was amended in June 2010. As amended, the 2008 Plan reserves 16.0 million shares of Autodesk common stock for issuance and will expire in June 2013. The 2008 Plan permits the grant of stock options, restricted stock units and restricted stock awards; however, no more than 2.5 million of the shares reserved for issuance under the 2008 Plan may be issued pursuant to awards of restricted stock and restricted stock units. Options and restricted stock units granted under the 2008 Plan vest over periods ranging from immediately upon grant to over a four year period, and options expire within seven to ten years from the date of grant. At October 31, 2011, the number of shares available for future issuance under the 2008 Plan was 9.4 million, of which 1.0 million shares were available for future grants of restricted stock.

The 2010 Plan, which was approved by Autodesk’s stockholders in June 2009, became effective in March 2010 and will expire in March 2020. The 2010 Plan permits the grant of stock options and restricted stock awards to non-employee members of Autodesk’s Board of Directors. Options and awards granted under the 2010 Plan vest over periods ranging from one year to four years, and options expire within seven years from the date of grant. The 2010 Plan reserves 3.0 million shares of Autodesk common stock. At October 31, 2011, 2.6 million shares were available for future issuance.

At a special meeting to be held on January 6, 2012, Autodesk is requesting that its stockholders approve the Autodesk 2012 Employee Stock Plan (“2012 Employee Plan”) and the Autodesk 2012 Outside Directors’ Stock Plan (“2012 Directors’ Plan”), which will replace the 2008 Plan and the 2010 Plan, respectively. If Autodesk’s stockholders approve the 2012 Employee Plan, the maximum aggregate number of shares of Common Stock which may be issued under the 2012 Employee Plan will be up to 21.2 million shares (which include shares then remaining in the 2008 plan as well as forfeited shares in certain prior employee stock plans). Upon approval of the 2012 Employee Plan, no further equity awards may be granted under the 2008 Plan. If Autodesk’s stockholders approve the 2012 Directors’ Plan, the number of shares of Common Stock reserved for issuance under the 2012 Directors’ Plan will be that number of shares remaining for issuance under the 2010 Plan as of as of January 6, 2012, not to exceed 2.6 million shares. Upon approval of the 2012 Directors’ Plan, no further equity awards may be granted under the 2010 Plan.

The following sections summarize activity under Autodesk’s stock plans.

 

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Stock Options:

A summary of stock option activity for the nine months ended October 31, 2011 is as follows:

 

     Number of
Shares
    Weighted
average
exercise price
per share
 
     (in millions)        

Options outstanding at January 31, 2011

     30.4      $ 28.93   

Granted

     5.2        40.94   

Exercised

     (4.4     24.97   

Cancelled

     (1.1     33.40   
  

 

 

   

Options outstanding at October 31, 2011

     30.1      $ 31.42   
  

 

 

   

Options exercisable at October 31, 2011

     18.2      $ 31.12   
  

 

 

   

Options available for grant at October 31, 2011

     12.0     
  

 

 

   

As of October 31, 2011, total compensation cost of $85.9 million related to non-vested options is expected to be recognized over a weighted average period of 1.9 years. The following table summarizes information about the pre-tax intrinsic value of options exercised, and the weighted average grant date fair value per share of options granted, during the three and nine months ended October 31, 2011, and 2010.

 

     Three Months Ended      Nine Months Ended  
     October 31, 2011      October 31, 2010      October 31, 2011      October 31, 2010  

Pre-tax intrinsic value of options exercised(1)

   $ 4.4       $ 15.1       $ 76.9       $ 31.5   

Weighted average grant date fair value per share of stock options granted(2)

   $ 10.45       $ 10.93       $ 14.06       $ 9.19   

 

(1) 

The intrinsic value of options exercised is calculated as the difference between the exercise price of the option and the market value of the stock on the date of exercise.

(2) 

The weighted average grant date fair value of stock options granted is calculated, as of the stock option grant date, using the Black-Scholes-Merton option pricing model.

The following table summarizes information about options outstanding and exercisable at October 31, 2011:

 

    Options Exercisable     Options Outstanding  
    Number of
Shares
(in millions)
    Weighted
average
contractual
life
(in years)
    Weighted
average
exercise
price
    Aggregate
intrinsic
value(1)
(in millions)
    Number of
Shares
(in millions)
    Weighted
average
contractual
life
(in years)
    Weighted
average
exercise
price
    Aggregate
intrinsic
value(1)
(in millions)
 

Range of per-share exercise prices:

               

$0.61 — $17.37

    4.0        $ 12.89          6.0        $ 13.57     

$17.39 — $29.49

    3.1          26.46          6.8          27.68     

$29.50 — $37.16

    4.6          32.95          6.1          32.66     

$37.26 — $41.62

    2.2          38.65          6.2          40.49     

$41.70 — $49.80

    4.3          45.75          5.0          45.48     
 

 

 

         

 

 

       
    18.2        2.3      $ 31.12      $ 122.1        30.1        4.1      $ 31.42      $ 189.1   
 

 

 

         

 

 

       

 

(1) 

Represents the total pre-tax intrinsic value, based on Autodesk’s closing stock price of $34.60 per share as of October 31, 2011, which would have been received by the option holders had all option holders exercised their options as of that date.

These options will expire if not exercised at specific dates ranging through September 2021.

 

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Table of Contents

Restricted Stock:

A summary of restricted stock award and restricted stock unit activity for the nine months ended October 31, 2011 is as follows:

 

     Unreleased
Restricted
Stock
    Weighted
average grant
date fair value
per share
 
     (in thousands)        

Unreleased restricted stock at January 31, 2011

     1,426.7      $ 30.43   

Awarded

     950.2        39.27   

Released

     (139.7     35.12   

Forfeited

     (81.2     31.51   
  

 

 

   

Unreleased restricted stock at October 31, 2011

     2,156.0      $ 33.98   
  

 

 

   

During the nine months ended October 31, 2011, Autodesk granted approximately 934,200 restricted stock units under the 2008 Plan. The restricted stock units vest over periods ranging from immediately upon grant to a pre-determined date that is typically within three years from the date of grant. Restricted 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. The fair value of the restricted stock units is expensed ratably over the vesting period. Autodesk recorded stock-based compensation expense related to restricted stock units of $6.9 million and $20.5 million during three and nine months ended October 31, 2011, respectively. Autodesk recorded stock-based compensation related to restricted stock units of $1.9 million and $5.8 million, during the three and nine months ended October 31, 2010, respectively. As of October 31, 2011, total compensation cost not yet recognized of $36.4 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 1.2 years. At October 31, 2011, the number of restricted stock units granted but unreleased was 2.1 million.

During the nine months ended October 31, 2011, Autodesk granted 16,000 restricted stock awards under the 2010 Plan. Restricted stock awards granted under the 2010 Plan vest on the date of the next annual meeting. Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to many of the rights of a stockholder, including voting rights. The fair value of the restricted stock awards is expensed ratably over the vesting period. Autodesk recorded stock-based compensation expense related to restricted stock awards of $0.1 million and $0.5 million during the three and nine months ended October 31, 2011, respectively. Autodesk recorded stock-based compensation expense related to restricted stock awards of $0.1 million and $0.5 million during the three and nine months ended October 31, 2010, respectively. As of October 31, 2011, total compensation cost not yet recognized of $0.3 million related to non-vested restricted stock awards, is expected to be recognized over a weighted average period of 0.6 years. At October 31, 2011, the number of restricted stock awards granted but unreleased was 16,000.

1998 Employee Qualified Stock Purchase Plan (“ESP Plan”)

Under Autodesk’s ESP Plan, 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 not less than 85% of fair market value as defined in the ESP Plan. At October 31, 2011, a total of 29.7 million shares were available for future issuance. This amount automatically increases on the first trading day of each fiscal year by an amount equal to the lesser of 10.0 million shares or 2.0% of the total of (1) outstanding shares plus (2) any shares repurchased by Autodesk during the prior fiscal year. Under the ESP Plan, the Company issues shares on the first trading day following March 31 and September 30 of each fiscal year. The ESP Plan expires during fiscal 2018.

Autodesk issued 1.0 million shares and 2.8 million shares under the ESP Plan during the three and nine months ended October 31, 2011, respectively, at average prices of $23.52 and $18.26 per share, respectively. During the three and nine months ended October 31, 2010, Autodesk issued 1.5 million and 3.2 million shares under the ESP Plan, respectively, at average prices of $14.91 and $14.77 per share, respectively. The weighted average grant date fair value of awards granted under the ESP Plan during the three and nine months ended October 31, 2011, calculated as of the award grant date using the Black-Scholes-Merton option pricing model, was $10.74 and $9.07 per share, respectively. The weighted average grant date fair value of awards granted under the ESP Plan during the three and nine months ended October 31, 2010, calculated as of the award grant date using the Black-Scholes-Merton option pricing model, was $7.60 and $7.22 per share, respectively.

 

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Table of Contents

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the three and nine months ended October 31, 2011 and 2010, respectively, as follows:

 

     Three Months
Ended October 31,
2011
    Three Months
Ended October 31,
2010
 

Cost of license and other revenue

   $ 0.9      $ 0.6   

Marketing and sales

     11.7        7.6   

Research and development

     8.9        5.7   

General and administrative

     4.1        3.1   
  

 

 

   

 

 

 

Stock-based compensation expense related to stock awards and ESP Plan purchases

     25.6        17.0   

Tax benefit

     (5.9     (5.4
  

 

 

   

 

 

 

Stock-based compensation expense related to stock awards and ESP Plan purchases, net of tax

   $ 19.7      $ 11.6   
  

 

 

   

 

 

 
     Nine Months
Ended October 31,
2011
    Nine Months
Ended October 31,
2010
 

Cost of license and other revenue

   $ 2.8      $ 2.1   

Marketing and sales

     34.8        27.4   

Research and development

     27.6        21.2   

General and administrative

     13.6        11.6   
  

 

 

   

 

 

 

Stock-based compensation expense related to stock awards and ESP Plan purchases

     78.8        62.3   

Tax benefit

     (19.3     (17.6
  

 

 

   

 

 

 

Stock-based compensation expense related to stock awards and ESP Plan purchases, net of tax

   $ 59.5      $ 44.7   
  

 

 

   

 

 

 

 

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Autodesk uses the Black-Scholes-Merton option-pricing model to estimate the fair value of stock-based awards based on the following assumptions:

 

     Three Months
Ended October 31, 2011
  Three Months
Ended October 31, 2010
     Stock Option
Plans
  ESP Plan   Stock Option
Plans
  ESP Plan

Range of expected volatilities

   43 - 45%   40 - 44%   43 - 44%   39 - 47%

Range of expected lives (in years)

   3.6 - 4.8   0.5 - 2.0   3.5 - 4.4   0.5 - 2.0

Expected dividends

   0%   0%   0%   0%

Range of risk-free interest rates

   0.5 - 0.9%   0.1 - 0.3%   0.9 - 1.2%   0.2 - 0.5%

Expected forfeitures

   7.8%   7.8%   10.5%   10.5%
     Nine Months
Ended October 31, 2011
  Nine Months
Ended October 31, 2010
     Stock Option
Plans
  ESP Plan   Stock Option
Plans
  ESP Plan

Range of expected volatilities

   40 - 45%   34 - 44%   40 - 44%   33 - 47%

Range of expected lives (in years)

   2.6 - 4.8   0.5 - 2.0   2.7 - 4.4   0.5 - 2.0

Expected dividends

   0%   0%   0%   0%

Range of risk-free interest rates

   0.5 - 1.9%   0.1 - 0.8%   0.9 - 1.9%   0.2 - 1.1%

Expected forfeitures

   7.8 - 10.5%   7.8 - 10.5%   10.5 - 13.5%   10.5 - 13.5%

Autodesk estimates expected volatility for stock-based awards based on the average of the following two measures. The first is a measure of historical volatility in the trading market for the Company’s common stock, and the second is the implied volatility of traded forward call options to purchase shares of the Company’s common stock.

