ADSK-04-30-2013-10Q


 
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 April 30, 2013
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 May 31, 2013, registrant had outstanding approximately 224.8 million shares of common stock.
 




AUTODESK, INC. FORM 10-Q
TABLE OF CONTENTS

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





PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended April 30,
 
2013
 
2012
Net revenue:
 
 
 
License and other
$
323.5

 
$
355.2

Subscription
246.9

 
233.4

Total net revenue
570.4

 
588.6

Cost of revenue:
 
 
 
Cost of license and other revenue
44.4

 
40.8

Cost of subscription revenue
23.1

 
18.0

Total cost of revenue
67.5

 
58.8

Gross profit
502.9

 
529.8

Operating expenses:
 
 
 
Marketing and sales
208.8

 
223.2

Research and development
150.8

 
152.7

General and administrative
61.5

 
59.9

Restructuring charges, net
0.4

 

Total operating expenses
421.5

 
435.8

Income from operations
81.4

 
94.0

Interest and other (expense) income, net
(8.8
)
 
3.5

Income before income taxes
72.6

 
97.5

Provision for income taxes
(17.0
)
 
(18.6
)
Net income
$
55.6

 
$
78.9

Basic net income per share
$
0.25

 
$
0.35

Diluted net income per share
$
0.24

 
$
0.34

Weighted average shares used in computing basic net income per share
223.8

 
228.1

Weighted average shares used in computing diluted net income per share
229.3

 
234.1


See accompanying Notes to Condensed Consolidated Financial Statements.



3



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

 
Three Months Ended April 30,
 
2013
 
2012
Net income
$
55.6

 
$
78.9

Other comprehensive income (loss), net of reclassifications:
 
 
 
Net gain (loss) on derivative instruments (net of tax effect of $0.2 and $0.6)
9.9

 
(3.4
)
Change in net unrealized gain on available-for-sale securities (net of tax effect of $0.2 and $0.6)
0.2

 
0.9

Net change in cumulative foreign currency translation (loss) gain (net of tax effect of $1.4 and $2.0)
(6.4
)
 
0.3

Total other comprehensive income (loss)
3.7

 
(2.2
)
Total comprehensive income
$
59.3

 
$
76.7


See accompanying Notes to Condensed Consolidated Financial Statements.

4





AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
April 30, 2013
 
January 31, 2013
ASSETS
 
 
 
Current assets:



Cash and cash equivalents
$
1,655.8


$
1,612.2

Marketable securities
432.1


342.1

Accounts receivable, net
285.8


495.1

Deferred income taxes
56.0


42.2

Prepaid expenses and other current assets
81.4


60.8

Total current assets
2,511.1


2,552.4

Marketable securities
392.0


411.1

Computer equipment, software, furniture and leasehold improvements, net
129.0


114.9

Purchased technologies, net
69.2


76.0

Goodwill
895.7


871.5

Deferred income taxes, net
134.3


122.8

Other assets
158.4


159.7


$
4,289.7


$
4,308.4

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:



Accounts payable
$
86.1


$
94.2

Accrued compensation
123.2


189.6

Accrued income taxes
35.4


13.9

Deferred revenue
663.7


647.0

Other accrued liabilities
71.4


99.0

Total current liabilities
979.8


1,043.7

Deferred revenue
187.7


187.6

Long term income taxes payable
193.3


194.2

Long term notes payable, net of discount
745.8

 
745.6

Other liabilities
98.6


94.1

Commitments and contingencies



Stockholders’ equity:



Preferred stock



Common stock and additional paid-in capital
1,499.5


1,449.8

Accumulated other comprehensive loss
(2.0
)

(5.7
)
Retained earnings
587.0


599.1

Total stockholders’ equity
2,084.5


2,043.2


$
4,289.7


$
4,308.4


See accompanying Notes to Condensed Consolidated Financial Statements.