Autodesk estimates the expected life of stock-based awards using both exercise behavior and post-vesting termination behavior as well as consideration of outstanding options.

Autodesk does not currently pay, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, an expected dividend yield of zero is used in the Black-Scholes-Merton option pricing model.

The risk-free interest rate used in the Black-Scholes-Merton option pricing 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 are ultimately expected to vest. Therefore, Autodesk has developed an estimate of the number of awards expected to cancel prior to vesting (“forfeiture rate”). The forfeiture rate is estimated based on historical pre-vest cancellation experience and is applied to all stock-based awards. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.

 

7. Income Taxes

Autodesk’s effective tax rate was 20% and 21% during the three and nine months ended October 31, 2011, respectively, compared to 25% and 24% during the three and nine months ended October 31, 2010, respectively. Autodesk’s effective tax rate decreased during the three months ended October 31, 2011 as compared to the same period in the prior fiscal year primarily due to an increase in discrete tax benefits associated with changes in estimates related to Autodesk’s tax return filings in fiscal 2012 and tax detriment from a California tax rate change and related valuation allowance recorded in fiscal 2011 as well as an increase in tax benefits in fiscal 2012 from foreign earnings taxed at lower rates. Excluding the impact of discrete tax items primarily associated with changes in estimates related to tax return filings and stock-based compensation benefits of $3.3 million and $7.8 million in the three and nine months ended October 31, 2011 respectively, the effective tax rate for each of the three and nine months ended October 31, 2011 was 24% and was lower than the Federal statutory tax rate of 35%, primarily due to foreign income taxed at lower rates and research and development credits partially offset by the impact of non-deductible stock-based compensation expense.

As of October 31, 2011, the Company had $198.3 million of gross unrecognized tax benefits, excluding interest, of which approximately $184.3 million represents the amount of unrecognized tax benefits that would impact the effective tax rate, if recognized. 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.

At October 31, 2011, Autodesk had net deferred tax assets of $172.9 million. The Company believes that it will generate sufficient future taxable income in appropriate tax jurisdictions to realize these assets.

 

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8. Acquisitions

During the nine months ended October 31, 2011, Autodesk completed the business combinations and technology purchases described below. The results of operations for the following acquisitions are included in the accompanying Condensed Consolidated Statement of Operations since their respective acquisition date. Pro forma results of operations have not been presented because the effects of the following acquisitions, individually and in the aggregate, were not material to Autodesk’s Condensed Consolidated Financial Statements.

For acquisitions accounted for as business combinations, Autodesk allocated the fair value of the total consideration transferred to 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 recorded the excess of consideration over the aggregate fair values as goodwill.

On March 1, 2011, Autodesk acquired Scaleform Corporation (“Scaleform”) for total cash consideration of $36.2 million. Scaleform was a privately held middleware and user interface tools company, whose technology has been licensed in the development of games across all major hardware platforms. Scaleform has been integrated into Autodesk’s Media and Entertainment segment.

On March 10, 2011, Autodesk acquired Blue Ridge Numerics, Inc (“Blue Ridge”) for total cash consideration of $41.2 million. Blue Ridge was a privately held company that designed and sold software that enables mechanical engineers to study fluid flow and thermal performance in virtual prototyping. Blue Ridge has been integrated into Autodesk’s Manufacturing segment.

On August 1, 2011, Autodesk acquired Instructables, Inc. (“Instructables”) for total cash consideration of $30.2 million. Instructables was a privately held web-based company specializing in user-created and uploaded instructions for do-it-yourself projects, on which other users can comment and rate for quality. Instructables has been integrated into Autodesk’s Platform Solutions and Emerging Business segment.

On August 24, 2011, Autodesk entered into a purchase agreement with Turbo Squid, Inc. (“Turbo Squid”) to acquire certain technology related assets for $26.0 million and entered into related cross-licensing and a commercial arrangement which is less than $0.2 million in expense per year. Additionally, Autodesk purchased the option to acquire Turbo Squid within a prescribed date range.

On October 14, 2011, Autodesk acquired Micro Application Packages Limited (“MAP”) for total cash consideration of $23.0 million. MAP was a privately held company specializing in software and services in the building information modeling (“BIM”) life cycle with the focus on fabrication. MAP has been integrated into Autodesk’s Architecture, Engineering and Construction segment.

During the nine months ended October 31, 2011, Autodesk also completed 13 other business combination and technology acquisitions for a total cash consideration of approximately $38.7 million. These business combinations and technology acquisitions were not material individually or in aggregate to Autodesk’s Condensed Consolidated Financial Statements.

The following table summarizes the fair value of the assets acquired and liabilities assumed by major class for each of the business combinations and technology acquisitions completed during the nine months ended October 31, 2011:

 

     Scaleform     Blue Ridge     Instructables     MAP     Turbo Squid      Other  

Developed technologies

   $ 5.9      $ 6.0      $ 0.4      $ 2.5      $ 26.0       $ 19.2   

Customer relationships

     4.4        9.2        0.2        2.0        —           3.3   

Trade name

     1.4        1.1        1.6        0.9        —           0.6   

User List

     —          —          5.1        —          —           —     

Patent

     3.6        —          —          —          —           —     

In-process research and development

     0.6        0.6        —          —          —           —     

Goodwill

     22.6        22.3        24.4        12.7        —           15.9   

Deferred Revenue

     —          (1.2     —          —          —           —     

Deferred tax liability

     (2.5     (3.6     (1.6     (1.6     —           —     

Net tangible assets (liabilities)

     0.2        6.8        0.1        6.5        —           (0.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 36.2      $ 41.2      $ 30.2      $ 23.0      $ 26.0       $ 38.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

For Scaleform, Blue Ridge, Instructables, and MAP the allocation of purchase price consideration to the assets and liabilities is not yet finalized. The allocation of the purchase price consideration was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized are amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction and residual goodwill.

 

9. Other Intangible Assets, Net

Other intangible assets that include purchased technologies, customer relationships, trade names and the related accumulated amortization were as follows:

 

     October 31,
2011
    January 31,
2011
 

Developed technologies, at cost (1)

   $ 374.3      $ 313.1   

Customer relationships and trade names, at cost (2)

     213.9        179.1   
  

 

 

   

 

 

 
     588.2        492.2   

Less: Accumulated amortization

     (427.1     (373.4
  

 

 

   

 

 

 

Other intangible assets, net

   $ 161.1      $ 118.8   
  

 

 

   

 

 

 

 

(1) 

Developed technologies include $1.2 million and zero of in-process research and development technology as of October 31, 2011 and January 31, 2011, respectively. In-process research and development is an indefinite lived asset that is held and tested at least annually for impairment until such time that it becomes fully developed technology. Once completed, the technology is amortized to expense over an applicable useful life.

(2) 

Included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets. Customer relationships and trade names include the effects of foreign currency translation.

The weighted average amortization period for purchased technologies, customer relationships and trade names during fiscal 2012 was 4.6 years. As of October 31, 2011, expected future amortization expense for purchased technologies, customer relationships and trade names for each of the fiscal years ended thereafter is as follows:

 

     Year ending
January 31,
 

Remainder of 2012

   $ 18.3   

2013

     63.6   

2014

     45.2   

2015

     24.6   

2016

     6.8   

2017

     1.0   

Thereafter

     1.6   
  

 

 

 
   $ 161.1   
  

 

 

 

 

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Table of Contents
10. Goodwill

The change in the carrying amount of goodwill during the nine months ended October 31, 2011, is as follows:

 

     Platform
Solutions and
Emerging
Business
     Architecture,
Engineering
and
Construction
     Manufacturing      Media and
Entertainment
    Total  

Balances as of January 31, 2011

             

Goodwill

   $ 45.3       $ 224.2       $ 279.1       $ 154.7      $ 703.3   

Accumulated impairment losses

     —           —           —           (149.2     (149.2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     45.3         224.2         279.1         5.5        554.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Addition arising from Scaleform acquisition

     —           —           —           22.6        22.6   

Addition arising from Blue Ridge acquisition

     —           —           22.3         —          22.3   

Addition arising from Instructables acquisition

     24.4         —           —           —          24.4   

Addition arising from MAP acquisition

     —           12.7         —           —          12.7   

Addition arising from other acquisitions

     7.6         2.8         2.0         3.5        15.9   

Effect of foreign currency translation,
purchase accounting and other

     0.1         0.9         0.9         —          1.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance as of October 31, 2011

             

Goodwill

     77.4         240.6         304.3         180.8        803.1   

Accumulated impairment losses

     —           —           —           (149.2     (149.2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 77.4       $ 240.6       $ 304.3       $ 31.6      $ 653.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Autodesk assigns goodwill to the reportable segment associated with each business combination, and tests goodwill for impairment annually in its fourth fiscal quarter or more often if circumstances indicate a potential impairment. When assessing goodwill for impairment, Autodesk uses discounted cash flow models that include assumptions regarding reportable segments’ projected cash flows (“Income Approach”) and corroborates it with the estimated consideration that the Company would receive if there were to be a sale of the reporting segment (“Market Approach”). Variances in these assumptions could have a significant impact on Autodesk’s conclusion as to whether goodwill is impaired or the amount of any impairment charge. Impairment charges, if any, result from instances where the fair values of net assets associated with goodwill are less than their carrying values. 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) significant slowdown in the worldwide economy or the industries Autodesk serves, or (iv) changes in Autodesk’s business strategy or internal financial results forecasts. A hypothetical 10% decrease in the fair value of any of Autodesk’s four reporting units would not have an impact on the carrying value, nor result in an impairment, of goodwill shown on Autodesk’s balance sheet as of October 31, 2011 for the respective reporting units.

 

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Table of Contents
11. Deferred Compensation

At October 31, 2011, Autodesk had marketable securities totaling $430.9 million, of which $32.7 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 $32.7 million at October 31, 2011, of which $3.2 million was classified as current and $29.5 million was classified as non-current liabilities. The value of debt and equity securities held in the rabbi trust at January 31, 2011 was $31.3 million. The total related deferred compensation liability at January 31, 2011 was $31.3 million, of which $3.4 million was classified as current and $27.9 million was classified as non-current liabilities. The current and non-current portions of the liability are recorded in the Condensed Consolidated Balance Sheets under “Accrued compensation” and “Other liabilities,” respectively.

 

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

Computer equipment, software, furniture, leasehold improvements and the related accumulated depreciation were as follows:

 

     October 31,
2011
    January 31,
2011
 

Computer software, at cost

   $ 132.1      $ 129.4   

Computer hardware, at cost

     149.6        123.7   

Leasehold improvements, land and buildings, at cost

     136.2        121.3   

Furniture and equipment, at cost

     48.3        43.6   
  

 

 

   

 

 

 
     466.2        418.0   

Less: Accumulated depreciation

     (364.1     (333.5
  

 

 

   

 

 

 

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

   $ 102.1      $ 84.5   
  

 

 

   

 

 

 

 

13. Borrowing Arrangements

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. The line of credit is syndicated with various financial institutions, including Citicorp USA, Inc., an affiliate of Citibank, which is one of the lead lenders and agent. At October 31, 2011, Autodesk had no outstanding borrowings on this line of credit. This facility expires in May 2016.

 

14. Restructuring Reserve

During fiscal 2011, fiscal 2010 and fiscal 2009 Autodesk initiated restructuring plans (“Fiscal 2011 Plan,” “Fiscal 2010 Plan” and “Fiscal 2009 Plan,” respectively) in order to further reduce operating costs. These restructuring plans resulted in targeted global staff reductions of approximately 200, 430, and 700 positions for fiscal 2011, 2010 and 2009, respectively. No leased facilities were consolidated as part of the Fiscal 2011 Plan. The Fiscal 2010 Plan and Fiscal 2009 Plan resulted in the consolidation of 32 and 27 leased facilities, respectively.

In connection with our restructuring plans, we recorded a favorable adjustment for changes in previous estimates during the nine months ended October 31, 2011.

 

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Table of Contents

The following table sets forth the restructuring activities for the nine months ended October 31, 2011.

 

     Balance at
January 31, 2011
     Additions      Payments     Adjustments(1)     Balance at
October 31, 2011
 

Fiscal 2011 Plan

            

Employee termination costs

   $ 1.5       $ —         $ (1.5   $ —        $ —     

Fiscal 2010 Plan

            

Lease termination and asset costs

     1.7         —           (0.9     (0.2     0.6   

Fiscal 2009 Plan

            

Lease termination and asset costs

     2.8         —           (0.7     (1.3     0.8   

Other

            

Lease termination costs

     2.6         —           (0.7     (0.3     1.6   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 8.6       $ —         $ (3.8   $ (1.8   $ 3.0   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current portion(2)

   $ 4.8              $ 1.5   

Non-current portion(2)

     3.8                1.5   
  

 

 

           

 

 

 

Total

   $ 8.6              $ 3.0   
  

 

 

           

 

 

 

 

(1) 

Adjustments include the impact of foreign currency translation.

(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.

 

15. 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. 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.

 

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Table of Contents
16. Common Stock Repurchase Program

Autodesk has a stock repurchase program that is used largely to help offset the dilution to net income per share caused by 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, and has the effect of returning excess cash generated from the Company’s business to stockholders. During the three and nine months ended October 31, 2011, Autodesk repurchased and retired 3.5 million and 7.7 million shares at an average repurchase price of $26.93 per share and $34.21 per share, respectively. Common stock and additional paid-in capital and retained earnings were reduced by $67.4 million and $26.9 million, respectively, during the three months ended October 31, 2011, as a result of the stock repurchases. Common stock and additional paid-in capital and retained earnings were reduced by $171.9 million and $91.8 million, respectively, during the nine months ended October 31, 2011.

At October 31, 2011, 16.7 million shares remained available for repurchase under repurchase plans approved by the Board of Directors. During the three and nine months ended October 31, 2011, 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 conditions, the number of employee stock option exercises, stock issuance, the trading price of Autodesk common stock, cash on hand and available in the United States, and company defined trading windows.

 

17. Comprehensive Income

The components of other comprehensive income (loss), net of taxes, were as follows:

 

     Three Months
Ended October 31,
    Nine Months
Ended October 31,
 
     2011     2010     2011     2010  

Net income

   $ 72.8      $ 53.6      $ 213.3      $ 150.4   

Other comprehensive income

        

Net loss on derivative instruments, net of taxes

     (3.3     (13.0     (2.8     (10.0

Change in net unrealized gain (loss) on available-for-sale securities, net of tax

     (1.4     0.9        (0.4     1.8   

Net change in cumulative foreign currency translation gain (loss)

     (6.2     11.0        7.2        7.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (10.9     (1.1     4.0        (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 61.9      $ 52.5      $ 217.3      $ 149.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), net of taxes, was comprised of the following at October 31, 2011 and January 31, 2011:

 

     October 31,
2011
    January 31,
2011
 

Net loss on derivative instruments

   $ (3.6   $ (0.8

Net unrealized gain on available-for-sale securities

     2.0        2.4   

Unfunded portion of pension plans

     (9.8     (9.8

Foreign currency translation adjustments

     14.8        7.6   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

   $ 3.4      $ (0.6
  

 

 

   

 

 

 

 

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Table of Contents
18. Net Income Per Share

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

 

     Three Months Ended
October 31,
     Nine months ended
October 31,
 
     2011      2010      2011      2010  

Numerator:

           

Net income

   $ 72.8       $ 53.6       $ 213.3       $ 150.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Denominator for basic net income per share—weighted average shares

     227.1         226.5         228.2         227.9   

Effect of dilutive securities

     3.6         5.9         5.5         5.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for dilutive net income per share

     230.7         232.4         233.7         233.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per share

   $ 0.32       $ 0.24       $ 0.93       $ 0.66   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share

   $ 0.32       $ 0.23       $ 0.91       $ 0.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

The computation of diluted net income 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 three months ended October 31, 2011 and 2010, 22.8 million and 20.2 million potentially anti-dilutive shares, respectively, were excluded from the computation of net income per share. For the nine months ended October 31, 2011 and 2010, 11.9 million and 19.9 million potentially anti-dilutive shares, respectively, were excluded from the computation of net income per share.

 

19. Segments

Autodesk reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. Autodesk has four reportable segments: Platform Solutions and Emerging Business (“PSEB”), Architecture, Engineering and Construction (“AEC”), Manufacturing (“MFG”) and Media and Entertainment (“M&E”). Autodesk has no material inter-segment revenue.

The PSEB, AEC and MFG segments derive revenue from the sale of licenses for software products and services to customers who design, build, manage or own building, manufacturing and infrastructure projects. Our M&E segment derives revenue from the sale of products to creative professionals, post-production facilities and broadcasters for a variety of applications, including feature films, television programs, commercials, music and corporate videos, interactive game production, web design and interactive web streaming.

PSEB includes Autodesk’s design product, AutoCAD. Autodesk’s AutoCAD product is a platform product that underpins the Company’s design product offerings for the industries it serves. For example, AEC and MFG offer tailored versions of AutoCAD software for the industries they serve. Autodesk’s AutoCAD product also provides a platform for Autodesk’s developer partners to build custom solutions for a range of diverse design-oriented markets. PSEB’s revenue primarily includes revenue from sales of licenses of Autodesk’s design products, AutoCAD and AutoCAD LT, as well as the Autodesk Design Suite and many other design products.

AEC software products help to improve the way building, civil infrastructure, process plant and construction projects are designed, built and managed. A broad portfolio of solutions enables greater efficiency, accuracy and sustainability across the entire project lifecycle. Autodesk AEC solutions include advanced technology for BIM, AutoCAD-based design and documentation productivity software, sustainable design analysis applications, and collaborative project management solutions. BIM, an integrated process for building and infrastructure design, analysis, documentation and construction, uses consistent, coordination information to improve communication and collaboration between the extended project team. AEC provides a comprehensive portfolio of BIM solutions that help customers deliver projects faster and more economically, while minimizing environmental impact. AEC’s revenue primarily includes revenue from the sales of licenses of Autodesk Revit family suites, AutoCAD Civil 3D, AutoCAD Architecture and AutoCAD Map 3D products.

 

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MFG provides the manufacturers in automotive and transportation, industrial machinery, consumer products and building products with comprehensive digital prototyping solutions that bring together design data from all phases of the product development process to develop a single digital model created in Autodesk Inventor software. Autodesk’s solutions for digital prototyping enable a broad group of manufacturers to realize benefits with minimal disruption to existing workflows. MFG’s revenue primarily includes revenue from the sales of licenses of Autodesk Inventor family suites, AutoCAD Mechanical and Autodesk Moldflow products.

M&E is comprised of two product groups: Animation, including design visualization, and Creative Finishing. Animation products, such as Autodesk 3ds Max, Autodesk Maya and the Autodesk Entertainment Creation Suite, provide tools for digital sculpting, modeling, animation, effects, rendering and compositing, for design visualization, visual effects and games production. Creative Finishing products provide editing, finishing and visual effects design and color grading.

All of Autodesk’s reportable segments distribute their respective products primarily through authorized resellers and distributors and, to a lesser extent, through direct sales to end-users. The accounting policies of the reportable segments are the same as those described in Note 1, “Business and Summary of Significant Accounting Policies” of our 2011 Annual Report on Form 10-K. Autodesk evaluates each segment’s performance on the basis of gross profit. Autodesk currently does not separately accumulate and report asset information by segment, except for goodwill, which is disclosed in Note 10, “Goodwill.”

Information concerning the operations of Autodesk’s reportable segments is as follows:

 

     Three Months Ended
October 31,
    Nine Months Ended
October 31,
 
     2011     2010     2011     2010  

Net revenue:

        

Platform Solutions and Emerging Business

   $ 209.7      $ 173.3      $ 618.7      $ 534.6   

Architecture, Engineering and Construction

     152.2        136.4        451.5        406.3   

Manufacturing

     133.5        116.7        392.5        337.3   

Media and Entertainment

     53.2        50.3        160.5        145.9   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 548.6      $ 476.7      $ 1,623.5      $ 1,424.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

        

Platform Solutions and Emerging Business

   $ 198.2      $ 164.1      $ 584.0      $ 505.6   

Architecture, Engineering and Construction

     137.5        124.5        408.8        368.8   

Manufacturing

     122.2        109.7        359.8        314.7   

Media and Entertainment

     43.2        38.9        129.6        112.6   

Unallocated (1)

     (12.1     (9.0     (30.6     (25.8
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 489.0      $ 428.2      $ 1,451.6      $ 1,275.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Unallocated amounts primarily relate to corporate expenses and other costs and expenses that are managed outside the reportable segments, including stock-based compensation expense.

 

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Information regarding Autodesk’s operations by geographic area is as follows:

 

     Three Months Ended
October 31,
     Nine Months Ended
October 31,
 
     2011      2010      2011      2010  

Net revenue:

           

Americas

           

U.S.