5



AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Three Months Ended April 30,
 
2013
 
2012
Operating activities:



Net income
$
55.6


$
78.9

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



Depreciation, amortization and accretion
33.1


29.2

Stock-based compensation expense
33.5


33.4

Excess tax benefits from stock-based compensation
(9.0
)

(9.9
)
Restructuring charges, net
0.4



Other operating activities
6.7


(1.1
)
Changes in operating assets and liabilities, net of business combinations
103.8


8.8

Net cash provided by operating activities
224.1


139.3

Investing activities:



Purchases of marketable securities
(264.6
)

(447.8
)
Sales of marketable securities
128.1


48.8

Maturities of marketable securities
68.9


128.5

Capital expenditures
(25.8
)

(11.5
)
Acquisitions, net of cash acquired
(34.7
)


Other investing activities
(3.6
)

(5.0
)
Net cash used in investing activities
(131.7
)

(287.0
)
Financing activities:



Proceeds from issuance of common stock, net of issuance costs
70.0


153.0

Repurchases of common stock
(129.2
)

(99.2
)
Excess tax benefits from stock-based compensation
9.0


9.9

Net cash (used in) provide by financing activities
(50.2
)

63.7

Effect of exchange rate changes on cash and cash equivalents
1.4


1.6

Net increase (decrease) in cash and cash equivalents
43.6


(82.4
)
Cash and cash equivalents at beginning of fiscal year
1,612.2


1,156.9

Cash and cash equivalents at end of period
$
1,655.8


$
1,074.5


See accompanying Notes to Condensed Consolidated Financial Statements.


6



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

The accompanying unaudited Condensed Consolidated Financial Statements of Autodesk, Inc. (“Autodesk” or the “Company”) as of April 30, 2013, and for the three months ended April 30, 2013, 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 months ended April 30, 2013 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2014, 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, 2013, filed on March 18, 2013.

Reclassifications

During the first quarter of fiscal 2014, Autodesk combined maintenance revenue and cloud services offering-related revenue into one category named "Subscription." As a result, revenue and cost of revenue related to cloud service offerings previously reflected in "License and other revenue" and "Cost of license and other revenue" were reclassified to "Subscription revenue" and "Cost of subscription revenue." These revenues and expenses have been reclassified in the Consolidated Statements of Operations for the three months ended April 30, 2012 to conform to the current period presentation as follows:


 
Three Months Ended
 
 
April 30, 2012
Reclassifications within revenue:
 
 
(Decrease) to license and other revenue
 
$
(5.8
)
Increase to subscription revenue
 
5.8

Reclassifications within cost of revenue:
 
 
(Decrease) to cost of license and other revenue
 
$
(6.3
)
Increase to cost of subscription revenue
 
6.3


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 three months ended April 30, 2013, that are of significance, or potential significance, to the Company.

Accounting Standards Adopted in the Three Months Ended April 30, 2013

Effective February 1, 2013, Autodesk adopted FASB's Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  This ASU requires additional disclosure about the changes in the components of accumulated other comprehensive income, including amounts reclassified and amounts due to current period other comprehensive income. The adoption of this standard did not impact the Company's financial condition, results of operations or cash flows.

Effective February 1, 2013, Autodesk adopted FASB's ASU 2011-11 and ASU 2013-01 regarding ASC Topic 210 "Balance Sheet: Disclosure about Offsetting Assets and Liabilities." This ASU requires that entities disclose additional information about offsetting and related arrangements to enable users of the financial statements to understand the effect of those arrangements on the financial position. The adoption of this standard did not impact the Company's financial condition, results of operations or cash flows.

7




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”). Citibank, N.A., an affiliate of Citibank, is one of the lead lenders and an 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.

Total sales to the distributor Tech Data Corporation, and its global affiliates (“Tech Data”), accounted for 25% of Autodesk’s total net revenue for the three months ended April 30, 2013 and 22% of Autodesk's total net revenue for the three months ended April 30, 2012. The majority of the net revenue from sales to Tech Data relates to Autodesk’s Platform Solutions and Emerging Business ("PSEB") segment and is for sales made outside of the United States. In addition, Tech Data accounted for 24% and 23% of trade accounts receivable at April 30, 2013 and January 31, 2013, respectively.


8



4. Financial Instruments

The following tables summarize the Company's financial instruments' amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category as of April 30, 2013 and January 31, 2013:
 
 
 
 
April 30, 2013
 
 
 
Amortized Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit and time deposits
$
313.6

 
$

 
$

 
$
313.6

 
$
32.2

 
$
281.4

 
$

 
Commercial paper
270.1

 

 

 
270.1

 

 
270.1

 

 
Municipal securities
7.4

 

 

 
7.4

 
7.4

 

 

 
Money market funds
428.2

 

 

 
428.2

 

 
428.2

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities
210.5

 
0.1

 

 
210.6

 
56.9

 
153.7

 

 
 
Certificates of deposit and time deposits
14.9

 

 

 
14.9

 
4.9

 
10.0

 

 
 
U.S. treasury securities
71.2

 

 

 
71.2

 
71.2

 

 

 
 
U.S. government agency securities
73.9

 

 

 
73.9

 
73.9

 

 

 
 
Sovereign debt
1.0

 

 

 
1.0

 

 
1.0

 

 
 
Municipal securities
21.8

 

 

 
21.8

 
21.8

 

 

 
 
Other
0.3

 

 

 
0.3

 
0.3

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
33.3

 
5.1

 

 
38.4

 
38.4

 

 

 
Long-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
178.8

 
1.4

 

 
180.2

 
180.2

 

 

 
 
U.S. treasury securities
120.1

 
0.2

 

 
120.3

 
120.3

 

 

 
 
U.S. government agency securities
45.5

 
0.2

 

 
45.7

 
45.7

 

 

 
 
Municipal securities
44.5

 
0.3

 

 
44.8

 
44.8

 

 

 
 
Sovereign debt
1.0

 

 

 
1.0

 

 
1.0

 

Convertible debt securities (2)
21.1

 
2.4

 
(2.9
)
 
20.6

 

 

 
20.6

Derivative contracts (3)
11.0

 
9.9

 
(3.4
)
 
17.5

 

 
8.0

 
9.5

 
 
Total
$
1,868.2

 
$
19.6

 
$
(6.3
)
 
$
1,881.5

 
$
698.0

 
$
1,153.4

 
$
30.1

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

9



 
 
 
 
January 31, 2013
 
 
 
Amortized Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit and time deposits
$
392.4

 
$

 
$

 
$
392.4

 
$
17.2

 
$
375.2

 
$

 
Corporate bond
1.8

 

 

 
1.8

 
1.8

 

 

 
Commercial paper
263.3

 

 

 
263.3

 

 
263.3

 

 
Money market funds
596.3

 

 

 
596.3

 

 
596.3

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities
122.9

 
0.1

 

 
123.0

 
40.4

 
82.6

 

 
 
Certificates of deposit and time deposits
15.1

 

 

 
15.1

 
10.0

 
5.1

 

 
 
U.S. treasury securities
83.3

 

 

 
83.3

 
83.3

 

 

 
 
U.S. government agency securities
79.5

 

 

 
79.5

 
79.5

 

 

 
 
Sovereign debt
1.0

 

 

 
1.0

 

 
1.0

 

 
 
Municipal securities
4.6

 

 

 
4.6

 
4.6

 

 

 
 
Other
0.3

 

 

 
0.3

 
0.3

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
31.1

 
4.2

 

 
35.3

 
35.3

 

 

 
Long-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
172.1

 
1.4

 

 
173.5

 
173.5

 

 

 
 
U.S. treasury securities
145.2

 
0.1

 

 
145.3

 
145.3

 

 

 
 
U.S. government agency securities
50.8

 
0.2

 

 
51.0

 
51.0

 

 

 
 
Municipal securities
36.0

 
0.1

 

 
36.1

 
36.1

 

 

 
 
Sovereign debt
1.0

 

 

 
1.0

 

 
1.0

 

 
 
Taxable auction-rate securities
4.2

 

 

 
4.2

 

 

 
4.2

Convertible debt securities (2)
18.1

 
1.6

 
(2.2
)
 
17.5

 

 

 
17.5

Derivative contracts (3)
10.2

 
9.2

 
(5.9
)
 
13.5

 

 
2.8

 
10.7

 
 
Total
$
2,029.2

 
$
16.9

 
$
(8.1
)
 
$
2,038.0

 
$
678.3

 
$
1,327.3

 
$
32.4

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

Autodesk applies fair value accounting for certain financial assets and liabilities, which consist of cash equivalents, marketable securities and other financial instruments, on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and (Level 3) unobservable inputs for which there is little or no market data, which require Autodesk to develop its own assumptions. When determining fair value, Autodesk uses observable market

10



data and relies on unobservable inputs only when observable market data is not available. There have been no transfers between fair value measurement levels during the three months ended April 30, 2013.