   $ 161.7       $ 142.8       $ 456.6       $ 409.4   

Other Americas

     38.7         36.5         116.3         99.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Americas

     200.4         179.3         572.9         508.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe, Middle East and Africa

     201.8         182.9         628.7         570.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia Pacific

           

Japan

     65.4         47.6         184.3         147.8   

Other Asia Pacific

     81.0         66.9         237.3         197.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Asia Pacific

     146.4         114.5         421.6         344.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 548.6       $ 476.7       $ 1,623.2       $ 1,424.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in our MD&A contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies, the statements in “Strategy” below, anticipated future net revenue, future operating margin and other future financial results (by product type and geography) and operating expenses, the effect of unemployment and availability of credit, the effects of the U.S. debt downgrade and weak global economic conditions, our backlog, expected trends in certain financial metrics, the impact of acquisitions and investment activities, the effect of fluctuations in exchange rates and our hedging activities on our financial results, the impact of natural disasters on our operations and financial results, our ability to successfully expand adoption of our products, and our ability to successfully increase sales of product suites as part of our overall sales strategy. In addition, forward-looking statements also consist of statements involving expectations regarding product acceptance, continuation of our stock repurchase program, statements regarding our liquidity and short-term and long-term cash requirements, as well as, statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.

Note: A glossary of terms used in this Form 10-Q appears at the end of this Item 2.

Strategy

Autodesk’s vision is to help people imagine, design and create a better world. We do this by developing software for the world’s designers, architects, engineers, and digital artists—the people who create products, buildings, infrastructure, films, and games. Autodesk serves customers in three primary markets: architecture, engineering and construction; manufacturing; and digital media and entertainment.

Our goal is to provide our customers with the world’s most valuable, innovative, and engaging software and services. Our product and services portfolio allows our customers to digitally visualize, simulate, and analyze their projects, helping them to better understand the consequences of their design decisions; save time, money, and resources; and become more innovative.

Today, complex challenges such as globalization, urbanization and sustainable design are driving our customers to new levels of performance and competitiveness, and we are committed to helping them address those challenges and take advantage of new opportunities. To achieve these goals, we are capitalizing on two of our strongest competitive advantages: our ability to bring advanced technology to mainstream markets, and the breadth and depth of our product portfolio.

By innovating in existing technology categories, we bring powerful new design capabilities to volume markets. Our products are designed to be easy-to-learn and use, and to provide customers with a low cost of deployment, a low total cost of ownership, and a rapid return on investment. In addition, our software architecture allows for extensibility and integration with other products. The breadth of our technology and product line gives us a unique competitive advantage because it allows our customers to address a wide variety of problems in ways that transcend industry and disciplinary boundaries. This is particularly important in helping our customers address the complex challenges mentioned above. We also believe that our technological leadership and global brand recognition have positioned us well for long-term growth and industry leadership.

In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, faculty and students is a key competitive advantage. This network of relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn and support our products quickly and easily. We have a significant number of registered third-party developers who create products that work well with Autodesk products and extend them for a variety of specialized applications. Users with expertise in our products are broadly and globally available from educational institutions and the existing workforce. We offer a wide range of educational programs, including student versions of software, curricula and faculty development. We have an extensive global community of students who are experienced with our software and poised to become the next generation of professional users—thus reducing the cost of training and providing new talent for our customers. Our global network of distributors, resellers, third party developers, customers, educational institutions and students has been developed over our twenty-nine year history. We believe it is an enduring competitive advantage that is difficult for others to replicate.

 

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Our growth strategy includes continually increasing the business value of our design tools to our customers in a number of ways. First, we seek to address an increasing portion of our customers’ workflow with products that extend the value of our customers’ digital design information into visualization, analysis and simulation. Second, we seek to improve our product interoperability and usability, thus improving our customers’ productivity and effectiveness. Third, we continue to develop new ways to deliver capability and value to our customers, such as product suites, software-as-a-service, and delivery of our solutions on mobile devices and new hardware platforms. Fourth, we extend our customers’ workflow with products for adjacent users and for the “customers of our customers,” thus increasing the value of the design information our customers produce. Finally, we continue to develop new lines of consumer products and services that are delivered and experienced through the Web, tablets, and mobile devices providing our advanced visualization technologies to consumers—a whole new category of Autodesk customer.

We believe that expanding our customers’ portfolios to include our suites presents a meaningful growth opportunity and is an important part of our overall strategy. As our customers in all industries adopt our design suites, we believe they will experience an increase in their productivity and the value of their design data. For the three and nine months ended October 31, 2011, revenue from suites increased 36% and 33%, respectively, as compared to the same periods in the prior fiscal year. As a percentage of total net revenue suites revenue increased to 27% in both the three and nine months ended October 31, 2011 as compared to 23% in both the three and nine months ended October 31, 2010.

Expanding our geographic coverage is another key element of our growth strategy. While emerging markets are important for many global businesses, we believe they hold special opportunity for us. Much of the growth in the world’s construction and manufacturing is happening in emerging markets. Further, emerging markets face many of the challenges that our design technology can help address, for example infrastructure build-out. We believe that emerging economies continue to present long-term growth opportunities for us. Revenue from emerging countries increased 15% and 17% during the three and nine months ended October 31, 2011, respectively, as compared to the same periods in the prior fiscal year. Revenue from emerging countries represented 16% of total net revenue for both the three and nine months ended October 31, 2011, as compared to 16% and 15% during the three and nine months ended October 31, 2010, respectively.

While we believe there are long-term growth opportunities in emerging economies, conducting business in these countries presents significant challenges, including economic volatility, geopolitical risk, local competition, intellectual property protection, poorly developed business infrastructure, scarcity of talent and software piracy.

Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will acquire products, technology and businesses as compelling opportunities that promote our strategy become available. We have increased the number, pace and dollars spent on acquisitions in comparison to fiscal 2011 but remain informed by and dependent on our business needs, the availability of suitable sellers and technology, and our own financial condition.

Our strategy depends upon a number of assumptions, including that we will be able to continue making our technology available to mainstream markets; leverage our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; drive adoption of our suites; improve the performance and functionality of our products; and adequately protect our intellectual property. If the outcome of any of these assumptions differs from our expectations, we may not be able to implement our strategy, which could potentially adversely affect our business. For further discussion regarding these and related risks see Part II, Item 1A, “Risk Factors.”

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our Condensed Consolidated Financial Statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 31, 2011 (the “2011 Form 10-K”). In addition, we highlighted those policies that involve a higher degree of judgment and complexity with further discussion of these judgmental areas in

 

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Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2011 Form 10-K. We believe these policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. Updates on the relevant periodic financial disclosures related to these policies are provided below.

Goodwill. As of October 31, 2011, a hypothetical 10% decrease in the fair value of our reporting units would not have an impact on the carrying value of goodwill, nor result in impairment of goodwill. For further discussion see Note 10, “Goodwill,” in the Notes to the Condensed Consolidated Financial Statements.

Income Taxes. We currently have $172.9 million of net deferred tax assets, primarily a result of state research and development credits, net operating losses, and timing differences for reserves, accrued liabilities, stock options, purchased technologies and capitalized intangibles, partially offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign subsidiaries, deferred tax liabilities associated with tax method change on advanced payments and valuation allowances against California and Canadian deferred tax assets. We perform a quarterly assessment of the recoverability of these net deferred tax assets and believe that we will generate sufficient future taxable income in appropriate tax jurisdictions to realize the net deferred tax assets. Our judgments regarding future profitability may change due to future market conditions and other factors. Any change in future profitability may require material adjustments to these net deferred tax assets, resulting in a reduction in net income in the period when such determination is made.

Overview of the Three and Nine Months Ended October 31, 2011

 

(in millions)    Three Months Ended
October 31, 2011
     As a % of Net
Revenue
    Three Months Ended
October 31, 2010
     As a % of Net
Revenue
 

Net Revenue

   $ 548.6         100   $ 476.7         100

Cost of revenue

     59.6         11     48.5         10
  

 

 

      

 

 

    

Gross Profit

     489.0         89     428.2         90

Operating expenses

     398.8         73     359.0         75
  

 

 

      

 

 

    

Income from Operations

   $ 90.2         16   $ 69.2         15
  

 

 

      

 

 

    

 

(in millions)    Nine Months Ended
October 31, 2011
     As a % of Net
Revenue
    Nine Months Ended
October 31, 2010
     As a % of Net
Revenue
 

Net Revenue

   $ 1,623.2         100   $ 1,424.1         100

Cost of revenue

     171.6         11     148.2         10
  

 

 

      

 

 

    

Gross Profit

     1,451.6         89     1,275.9         90

Operating expenses

     1,187.8         73     1,076.1         76
  

 

 

      

 

 

    

Income from Operations

   $ 263.8         16   $ 199.8         14
  

 

 

      

 

 

    

In both the three and nine months ended October 31, 2011, our business grew year over year as evidenced by our increases in revenue, gross profit and income from operations. Contributing to the year over year increases in revenue were increases in revenue from new seat license revenue and maintenance revenue. In addition, we experienced increases in revenue for most of our major products, all of our reportable segments, and all of our geographic areas during three and nine months ended October 31, 2011 as compared to the same periods in the prior fiscal year. The reasons for these increases are discussed below under the heading “Results of Operations.” In addition, we continued to control our operating costs, which led to year over year improvements in profitability. The 30% and 32% increase in income from operations in the three and nine months ended October 31, 2011, respectively, as compared to the same periods in the prior fiscal year, was due to the increase in our net revenue, while controlling the growth of operating expenses.

Our total operating margin increased as a percentage of revenue from 15% for the three months ended October 31, 2010 to 16% during the three months ended October 31, 2011. Our total operating margin increased as a percentage of revenue from 14% for the nine months ended October 31, 2010 to 16% during the nine months ended October 31, 2011. The increase in our operating margin was primarily because net revenue increased at a faster rate than the increase in our costs due to cost containment efforts that have continued through the year. Net revenue increased $71.9 million or 15% for the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, while our operating expenses increased $39.8 million, or 11% for the three months ended October 31, 2011. Net revenue increased $199.1 million or 14% for the nine months ended October 31, 2011, as compared to the same period in the prior fiscal year, while our operating expenses increased $111.7 million, or 10% for the nine months ended October 31, 2011. The 11% and 10% increase in operating expenses in the three and nine months ended October 31, 2011, respectively, as compared to the three and nine months ended October 31, 2010 was due to an increase in salaries and benefits due to increased headcount and the return of

 

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employee costs which were temporarily suppressed in the prior year such as salary reductions, employee incentives and mandatory vacation, and other costs associated with higher revenue. These increases were partially offset by the decrease in restructuring charges of $10.3 million for the nine months ended October 31, 2011.

We generate a majority of our revenue in the U.S., Japan, Germany, the United Kingdom and France. Included in the overall increase in revenue were impacts associated with foreign currency. Our revenue benefited from foreign exchange rate changes during the three and nine months ended October 31, 2011, as compared to the same periods in the prior fiscal year. During the three and nine months ended October 31, 2011, net revenue increased 15% and 14%, respectively, compared to the same periods in the prior fiscal year; had applicable exchange rates from the three and nine months ended October 31, 2010 been in effect during the three and nine months ended October 31, 2011, and had we excluded foreign exchange hedge gains and losses from the three and nine months ended October 31, 2011 and 2010 (“on a constant currency basis”), net revenue would have increased 12% and 13%, respectively, compared to the same periods in the prior fiscal year. During the three and nine months ended October 31, 2011, total spend, defined as cost of revenue plus operating expenses, increased 12% and 11%, respectively, compared to the same periods in the prior fiscal year as reported and increased 9% and 8%, respectively, on a constant currency basis. Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend and income from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue of certain anticipated transactions, but do not attempt to completely mitigate the impact of fluctuation of such foreign currency against the U.S. dollar.