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

A reconciliation of the change in Autodesk’s Level 3 items for the three months ended April 30, 2013 was as follows:

 
Fair Value Measurements Using
Significant Unobservable Inputs
 
(Level 3)
 
 
Derivative Contracts
 
Convertible Debt Securities
 
Taxable
Auction-Rate
Securities
 
Total
Balance at January 31, 2013
 
$
10.7

 
$
17.5

 
$
4.2

 
$
32.4

Purchases
 
0.9

 
2.6

 

 
3.5

Settlements
 

 

 
(4.0
)
 
(4.0
)
Net realized losses
 

 

 
(0.2
)
 
(0.2
)
Net unrealized (losses) gains
 
(2.1
)
 
0.5

 

 
(1.6
)
Balance at April 30, 2013
 
$
9.5

 
$
20.6

 
$

 
$
30.1


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

 
April 30, 2013
 
Cost
 
Fair Value
Due in 1 year
$
393.6

 
$
393.7

Due in 1 year through 5 years
411.0

 
412.6

Due in 5 years through 10 years

 

Due after 10 years

 

Total
$
804.6

 
$
806.3


As of April 30, 2013 and January 31, 2013, Autodesk did not have any securities in a continuous unrealized loss position for greater than twelve months.

Autodesk also has direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If Autodesk determines that an other-than-temporary impairment has occurred, Autodesk writes down the investment to its fair value. Autodesk estimates fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. During the three months ended April 30, 2013 Autodesk recorded no other-than-temporary impairment on its privately held equity investments.

The sale or settlement of certain equity investments during the three months ended April 30, 2013 and 2012 resulted in a loss of $0.2 million. The loss was recorded in “Interest and other (expense) income, net” on the Company's Condensed Consolidated Statement of Operations. The sales or redemptions of “available-for-sale securities” in the three months periods ended April 30, 2012 resulted in no gains or losses.

Proceeds from the sale and maturity of marketable securities for the three months ended April 30, 2013 and 2012 were $197.0 million and $177.3 million, respectively.



11



Derivative Financial Instruments

Under its risk management strategy, Autodesk uses derivative instruments to manage its short-term exposures to fluctuations in foreign currency exchange rates which exist as part of ongoing business operations. Autodesk's general practice is to hedge a 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 ongoing assessment of counterparty risk, the Company will adjust its exposure to various counterparties. Autodesk generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty.  However, Autodesk does not have any master netting arrangements in place with collateral features.

Foreign currency contracts designated as cash flow hedges

Autodesk 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 monthly 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 loss” to “Interest and other (expense) income, net” in the Company's Condensed Consolidated Financial Statements at that time.

The net notional amounts of these contracts are presented net settled and were $354.6 million at April 30, 2013 and $359.8 million at January 31, 2013. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The majority of the net gain of $12.7 million remaining in “Accumulated other comprehensive loss” as of April 30, 2013 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. These forward contracts are marked-to-market on a monthly basis with gains and losses recognized as “Interest and other (expense) income, net.” These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivative instruments are intended to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables. The net notional amounts of these foreign currency contracts are presented net settled and were $44.4 million at April 30, 2013 and $78.4 million at January 31, 2013.

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


12



Fair Value of Derivative Instruments

The fair value of derivative instruments in Autodesk’s Condensed Consolidated Balance Sheets were as follows as of April 30, 2013 and January 31, 2013:

 
Balance Sheet Location
 
Fair Value at
 
April 30, 2013
 
January 31, 2013
Derivative Assets
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Prepaid expenses and other current assets (1)
 
$
8.7

 
$
6.7

Derivatives not designated as hedging instruments
Other assets
 
9.5

 
10.7

Total derivative assets
 
 
$
18.2

 
$
17.4

Derivative Liabilities
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Other accrued liabilities (2)
 
$
0.7

 
$
3.9

Total derivative liabilities
 
 
$
0.7

 
$
3.9

____________________ 
(1)
Considering Autodesk's master netting arrangements, these contracts are presented net settled. The gross balance is $10.8 million and $8.2 million at April 30, 2013 and January 31, 2013, respectively.
(2)
Considering Autodesk's master netting arrangements, these contracts are presented net settled. The gross balance is $2.8 million and $5.4 million at April 30, 2013 and January 31, 2013, respectively.

The effects of derivatives designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three months ended April 30, 2013 and 2012, respectively (amounts presented include any income tax effects):

 
Foreign Currency 
Contracts
 
Three Months Ended April 30,
 
2013
 
2012
Amount of gain recognized in accumulated other comprehensive income on derivatives (effective portion)
$
13.6

 
$
1.5

Amount and location of gain (loss) reclassified from accumulated other comprehensive income into income (effective portion)
 
 
 
Net revenue
$
4.3

 
$
6.3

Operating expenses
(0.5
)
 
(1.5
)
Total
$
3.8

 
$
4.8

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


The effects of derivatives not designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three months ended April 30, 2013 and 2012, respectively (amounts presented include any income tax effects):

 
Three Months Ended April 30,
 
2013
 
2012
Amount and location of gain recognized in income on derivatives
 
 
 
Interest and other (expense) income, net
$
1.5

 
$
2.1



13



5. Stock-based Compensation Expense

Stock Plans

As of April 30, 2013, 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 2012 Employee Stock Plan (“2012 Employee Plan”), which is available only to employees, and the Autodesk 2012 Outside Directors’ Plan (“2012 Directors' Plan”), which is available only to non-employee directors. Additionally, there are eight expired or terminated plans with options outstanding. 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.

The 2012 Employee Plan was approved by Autodesk's stockholders and became effective in January 2012. The 2012 Employee Plan reserves up to 21.2 million shares which includes 15.2 million shares reserved upon the effectiveness of the 2012 Employee Plan as well as up to 6.0 million shares forfeited under certain prior employee stock plans during the life of the 2012 Employee Plan. The 2012 Employee Plan permits the grant of stock options, restricted stock units and restricted stock awards. Each restricted stock unit or restricted stock award granted will be counted against the shares authorized for issuance under the 2012 Employee Plan as 1.79 shares. If a granted option, restricted stock unit or restricted stock award expires or becomes unexercisable for any reason, the unpurchased or forfeited shares that were granted may be returned to the 2012 Employee Plan and may become available for future grant under the 2012 Employee Plan. As of April 30, 2013, 9.0 million shares subject to options and restricted stock units have been granted under the 2012 Employee Plan. Options and restricted stock units that were granted under the 2012 Stock Plan vest over periods ranging from immediately upon grant to over a three-year period and options expire 10 years from the date of grant. The 2012 Employee Plan will expire on June 30, 2022. At April 30, 2013, 10.3 million shares were available for future issuance under the 2012 Employee Plan.

The 2012 Directors' Plan was approved by Autodesk's stockholders in January 2012. The 2012 Directors' Plan permits the grant of stock options, restricted stock units and restricted stock awards to non-employee members of Autodesk’s Board of Directors. Each restricted stock unit or restricted stock award granted will be counted against the shares authorized for issuance under the 2012 Directors' Plan as 2.11 shares. As of April 30, 2013, 0.2 million restricted stock units have been granted under the 2012 Directors' Plan. Restricted stock units that were granted under the 2012 Directors' Plan vest over one to three years from the date of grant. The 2012 Directors' Plan reserved 2.6 million shares of Autodesk common stock. The 2012 Directors' Plan will expire on June 30, 2022. At April 30, 2013, 2.4 million shares were available for future issuance under the 2012 Directors' Plan.