We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, “Tech Data”). Tech Data accounted for 16% of our total net revenue during the three and nine months ended October 31, 2011. Tech Data accounted for 15% and 16% of our total net revenue during the three and nine months ended October 31, 2010, respectively. On October 27, 2011, Tech Data purchased certain assets of Mensch und Maschine Software (“MuM”), which has been a distributor of our products in Europe. The acquisition concentrates additional sales through Tech Data, and on a consolidated basis would have accounted for 20% and 22% of our revenue for the three and nine months ended October 31, 2011, respectively if the acquisition had occurred on February 1, 2011. We believe our business is not substantially dependent on Tech Data, including following the acquisition of certain assets of MuM. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between us and Tech Data be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue.

Our primary goals for the remainder of fiscal 2012 are to grow revenue and improve our operating margin percentage by delivering our market-leading products and solutions to our customers and investing in product functionality and new product lines, including suites offerings. However, there can be no assurance that we will achieve our financial goals and improve our financial results. Additionally, we believe that unemployment rates and the availability of credit to major industries we serve are important indicators for our business; if global economic conditions deteriorate we may not achieve our financial goals.

Revenue from flagship products was 57% and 58% of total net revenue during the three and nine months ended October 31, 2011, respectively, and increased 8% for both the three and nine months ended October 31, 2011, as compared to the same periods in the prior fiscal year. Revenue from suites was 27% of total net revenue for both the three and nine months ended October 31, 2011, and increased 36% and 33%, respectively, as compared to the same periods in the prior fiscal year. During the nine months ended October 2011, we released our new design and creation suites that include English language versions of our Autodesk Design Suite, Autodesk Factory Design Suite, Autodesk Product Design Suite, Autodesk Building Design Suite, Autodesk Entertainment Creation Suite, Autodesk Infrastructure Design Suite and Autodesk Plant Design Suite, as well as a Japanese language version of our Autodesk Entertainment Creation Suite. Suites revenue and growth rates for suites consist primarily of revenue from our pre-existing suite families, such as Inventor and Revit suites. Revenue from new and adjacent products was 16% and 15% of total net revenue during the three and nine months ended October 31, 2011, respectively, and increased 11% and 8%, respectively, as compared to the same periods in the prior fiscal year. We anticipate, as our new and existing customers migrate from our stand-alone products, that our revenue from suites will increase as a percentage of revenue and that our revenue from our flagship and new and adjacent products will decline as a percentage of revenue.

At October 31, 2011, we had $1,534.2 million in cash and marketable securities. We completed the quarter ended October 31, 2011 with a higher deferred revenue balance and a lower accounts receivable balance as compared to the fiscal year ended January 31, 2011. Our deferred revenue balance at October 31, 2011 included $552.9 million related to customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts. Our maintenance contracts are for a term of predominantly one year, but may be two or three years, or occasionally as long as five year terms. We repurchased 3.5 million shares of our common stock for $94.3 million during the three months ended October 31, 2011 and

 

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7.7 million shares of our common stock for $263.7 million during the nine months ended October 31, 2011. Comparatively, we repurchased 2.5 million shares of our common stock for $74.9 million during the three months ended October 31, 2010 and we repurchased 7.0 million shares of our common stock for $204.1 million during the nine months ended October 31, 2010.

Results of Operations

Net Revenue

 

     Three Months
Ended

October 31, 2011
     Increase compared to
prior fiscal year
    Three Months
Ended

October 31, 2010
     Nine Months
Ended

October 31, 2011
     Increase compared to
prior fiscal year
    Nine Months
Ended

October 31, 2010
 
(in millions)           $              %                   $              %        

Net Revenue:

                     

License and other

   $ 331.4       $ 49.4         18   $ 282.0       $ 987.4       $ 144.9         17   $ 842.5   

Maintenance

     217.2         22.5         12     194.7         635.8         54.2         9     581.6   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

 
   $ 548.6       $ 71.9         15   $ 476.7       $ 1,623.2       $ 199.1         14   $ 1,424.1   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

 

Net Revenue by Geographic Area:

                     

Americas

   $ 200.4       $ 21.1         12   $ 179.3       $ 572.9       $ 64.0         13   $ 508.9   

Europe, Middle East and Africa

     201.8         18.9         10     182.9         628.7         58.4         10     570.3   

Asia Pacific

     146.4         31.9         28     114.5         421.6         76.7         22     344.9   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

 
   $ 548.6       $ 71.9         15   $ 476.7       $ 1,623.2       $ 199.1         14   $ 1,424.1   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

 

Net Revenue by Operating Segment:

                     

Platform Solutions and Emerging Business

   $ 209.7       $ 36.4         21   $ 173.3       $ 618.7       $ 84.1         16   $ 534.6   

Architecture, Engineering and Construction

     152.2         15.8         12     136.4         451.5         45.2         11     406.3   

Manufacturing

     133.5         16.8         14     116.7         392.5         55.2         16     337.3   

Media and Entertainment

     53.2         2.9         6     50.3         160.5         14.6         10     145.9   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

 
   $ 548.6       $ 71.9         15   $ 476.7       $ 1,623.2       $ 199.1         14   $ 1,424.1   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

 

License and Other Revenue

License and other revenue is comprised of two components: all forms of product license revenue and other revenue. Product license revenue includes revenue from the sale of new seat licenses and upgrades. Other revenue consists of revenue from Creative Finishing, consulting and training services and collaborative project management services.

Total license and other revenue increased 18% during the three months ended October 31, 2011, as compared to the three months ended October 31, 2010. This increase was primarily due to the 11% increase in revenue from commercial new seat licenses during the three months as compared to the same period in the prior fiscal year. During the three months ended October 31, 2011, the 11% increase in commercial new seat licenses was due to the increase in the number of seats sold. Commercial new seat license revenue, as a percentage of license and other revenue, was 66% and 70% for the three months ended October 31, 2011 and 2010, respectively.

Total license and other revenue increased 17% during the nine months ended October 31, 2011, as compared to the nine months ended October 31, 2010. This increase was primarily due to the 15% increase in revenue from commercial new seat licenses during the nine months as compared to the same period in the prior fiscal year. During the nine months ended October 31, 2011, 11 percentage points of the 15% increase in commercial new seat licenses was due to the increase in the number of seats sold and 4 percentage points was due to an increase in the average net revenue per seat. Commercial new seat license revenue, as a percentage of license and other revenue, was 67% and 69% for the nine months ended October 31, 2011 and 2010, respectively.

Also contributing to the increase in license and other revenue during the three and nine months ended October 31, 2011, as compared to the same periods in the prior fiscal year, was an increase in upgrade revenue, of 17% and 29%, respectively. Upgrade revenue was higher during the three months ended October 31, 2011 as compared to the same period in the prior fiscal year due to an increase in large enterprise transactions, customers migrating from stand alone products to suites and a promotion that was run related to the education solutions suites. Upgrade revenue was higher during the nine months ended October 31, 2011, as compared to the same period of the prior fiscal year, primarily due to an ACAD LT upgrade promotion during the first quarter of fiscal 2012 and the promotion related to the education solutions suites in the third quarter of fiscal 2012 mentioned above.

Revenue from the sales of our services, training and support, included in “License and other revenue,” represented less than 3% of total net revenue for all periods presented.

 

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Maintenance Revenue

Our maintenance revenue relates to a program known by our user community as the Subscription Program. Our maintenance program provides our commercial and educational customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance program, customers are eligible to receive unspecified upgrades when and if available, downloadable training courses and online support. We recognize maintenance revenue ratably over the maintenance contract periods.

Maintenance revenue increased 12% during the three months ended October 31, 2011, as compared to the three months ended October 31, 2010, primarily due to an 11% increase in commercial maintenance revenue. The 11% increase in commercial maintenance revenue was due to an 8 percentage point increase from commercial enrollment during the corresponding maintenance contract term and a 3 percentage point increase from net revenue per maintenance seat. Commercial maintenance revenue represented 98% of maintenance revenue for both the three months ended October 31, 2011 and 2010.

Maintenance revenue increased 9% during the nine months ended October 31, 2011, as compared to the nine months ended October 31, 2010, primarily due to a 9% increase in commercial maintenance revenue. The 9% increase in commercial maintenance revenue was due to a 7 percentage point increase from commercial enrollment during the corresponding maintenance contract term and a 2 percentage point increase from net revenue per maintenance seat. Commercial maintenance revenue represented 98% of maintenance revenue for the both the nine months ended October 31, 2011 and 2010. Total subscription program enrollment at both October 31, 2011 and January 31, 2011 consisted of about 3.1 and 2.9 million users, respectively.

Changes in maintenance revenue lag changes in net billings for maintenance contracts because we recognize the revenue from those contracts ratably over their contract terms. Our maintenance contracts are for a term of predominantly one year, but may be two or three years, or occasionally as long as five year terms. Net maintenance billings increased 18% and 20% during the three and nine months ended October 31, 2011, respectively, as compared to the three and nine months ended October 31, 2010. This increase was due to an increase in maintenance renewals, new multi-year maintenance contracts, and the impact from the upgrade promotions mentioned above in “License and Other Revenue.”

Deferred revenue at October 31, 2011 and January 31, 2011, was $619.9 million and $587.9 million, respectively. Deferred revenue consists primarily of deferred maintenance revenue. To a lesser extent, deferred revenue consists of deferred license and other revenue derived from collaborative project management services, consulting services and deferred license sales.

Backlog related to current software license product orders that had not shipped at the end of the quarter decreased by $5.5 million during the nine months ended October 31, 2011 from $27.5 million at January 31, 2011 to $22.0 million at October 31, 2011. Backlog from current software license product orders that we have not yet shipped consists of orders for currently available licensed software products from customers with approved credit status and may include orders with current ship dates and orders with ship dates beyond the current fiscal period.

Net Revenue by Geographic Area

Net revenue in the Americas geography increased by 12% during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year. This increase in net revenue in the Americas was primarily due to a 53% increase in upgrade revenue, primarily driven by a promotion related to our education solutions suites, and a 9% increase in maintenance revenue. Net revenue in the Americas geography increased by 13% during the nine months ended October 31, 2011, as compared to the same period in the prior fiscal year. This increase was primarily due to a 12% increase in new seat revenue and a 52% increase in upgrade revenue, primarily driven by a promotion related to our education solution suites, in the Americas during the nine months ended October 31, 2011 as compared to the nine months ended October 31, 2010. Maintenance revenue increased 9% during the nine months ended October 31, 2011 as compared to the same period in the prior fiscal year.