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

Stock Options:

A summary of stock option activity for the three months ended April 30, 2013 is as follows:
 
 
Number of
Shares
 
Weighted average exercise price per share
 
Weighted
average remaining contractual term
 
Aggregate Intrinsic Value (3)
 
(in millions)
 
 
 
(in years)
 
(in millions)
Options outstanding at January 31, 2013
19.0

 
$
32.69

 
 
 
 
Granted (1)

 

 
 
 
 
Exercised
(2.0
)
 
23.46

 
 
 
 
Canceled
(0.3
)
 
40.21

 
 
 
 
Options outstanding at April 30, 2013
16.7

 
$
33.66

 
3.6
 
$
126.5

Options vested and exercisable at April 30, 2013
14.3

 
$
32.96

 
3.1
 
$
119.3

Options vested as of April 30, 2013 and expected to vest thereafter (2)
16.6

 
$
33.64

 
3.6
 
$
126.3

Options available for grant at April 30, 2013
12.7

 
 
 
 
 
 
 _______________
(1)
Autodesk did not grant stock options in the three months ended April 30, 2013.
(2)
Options expected to vest reflect an estimated forfeiture rate.
(3)
Represents the total pre-tax intrinsic value, based on Autodesk’s closing stock price of $39.38 per share as of April 30, 2013, which would have been received by the option holders had all option holders exercised their options as of that date.


14



As of April 30, 2013, total compensation cost of $27.0 million related to non-vested options is expected to be recognized over a weighted average period of 1.2 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 months ended April 30, 2013, and 2012.
 
 
Three Months Ended
 
April 30, 2013
 
April 30, 2012
Pre-tax intrinsic value of options exercised (1)
$
32.8

 
$
60.3

Weighted average grant date fair value per share of stock options granted (2) (3)
N/A

 
$
13.43

 _______________
(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.
(3)
Autodesk did not grant stock options in the three months ended April 30, 2013.

The following table summarizes information about options outstanding and exercisable at April 30, 2013:

 
Options Vested and 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$2.28 - $28.56
3.3

 
 
 
$
15.99

 
 
 
3.5

 
 
 
$
16.62

 
 
$28.57 - $31.22
2.9

 
 
 
29.53

 
 
 
3.4

 
 
 
29.54

 
 
$31.23 - $38.55
2.3

 
 
 
33.79

 
 
 
2.5

 
 
 
34.03

 
 
$38.56 - $41.62
2.2

 
 
 
41.62

 
 
 
3.3

 
 
 
41.62

 
 
$41.63 - $49.80
3.6

 
 
 
45.52

 
 
 
4.0

 
 
 
45.38

 
 
 
14.3

 
3.1
 
$
32.96

 
$
119.3

 
16.7

 
3.6
 
$
33.66

 
$
126.5

 _______________
(1)
Represents the total pre-tax intrinsic value, based on Autodesk’s closing stock price of $39.38 per share as of April 30, 2013, 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 2022.


15



Restricted Stock:

A summary of restricted stock unit and restricted stock award activity for the three months ended April 30, 2013 is as follows:
 
 
Unreleased
Restricted
Stock
 
Weighted
average grant
date fair value
per share
 
(in thousands)
 
 
Unreleased restricted stock at January 31, 2013
5,020.8

 
$
33.89

Granted
1,078.0

 
41.58

Released
(714.5
)
 
35.66

Canceled
(180.0
)
 
35.31

        Performance Adjustment (1)
(14.0
)
 
35.94

Unreleased restricted stock at April 30, 2013
5,190.3

 
$
35.27

 _______________
(1)
Based on Autodesk financial results for the performance period, the fiscal 2013 performance stock units were earned at 92.3% of the target award. The fiscal 2013 performance stock units will pay out at 92.3% percent of the target award; however, the vesting of the performance stock units is subject to the holders satisfying the remaining service condition of the awards.

During the three months ended April 30, 2013, Autodesk granted 0.5 million restricted stock units. 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 $16.0 million during the three months ended April 30, 2013. Autodesk recorded stock-based compensation expense related to restricted stock units of $10.8 million during the three months ended April 30, 2012. As of April 30, 2013, total compensation cost not yet recognized of $97.5 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 1.8 years. At April 30, 2013, the number of restricted stock units granted but unreleased was 4.4 million.

During the three months ended April 30, 2013, Autodesk granted 0.5 million performance restricted stock units ("PSUs") for which the ultimate number of shares earned is determined based on the achievement of performance criteria at the end of the stated performance period. The performance criteria is based upon annual revenue and non-GAAP operating margin goals adopted by the Compensation and Human Resource Committee (the “Annual Financial Results”), as well as total stockholder return compared against the S&P Computer Software Select Index (“Relative TSR”). Each PSU covers a three year period:

Up to one third of the PSU may vest following year one depending upon the achievement of Annual Financial Results for year one as well as 1 year Relative TSR (covering year one).

Up to one third of the PSU may vest following year two depending upon the achievement of Annual Financial Results for year two as well as 2 year Relative TSR (covering years one and two).

Up to one third of the PSU may vest following year three depending upon the achievement of Annual Financial Results for year three as well as 3 year Relative TSR (covering years one, two and three).

PSUs are not considered outstanding stock at the time of grant, as the holders of these units are not entitled to any of the rights of a stockholder, including voting rights. Autodesk has determined the grant-date fair value for these awards using a Monte Carlo simulation model since the awards are subject to a market condition. The fair value of the PSUs is expensed using the straight-line method over the vesting period. Autodesk recorded stock-based compensation expense related to PSUs of $2.7 million and $1.2 million for the three months ended April 30, 2013 and 2012, respectively. As of April 30, 2013, total compensation cost not yet recognized of $11.1 million related to non-vested performance restricted stock units, is expected to be recognized over a weighted average period of 1.7 years. At April 30, 2013, the number of PSUs granted but not vested was 0.8 million.


16



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 April 30, 2013, a total of 34.7 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% 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 1.5 million shares under the ESP Plan during the three months ended April 30, 2013 with an average price of $22.32 per share. During the three months ended April 30, 2012, Autodesk issued 1.6 million shares under the ESP Plan, at average prices of $21.63 per share, respectively. The weighted average grant date fair value of awards granted under the ESP Plan during the three months ended April 30, 2013, calculated as of the award grant date using the Black-Scholes-Merton option pricing model, was $11.84 per share. The weighted average grant date fair value of awards granted under the ESP Plan during the three months ended April 30, 2012, calculated as of the award grant date using the Black-Scholes-Merton option pricing model, was $14.00 per share.

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the three months ended April 30, 2013 and 2012, respectively, as follows:
 
 
Three Months Ended April 30, 2013
 
Three Months Ended April 30, 2012
Cost of license and other revenue
$
0.9

 
$
0.9

Cost of subscription
0.6

 
0.4

Marketing and sales
14.1

 
14.6

Research and development
10.9

 
11.1

General and administrative
7.0

 
6.4

Stock-based compensation expense related to stock awards and ESP Plan purchases
33.5

 
33.4

Tax benefit
(9.3
)
 
(8.7
)
Stock-based compensation expense related to stock awards and ESP Plan purchases, net of tax
$
24.2

 
$
24.7


Stock-based Compensation Expense Assumptions

Autodesk determines the grant-date fair value of our share-based payment awards using a Black-Scholes model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case we use a binomial-lattice model (e.g., Monte Carlo simulation model). The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. Autodesk uses the following assumptions to estimate the fair value of stock-based awards:
 
 
Three Months Ended April 30, 2013
 
Three Months Ended April 30, 2012
 
Stock Option (1)
 
Performance Stock Unit
 
ESP Plan
 
Stock Option
 
Performance Stock Unit (2)
 
ESP Plan
Range of expected volatilities
N/A
 
34%
 
27 - 36%
 
44 - 45%
 
N/A
 
41 - 43%
Range of expected lives (in years)
N/A
 
N/A
 
0.5 - 2.0
 
3.6 - 4.6
 
N/A
 
0.5 - 2.0
Expected dividends
N/A
 
—%
 
—%
 
—%
 
N/A
 
—%
Range of risk-free interest rates
N/A
 
0.1%
 
0.1 - 0.3%
 
0.5 - 0.8%
 
N/A
 
0.1 - 0.3%
Expected forfeitures
N/A
 
N/A
 
7.7%
 
7.8%
 
N/A
 
7.8%
 _______________
(1)
Autodesk did not grant stock options in the three months ended April 30, 2013.
(2)
Autodesk did not grant PSUs in the three months ended April 30, 2012 that were subject to market conditions.


17



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. The expected volatility for PSUs subject to market conditions includes the expected volatility of Autodesk's peer companies within the S&P computer software select index.