Net revenue in the EMEA geography increased by 10%, or 8% on a constant currency basis, during the three months ended October 31, 2011 as compared to the same period in the prior fiscal year. The increase was primarily due to a 15% increase in new seat revenue and a 10% increase in maintenance revenue in the EMEA geography during the three months ended October 31, 2011 as compared to the three months ended October 31, 2010. The increase in our revenue in this geography was led by the United Kingdom, Germany and France. Net revenue in the EMEA geography increased by 10%, or 11% on a constant currency basis, during the nine months ended October 31, 2011 as compared to the same period in the prior fiscal year. The increase was primarily due to a 14% increase in new seat revenue and a 5% increase in maintenance revenue in this geography during the nine months ended October 31, 2011 as compared to the nine months ended October 31, 2010. The increase in our revenue in this geography was led by the Russian Federation, the United Kingdom and Belgium.

 

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Net revenue in the APAC geography increased by 28%, or 19% on a constant currency basis, during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to a 20% increase in new seat revenue and a 21% increase in maintenance revenue. Net revenue expansion in this geography during the three months ended October 31, 2011 was led by Japan, Australia and South Korea. Net revenue in the APAC geography increased by 22%, or 15% on a constant currency basis, during the nine months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to a 19% increase in new seat revenue and 21% increase in maintenance revenue. Net revenue expansion in this geography during the nine months ended October 31, 2011 was led by Japan, Australia and South Korea. Net revenue in the APAC geography during the three and nine months ended October 31, 2011 also benefited from a large transaction with revenue recognized of approximately $11.0 million, which was recorded in our Platform Solutions and Emerging Business segment.

Net revenue in emerging economies increased 15% during the three months ended October 31, 2011 as compared to the same period in the prior fiscal year, primarily due to revenue increases from the Russian Federation, China and India. This growth was a significant factor in our international sales growth during the three months ended October 31, 2011. Revenue from emerging economies represented 16% of total net revenue for both the three months ended October 31, 2011 and 2010. Net revenue in emerging economies increased 17% during the nine months ended October 31, 2011 as compared to the same period in the prior fiscal year, primarily due to revenue from the Russian Federation, India and Mexico. This growth was a significant factor in our international sales growth during the nine months ended October 31, 2011. Revenue from emerging economies represented 16% and 15% of total net revenue during the nine months ended October 31, 2011 and 2010, respectively.

International net revenue represented 71% and 72% of our total net revenue for the three and nine months ended October 31, 2011, respectively, as compared to 70% and 71% during the respective periods of the prior fiscal year. We believe that international revenue will continue to comprise a majority of our total net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue may have an adverse effect on our business in those countries and our overall financial performance. Net revenue from Japan was $65.4 million and $184.3 million for the three and nine months ended October 31, 2011, respectively, or approximately 12% and 11% of our total net revenue, during the three and nine months ended October 31, 2011, respectively. Although we believe the impact of the disasters in Japan in March 2011 on our future financial results will be immaterial, the pace of recovery has created an element of uncertainty on our future financial results. Changes in the value of the U.S. dollar relative to other currencies have significantly affected, and could continue to significantly affect, our financial results for a given period even though we hedge a portion of our current and projected revenue. Additionally, the U.S. debt downgrade and weak global economic conditions that have been characterized by restructuring of sovereign debt, high unemployment, and volatility in the financial markets may impact our future financial results.

Net Revenue by Operating Segment

We have four reportable segments: Platform Solutions and Emerging Business (“PSEB”), Architecture, Engineering and Construction (“AEC”), Manufacturing (“MFG”) and Media and Entertainment (“M&E”). We have no material inter-segment revenue.

Net revenue for PSEB, which includes our Autodesk Design Suite, increased 21% during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to a 17% increase in revenue from our AutoCAD LT products. During the nine months ended October 31, 2011, net revenue for PSEB increased 16% as compared to the same period of the prior fiscal year primarily due to a 13% increase in revenue from our AutoCAD LT products. Net revenue in PSEB during the three and nine months ended October 31, 2011 also benefited from a large transaction in the APAC geography that is mentioned above.

Net revenue for AEC increased 12% during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to a 24% increase in revenue from our Revit family of products, which includes our Autodesk Building Design Suite. During the nine months ended October 31, 2011, net revenue for AEC increased 11% as compared to the same period of the prior fiscal year primarily due to a 19% increase in revenue from our Revit family of products which includes our Autodesk Building Design Suite.

Net revenue for MFG increased 14% during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to a 14% increase in revenue from our Inventor family of products, which includes the Autodesk Product Design Suite. During the nine months ended October 31, 2011, net revenue for MFG increased 16% as compared to the same period of the prior fiscal year primarily due to a 16% increase in revenue from our Inventor family of products, which includes the Autodesk Product Design Suite.

 

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Net revenue for M&E increased 6% during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to a 15% increase in revenue from our Animation product group, which includes our Autodesk Entertainment Creation Suite, offset by a 13% decrease in revenue from Creative Finishing. The increase in Animation revenue was primarily due to a 13% increase in Autodesk Maya related products. During the nine months ended October 31, 2011, net revenue for M&E increased 10% as compared to the same period in the prior fiscal year, primarily due to a 16% increase in revenue from our Animation product group, offset by a 3% decrease in revenue from Creative Finishing. The increase in Animation revenue was primarily due to a 17% increase in revenue from Autodesk Maya related products.

Cost of Revenue and Operating Expenses

Cost of Revenue

 

     Three  Months
Ended

October 31, 2011
    Increase compared  to
prior fiscal year
    Three Months
Ended

October 31, 2010
    Nine Months
Ended

October 31, 2011
    Increase compared  to
prior fiscal year
    Nine Months
Ended

October 31, 2010
 
(in millions)      $          %             $          %        

Cost of revenue:

                  

License and other

   $ 50.5      $ 10.2         25   $ 40.3      $ 138.8      $ 16.8         14   $ 122.0   

Maintenance

     9.1        0.9         11     8.2        32.8        6.6         25     26.2   
  

 

 

   

 

 

      

 

 

   

 

 

   

 

 

      

 

 

 
   $ 59.6      $ 11.1         23   $ 48.5      $ 171.6      $ 23.4         16   $ 148.2   
  

 

 

   

 

 

      

 

 

   

 

 

   

 

 

      

 

 

 

As a percentage of net revenue

     11          10     11          10

Cost of license and other revenue includes labor costs of order fulfillment and costs of fulfilling consulting and training services contracts and collaborative project management services contracts. Cost of license and other revenue also includes stock-based compensation expense, direct material and overhead charges, amortization of purchased technology, professional services fees and royalties. Direct material and overhead charges include the cost of hardware sold (mainly PC-based workstations for Creative Finishing in the M&E segment), costs associated with transferring our software to electronic media, printing of user manuals and packaging materials and shipping and handling costs.

Cost of license and other revenue increased 25% and 14% during the three and nine months ended October 31, 2011, respectively, as compared to the same periods in the prior fiscal year, primarily due to increased support costs and lower margin consulting engagements.

Cost of maintenance revenue includes labor costs of providing product support to our maintenance customers, including rent and occupancy, shipping and handling costs and professional services fees. Cost of maintenance revenue increased 11% and 25% during the three and nine months ended October 31, 2011, respectively, as compared to the same periods in the prior fiscal year, due to an increase in maintenance support headcount and increased annual fulfillment costs related to supplying USB flash drives of our suites products.

Cost of revenue, at least over the near term, is affected by the volume and mix of product sales, mix of physical versus electronic fulfillment, fluctuations in consulting costs, amortization of purchased technology, new customer support offerings, royalty rates for licensed technology embedded in our products and employee stock-based compensation expense. We expect cost of revenue to increase in absolute dollars, but to remain relatively consistent as a percentage of net revenue during the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011.

Marketing and Sales

 

     Three  Months
Ended

October 31, 2011
    Increase compared to
prior fiscal year
    Three  Months
Ended

October 31, 2010
    Nine  Months
Ended

October 31, 2011
    Increase compared to
prior fiscal year
    Nine  Months
Ended

October 31, 2010
 
(in millions)      $          %             $          %        

Marketing and sales

   $ 206.2      $ 21.1         11   $ 185.1      $ 609.1      $ 60.0         11   $ 549.1   

As a percentage of net revenue

     38          39     38          39

Marketing and sales expenses include salaries, bonuses, benefits and stock-based compensation expense for our marketing and sales employees, and the expense of travel, entertainment and training for such personnel, and the costs of programs aimed at increasing revenue, such as advertising, trade shows and expositions, and various sales and promotional programs. Marketing and sales expenses also include labor costs of sales and order processing, sales and dealer commissions, rent and occupancy, and the cost of supplies and equipment. Marketing and sales expenses increased 11% for both the three and nine months ended October 31, 2011, as compared to the same periods in the prior fiscal year, primarily due to higher

 

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employee-related costs related to salaries and fringe benefits primarily associated with increased head count and the reinstatement of merit increases in fiscal 2012. We expect marketing and sales expense to slightly increase in absolute dollars, but to decrease as a percentage of net revenue during the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011.

Research and Development

 

     Three  Months
Ended
October 31, 2011
    Increase compared
to prior fiscal year
    Three  Months
Ended

October 31, 2010
    Nine  Months
Ended

October 31, 2011
    Increase compared to
prior fiscal year
    Nine  Months
Ended

October 31, 2010
 
(in millions)      $        %           $        %      

Research and development

   $ 141.2      $ 18.4         15   $ 122.8      $ 417.0      $ 47.7         13   $ 369.3   

As a percentage of net revenue

     26          26     26          26

Research and development expenses, which are expensed as incurred, consist primarily of salaries, bonuses, benefits and stock-based compensation expense for research and development employees, and the expense of travel, entertainment and training for such personnel, rent and occupancy, professional services such as fees paid to software development firms and independent contractors. Research and development expenses increased 15% and 13% during the three and nine months ended October 31, 2011, respectively, as compared to the same periods in the prior fiscal year, primarily due to an increase in salaries and fringe benefits primarily associated with increased head count and the reinstatement of merit increases in fiscal 2012. We expect research and development expense to increase in absolute dollars and increase as a percentage of net revenue during the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011.

General and Administrative

 

     Three  Months
Ended

October 31, 2011
    Increase compared to
prior fiscal year
    Three  Months
Ended

October 31, 2010
    Nine  Months
Ended

October 31, 2011
    Increase compared to
prior fiscal year
    Nine  Months
Ended

October 31, 2010
 
(in millions)      $      %         $      %    

General and administrative

   $ 51.4      $ 0.3         1   $ 51.1      $ 163.0      $ 14.3         10   $ 148.7   

As a percentage of net revenue

     9          11     10          10

General and administrative expenses include salaries, bonuses, benefits and stock-based compensation expense for our finance, human resources and legal employees, as well as professional fees for legal and accounting services, amortization of acquisition related customer relationships and trade names, expense of travel, entertainment and training, expense of communication and the cost of supplies and equipment. General and administrative expenses increased 1% and 10% during the three and nine months ended October 31, 2011, respectively, as compared to the same periods in the prior fiscal year, primarily due to an increase in amortization of acquisition related customer relationships and trade names and an increase in salaries and fringe benefits primarily associated with increased head count and the reinstatement of merit increases in fiscal 2012. We expect general and administrative expenses to increase in absolute dollars, but to remain relatively consistent as a percentage of net revenue during the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011.

Restructuring Charges

 

     Three  Months
Ended

October 31, 2011
    Decrease
compared to
prior fiscal
year
    Three  Months
Ended

October 31, 2010
    Nine  Months
Ended

October 31, 2011
    Decrease
compared to
prior  fiscal

year
    Nine  Months
Ended

October 31, 2010
 
(in millions)      $      %         $     %    

Restructuring

   $ —        $ —           0   $ —        $ (1.3   $ (10.3     -114   $ 9.0   

As a percentage of net revenue

     0          0     0         1

In connection with our restructuring plans, we recorded a favorable adjustment for changes in previous estimates during the nine months ended October 31, 2011. During the three and nine months ended October 31, 2010, we reduced the number of employees by approximately 20 and 190 positions globally, respectively, and recorded restructuring charges of zero and $9.0 million, respectively, which related to one-time employee termination benefits. See Note 14, “Restructuring Reserve,” in the Notes to the Condensed Consolidated Financial Statements for further discussion.

 

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Interest and Other Income (Expense), Net

The following table sets forth the components of interest and other income (expense), net:

 

     Three Months Ended     Nine Months Ended  
     October 31,     October 31,  
(in millions)    2011      2010     2011      2010  

Interest and investment income, net

   $ 0.5       $ 3.1      $ 3.6       $ 6.7   

Gain/(loss) on foreign currency

     0.3         (1.1     0.2         (11.2

Other income

     0.3         0.5        2.4         3.7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest and other income (expense), net

   $ 1.1       $ 2.5      $ 6.2       $ (0.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest and other income (expense), net, decreased $1.4 million during the three months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to the decrease of $2.6 million in interest and investment income, partially offset by gains on foreign currency. The $0.3 million gain and $1.1 million loss on foreign currency in the three months ended October 31, 2011 and 2010, respectively, is primarily due to the impact of re-measuring foreign currency transactions into the functional currency of the corresponding entity. Interest and other income (expense), net, increased $7.0 million during the nine months ended October 31, 2011, as compared to the same period in the prior fiscal year, primarily due to gains on foreign currency. The $0.2 million gain and the $11.2 million loss on foreign currency in the nine months ended October 31, 2011 and 2010, respectively, is primarily due to the impact of re-measuring foreign currency transactions into the functional currency of the corresponding entity. The amount of the gain (loss) on foreign currency is driven by the volume of foreign currency transactions and the foreign currency exchange rates for the period.

Provision for Income Taxes

We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse.

Our effective tax rate was 20% and 21% during the three and nine months ended October 31, 2011, respectively, compared to 25% and 24% during the three and nine months ended October 31, 2010, respectively. Our effective tax rate decreased during the three months ended October 31, 2011 as compared to the same period in the prior fiscal year primarily due to an increase in discrete tax benefits associated with changes in estimates related to Autodesk’s tax return filings in fiscal 2012 and tax detriment from a California tax rate change and related valuation allowance recorded in fiscal 2011 as well as an increase in tax benefits in fiscal 2012 from foreign earnings taxed at lower rates. Excluding the impact of discrete tax items primarily associated with changes in estimates related to tax return filings and stock-based compensation benefits of $3.3 million and $7.8 million in the three and nine months ended October 31, 2011, respectively, the effective tax rate for both the three and nine months ended October 31, 2011 was 24%, and was lower than the Federal statutory tax rate of 35% primarily due to foreign income taxed at lower rates and research and development credits partially offset by the impact of non-deductible stock-based compensation expense.

Our future effective tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, research credits, state income taxes, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, U.S. Manufacturer’s deduction, closure of statute of limitations or settlement of tax audits, changes in valuation allowances and changes in tax laws including possible U.S. tax law changes that, if enacted, could significantly impact how U.S. multinational companies are taxed on foreign subsidiary earnings. A significant amount of our earnings is generated by our Europe and Asia Pacific subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which U.S. taxes have not previously been provided.

At October 31, 2011, we had net deferred tax assets of $172.9 million. We believe that we will generate sufficient future taxable income in appropriate tax jurisdictions to realize these assets.

Other Financial Information

In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the three and nine months ended October 31, 2011, and 2010, our gross profit, gross margin, income from operations, operating margin, net income and diluted earnings per share on a GAAP and non-GAAP basis were as follows (in millions except for gross margin, operating margin and per share data):

 

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     Three Months Ended     Nine Months Ended  
     October 31, 2011     October 31, 2010     October 31, 2011     October 31, 2010  
     (Unaudited)     (Unaudited)  

Gross profit

   $ 489.0      $ 428.2      $ 1,451.6      $ 1,275.9   

Non-GAAP gross profit

   $ 501.0      $ 437.2      $ 1,482.1      $ 1,301.8   

Gross margin

     89     90     89     90

Non-GAAP gross margin

     91     92     91     91

Income from operations

   $ 90.2      $ 69.2      $ 263.8      $ 199.8   

Non-GAAP income from operations

   $ 135.1      $ 100.3      $ 393.0      $ 312.7   

Operating margin

     16     15     16     14

Non-GAAP operating margin

     25     21     24     22

Net income

   $ 72.8      $ 53.6      $ 213.3      $ 150.4   

Non-GAAP net income

   $ 102.1      $ 75.0      $ 299.3      $ 227.7   

Diluted earnings per share (1)

   $ 0.32      $ 0.23      $ 0.91      $ 0.64   

Non-GAAP diluted earnings per share (1)

   $ 0.44      $ 0.32      $ 1.28      $ 0.97   

 

(1) 

Earnings per share were computed independently for each of the periods presented; therefore the sum of the earnings per share amounts for the quarters may not equal the total for the year.

For our internal budgeting and resource allocation process, we use non-GAAP measures to supplement our condensed consolidated financial statements presented on a GAAP basis. These non-GAAP measures do not include certain items that may have a material impact upon our reported financial results. We use non-GAAP measures in making operating decisions because we believe those measures provide meaningful supplemental information regarding our earning potential. In addition, these non-GAAP financial measures facilitate comparisons to our and our competitors’ historical results and operating guidance. We also use these measures for purposes of determining company-wide incentive compensation.

There are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. The non-GAAP financial measures included above are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. The non-GAAP financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

 

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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures

(In millions except for gross margin, operating margin and per share data):

 

     Three Months Ended     Nine Months Ended  
     October 31,     October 31,  
     2011     2010     2011     2010  
     (Unaudited)     (Unaudited)  

Gross profit

   $ 489.0      $ 428.2      $ 1,451.6      $ 1,275.9   

Stock-based compensation expense

     0.9        0.6        2.8        2.1   

Amortization of purchased intangibles (1)

     11.1        8.4        27.7        23.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP gross profit

   $ 501.0      $ 437.2      $ 1,482.1      $ 1,301.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     89     90     89     90

Stock-based compensation expense

     0     0     0     0

Amortization of purchased intangibles

     2     2     2     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP gross margin

     91     92     91     91
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 90.2      $ 69.2      $ 263.8      $ 199.8   

Stock-based compensation expense

     25.6        17.0        78.8        62.3   

Amortization of purchased intangibles (1)

     19.3        14.1        51.7        41.6   

Restructuring charges

     —          —          (1.3     9.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP income from operations

   $ 135.1      $ 100.3      $ 393.0      $ 312.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     16     15     16     14

Stock-based compensation expense

     5     3     5     4

Amortization of purchased intangibles (1)

     4     3     3     3

Restructuring charges

     0     0     0     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP operating margin

     25     21     24     22
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 72.8      $ 53.6      $ 213.3      $ 150.4   

Stock-based compensation expense

     25.6        17.0        78.8        62.3   

Amortization of purchased intangibles (1)

     19.3        14.1        51.7        41.6   

Restructuring charges

     —          —          (1.3     9.0   

Discrete tax provision items

     (4.2     0.3        (7.4     (1.3

Income tax effect of non-GAAP adjustments

     (11.4     (10.0     (35.8     (34.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net income

   $ 102.1      $ 75.0      $ 299.3      $ 227.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share (2)

   $ 0.32      $ 0.23      $ 0.91      $ 0.64   

Stock-based compensation expense

     0.11        0.07        0.34        0.26   

Amortization of purchased intangibles (1)

     0.08        0.06        0.22        0.18   

Restructuring charges

     —          —          (0.01     0.04   

Discrete tax provision items

     (0.02     —          (0.03     (0.01

Income tax effect of non-GAAP adjustments

     (0.05     (0.04     (0.15     (0.14
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP diluted net income per share (2)

   $ 0.44      $ 0.32      $ 1.28      $ 0.97   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amortization of purchased intangibles includes amortization of purchased developed technology, customer relationships and trade names for acquisitions subsequent to December 2005.

(2) 

Earnings per share were computed independently for each of the periods presented; therefore the sum of the earnings per share amounts for the quarters may not equal the total for the year.

Our non-GAAP financial measures as set forth in the table above exclude the following:

Stock-based compensation expenses. We exclude stock-based compensation expenses from non-GAAP measures primarily because they are non-cash expenses and management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods.

Amortization of purchased intangibles. We incur amortization of acquisition-related purchased intangible assets primarily in connection with acquisitions of certain businesses and technologies. The amortization of purchased intangibles varies depending on the level of acquisition activity and management finds it useful to exclude these variable charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods.

 

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Restructuring charges. These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, and the closure of facilities and cancelation of certain contracts. We exclude these charges because these expenses are not reflective of ongoing financial results in the current period.

Discrete tax items. We exclude the GAAP tax provision, including discrete items, from the non-GAAP measure of income, and include a non-GAAP tax provision based upon the projected annual non-GAAP effective tax rate. Discrete tax items include income tax expenses or benefits that do not relate to ordinary income from continuing operations in the current fiscal year, unusual or infrequently occurring items, or the tax impact of certain stock-based compensation. Examples of discrete tax items include, but are not limited to, certain changes in judgment and changes in estimates of tax matters related to prior fiscal years, certain costs related to business combinations, certain changes in the realizability of deferred tax assets or changes in tax law. Management believes this approach assists investors in understanding the tax provision and the effective tax rate related to ongoing operations.

Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded from the non-GAAP measures relate to the tax impact on the difference between GAAP and non-GAAP costs and expenses, primarily due to stock-based compensation, purchased intangibles and restructuring for GAAP and non-GAAP measures.

Liquidity and Capital Resources

Our primary source of cash is from the sale of licenses to our products. Our primary use of cash is payment of our operating costs which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs. In addition to operating expenses, we also use cash to invest in our growth initiatives, which include acquisitions of products, technology and businesses and to fund our stock repurchase program. See further discussion of these items below.

At October 31, 2011, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1,534.2 million and net accounts receivable of $259.2 million. In addition, at October 31, 2011 we had a line of credit facility that permitted unsecured short-term borrowings of up to $400.0 million that we entered into in May 2011 and replaced our $250.0 million line of credit facility that would have expired in August 2012. During the three and nine months ended October 31, 2011 and 2010, we had no borrowings or repayments under our current or prior line of credit facility. This credit facility is available for working capital and general corporate purposes and expires in May 2016.

Our cash and cash equivalents are held by diversified financial institutions globally. Our primary commercial banking relationship is with Citibank and its global affiliates (“Citibank”). In addition, Citibank is one of the lead lenders and agent in the syndicate of our $400.0 million line of credit.

The increase in our cash, cash equivalents and marketable securities from $1,466.9 million at January 31, 2011 to $1,534.2 million at October 31, 2011 is principally the result of cash generated from operations and to a lesser extent, the proceeds from the issuance of common stock following stock option exercises. These increases to cash, cash equivalents and marketable securities were partially offset by cash used for repurchases of our common stock, business combinations, capital expenditures, including developed technologies, and other investing activities. Cash generated from operations was positively impacted by higher net revenue.

The primary source for net cash provided by operating activities of $398.3 million for the nine months ended October 31, 2011 was net income of $213.3 million increased by the effect of non-cash expenses totaling $164.0 million associated with depreciation and amortization and stock-based compensation. In addition, net cash flow provided by changes in operating assets and liabilities was $55.3 million. The primary source of working capital was an increase in deferred revenue, a decrease in accounts receivable and an increase in accounts payable. Our days sales outstanding in trade receivables was 43 at October 31, 2011 compared to 55 days at January 31, 2011. The days sales outstanding decrease relates primarily to seasonality in our subscription contract renewals; subscription billings are generally higher in the fourth quarter in comparison to the rest of our fiscal year. The primary working capital uses of cash were for the purchase of shares under the Employee Stock Purchase Plan (“ESP Plan”) and payment of the reduction of the accrued expenses primarily related to our fiscal 2011 employee bonus accrual and fourth quarter fiscal 2011 commissions. At October 31, 2011, our short-term investment portfolio had an estimated fair value of $240.3 million and a cost basis of $239.3 million. The portfolio fair value consisted of $127.0 million invested in commercial paper and corporate securities, $50.1 million invested in U.S. government agency securities, $32.7 million invested in mutual funds, $15.4 million invested in U.S. treasury securities, $10.0 million invested in municipal securities, $4.8 million invested in certificates of deposit and time deposits with remaining maturities at the date of purchase greater than 90 days and less than one year and $0.3 million invested in other short-term securities.

 

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At October 31, 2011, $32.7 million of trading securities were invested in a defined set of mutual funds as directed by the participants in our Deferred Compensation Plan (see Note 11, “Deferred Compensation,” in the Notes to Condensed Consolidated Financial Statements for further discussion).

Long-term cash requirements for items other than normal operating expenses are anticipated for the following: stock repurchases; the acquisition of businesses, software products, or technologies complementary to our business; capital expenditures; and funding restructuring costs.

As of October 31, 2011, there have been no material changes in our contractual obligations or commercial commitments compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.

Our cash, cash equivalent and marketable securities balances are concentrated in a few locations around the world, with substantial amounts held outside of the U.S. We believe that such dispersion meets our business and liquidity needs. Certain amounts held outside the U.S. could be repatriated to the U.S. (subject to local law restrictions), but under current U.S. tax law, could be subject to U.S. income taxes less applicable foreign tax credits. We have provided for the U.S. income tax liability on foreign earnings, except for foreign earnings that are considered permanently reinvested outside the U.S. Our intent is that amounts related to foreign earnings permanently reinvested outside the U.S. will remain outside the U.S. and we will meet our U.S. liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.

Our existing cash, cash equivalents and investment balances may decline in fiscal 2012 in the event of a weakening of the global economy or changes in our planned cash outlay. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next 12 months. Our existing credit facility at December 6, 2011 is $400.0 million of which we have no amounts outstanding. This credit facility is available for working capital and general corporate purposes.

Our revenue, earnings, cash flows, receivables and payables are subject to fluctuations due to changes in foreign currency exchange rates. Our risk management strategy utilizes foreign currency contracts to manage our exposure to foreign currency volatility that exists as part of our ongoing business operations. We utilize cash flow hedge contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. In addition, we use balance sheet hedge contracts to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. As of October 31, 2011, we had open cash flow and balance sheet hedge contracts with future settlements within one to twelve months. Contracts were primarily denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars, and Australian dollars. We do not enter into any foreign exchange derivative instruments for trading or speculative purposes. The notional amount of our option and forward contracts was $426.0 million and $401.6 million at October 31, 2011 and January 31, 2011, respectively.

Issuer Purchases of Equity Securities

The purpose of Autodesk’s stock repurchase program is largely to help offset the dilution to net income per share caused by the issuance of stock under our employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders, and has the effect of returning excess cash generated from our business to stockholders. The number of shares acquired and the timing of the purchases are based on several factors, including general market conditions, the volume of employee stock option exercises, stock issuance, the trading price of our common stock, cash on hand and available in the U.S., and company defined trading windows. In December 2007, the Board of Directors approved a plan which authorized the repurchase of 20.0 million shares; at October 31, 2011, all shares have been repurchased under this plan. In December 2010, the Board of Directors approved an additional plan which authorized the repurchase of 20.0 million shares; at October 31, 2011, 3.3 million repurchases have been made under this plan. These plans do not have a fixed expiration date. During the three and nine months ended October 31, 2011, we repurchased 3.5 million and 7.7 million shares of our common stock, respectively. At October 31, 2011, 16.7 million shares remained available for repurchase under the existing repurchase authorization. This program does not have a fixed expiration date. See Note 16, “Common Stock Repurchase Program,” in the Notes to Condensed Consolidated Financial Statements for further discussion.

 

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The following table provides information about the repurchase of common stock in open-market transactions during the quarter ended October 31, 2011:

 

(Shares in thousands)    Total Number of
Shares
Purchased
     Average Price
Paid per  Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)
     Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs (2)
 

August 1—August 31

     1,276.0       $ 26.27         1,276.0         18,966.5   

September 1—September 30

     2,226.5         27.31         2,226.5         16,740.0   

October 1—October 31

     —           —           —           16,740.0   
  

 

 

       

 

 

    

Total

     3,502.5       $ 26.93         3,502.5         16,740.0   
  

 

 

       

 

 

    

 

(1) 

Represents shares purchased in open-market transactions under the stock repurchase plan approved by the Board of Directors.

(2) 

These amounts correspond to the plans approved by the Board of Directors in December 2007 and December 2010 that each authorized the repurchase of 20.0 million shares. These plans do not have a fixed expiration date.

There were no sales of unregistered securities during the three months ended October 31, 2011.

Off-Balance Sheet Arrangements

Other than operating leases, we do not engage in off-balance sheet financing arrangements or have any variable-interest entities. As of October 31, 2011, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Glossary of terms

BIM (Building Information Modeling)—BIM describes a model-based technology linked with a database of project information, and is the process of generating and managing information throughout the life cycle of a building. BIM is used as a digital representation of the building process to facilitate exchange and interoperability of information in digital formats.

Digital prototyping—Digital prototyping allows designers, architects and engineers to analyze, simulate and visualize a design using a digital or virtual model rather than a physical model.

Upgrade—In an upgrade, a customer pays an incremental fee at currently available prices toward the purchase of the latest version of the same product. Upgrades are available only for licenses of software that are three versions prior to the latest version available or newer; the license to the previous version of the product is terminated. A similar exchange and termination of a previous version of a product that is four versions prior to the latest version available or older, is recorded as commercial new revenue. An upgrade also includes a crossgrade where a customer pays an incremental fee at currently available prices toward the purchase of a different product; the license to the previous product is terminated.

Flagship—Autodesk flagship products are our core design products. Flagship includes the following products: Autodesk 3ds Max, AutoCAD, AutoCAD LT, AutoCAD vertical products (such as AutoCAD Architecture and AutoCAD Mechanical), Civil 3D, Maya, Plant 3D and Revit products (standalone).

Suites—Autodesk suites are a combination of products that target a specific user objective (product design, building design, etc.) and support a set of workflows for that objective. Our new design and creation suites include: Autodesk Design Suite, Autodesk Building Design Suite, Autodesk Entertainment Creation Suite, Autodesk Factory Design Suite, Autodesk Infrastructure Design Suite, Autodesk Plant Design Suite and Autodesk Product Design Suite. Our previously established suites include: Autodesk Inventor family suites, Autodesk Revit family suites and educational/academic suites.

New and Adjacent—Autodesk new and adjacent products include Autodesk’s new product offerings as well as products that are not included in flagship or suites. New and adjacent includes the following services and products: Autodesk Alias Design products, Autodesk Consulting, Autodesk Buzzsaw, Autodesk Constructware, Autodesk consumer products, Autodesk Creative Finishing products, Autodesk Moldflow products, Autodesk Navisworks, Autodesk Simulation, Autodesk Vault products and all other products.

 

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Constant currency growth rates—We attempt to represent the changes in the underlying business operations by eliminating fluctuations caused by changes in foreign currency exchange rates as well as eliminating hedge gains or losses recorded within the current and comparative period. Our constant currency methodology removes all hedging gains and losses from the calculation.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency exchange risk

Our revenue, earnings, cash flows, receivables and payables are subject to fluctuations due to changes in foreign currency exchange rates. Our risk management strategy utilizes foreign currency contracts to manage our exposure to foreign currency volatility that exists as part of our ongoing business operations. We utilize cash flow hedge contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. In addition, we use balance sheet hedge contracts to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. As of October 31, 2011 and January 31, 2011, we had open cash flow and balance sheet hedge contracts with future settlements within one to twelve months. Contracts were primarily denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars and Australian dollars. We do not enter into any foreign exchange derivative instruments for trading or speculative purposes. The notional amount of our option and forward contracts was $426.0 million and $401.6 million at October 31, 2011 and January 31, 2011, respectively.

We utilize foreign currency contracts to reduce the exchange rate impact on the net revenue and operating expenses of certain anticipated transactions. A sensitivity analysis performed on our hedging portfolio as of October 31, 2011 indicated that a hypothetical 10% appreciation of the U.S. dollar from its value at October 31, 2011 and January 31, 2011 would increase the fair value of our foreign currency contracts by $36.4 million and $31.6 million, respectively. A hypothetical 10% depreciation of the dollar from its value at October 31, 2011 and January 31, 2011 would decrease the fair value of our foreign currency contracts by $21.5 million and $26.6 million, respectively.

Interest Rate Risk

Interest rate movements affect both the interest income we earn on our short term investments and, to a lesser extent, the market value of certain longer term securities. At October 31, 2011, we had $1,231.6 million of cash equivalents and marketable securities. With an average investment balance for the quarter of approximately $941.0 million, if interest rates were to change by 10%, this would result in a $0.1 million change in annual interest income. Further, at October 31, 2011, we had approximately $308.5 million invested in a longer term portfolio (with remaining maturities that may be less than one year) which, with 50 and 100 basis point moves, would result in market value changes (gains or losses) of $2.1 million and $4.1 million respectively, over a twelve month period.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to Autodesk’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.

Our disclosure controls and procedures include components of our internal control over financial reporting. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Autodesk have been detected.

 

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