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 in the foreseeable future, any cash dividends. Consequently, an expected dividend yield of zero is used in the Black-Scholes-Merton option pricing model and the Monte Carlo simulation model.

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

Autodesk recognizes expense only for the stock-based awards that 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.

6. Income Tax

Autodesk’s effective tax rate was 23% during the three months ended April 30, 2013 compared to 19% during the three months ended April 30, 2012. Autodesk's effective tax rate increased 4% during the three months ended April 30, 2013 as compared to the same period in the prior fiscal year primarily due to discrete tax benefits from closure of the statute of limitations during the first quarter of fiscal 2013 and lower tax benefits related to stock based compensation in the first quarter of fiscal 2014, partially offset by tax benefits from the reinstated federal research credit. Excluding the impact of discrete tax items, the effective tax rate for the three months ended April 30, 2013 was 24%, and was lower than the Federal statutory tax rate of 35% primarily due to foreign income taxed at lower rates partially offset by the impact of non-deductible stock based compensation expense.

As of April 30, 2013, the Company had $214.7 million of gross unrecognized tax benefits, excluding interest, of which approximately $205.4 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 April 30, 2013, Autodesk had net deferred tax assets of $190.3 million. The Company believes that it will generate sufficient future taxable income in appropriate tax jurisdictions to realize these assets.

7.    Acquisitions

During the three months ended April 30, 2013, Autodesk completed three business combinations for total cash consideration of approximately $35.0 million. The results of operations for the following acquisitions are included in the accompanying Condensed Consolidated Statement of Operations since their respective acquisition dates. Pro forma results of operations have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to Autodesk’s Condensed Consolidated Financial Statements.

Autodesk recorded 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 transferred over the aggregate fair values as goodwill.


18



The following table summarizes the fair value of the assets acquired and liabilities assumed by major class for the business combinations and technology acquisitions completed during the three months ended April 30, 2013:
Developed technologies
 
$
4.3

Customer relationships
 
2.0

Trade name
 
0.5

Goodwill
 
27.3

Deferred tax asset
 
0.7

Net tangible assets
 
0.2

Total
 
$
35.0


8. Other Intangible Assets, Net

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

 
April 30, 2013
 
January 31, 2013
Purchased technologies, at cost
$
435.0

 
$
431.0

Customer relationships, trade names, patents, user list, at cost (1)
260.5

 
259.5

 
695.5

 
690.5

Less: Accumulated amortization
(566.8
)
 
(546.3
)
Other intangible assets, net
$
128.7

 
$
144.2

_______________ 
(1)
Included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets. Customer relationships and trade names include the effects of foreign currency translation.

9. Goodwill

The change in the carrying amount of goodwill during the three months ended April 30, 2013, is as follows:
 
 
Platform
Solutions and
Emerging
Business
 
Architecture,
Engineering
and
Construction
 
Manufacturing
 
Media and
Entertainment
 
Total
Balances as of January 31, 2013
 
 
 
 
 
 
 
 
 
Goodwill
$
129.5

 
$
310.3

 
$
389.9

 
$
191.0

 
$
1,020.7

Accumulated impairment losses

 

 

 
(149.2
)
 
(149.2
)
 
129.5

 
310.3

 
389.9

 
41.8

 
871.5

Addition arising from other acquisitions

 
17.1

 
10.2

 

 
27.3

Effect of foreign currency translation and purchase accounting adjustments
0.5

 
(1.4
)
 
(2.2
)
 

 
(3.1
)
Balance as of April 30, 2013
 
 
 
 
 
 
 
 
 
Goodwill
130.0

 
326.0


397.9


191.0


1,044.9

Accumulated impairment losses

 

 

 
(149.2
)
 
(149.2
)
 
$
130.0

 
$
326.0

 
$
397.9

 
$
41.8

 
$
895.7


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. For purposes of the goodwill impairment test, a reporting unit is an operating segment or one level below. Autodesk's operating segments are aligned with the management principles of Autodesk's business.


19



When assessing goodwill for impairment, Autodesk first assesses 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. Qualitative factors considered in this assessment include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing a two-step quantitative impairment test is unnecessary. If a two-step quantitative impairment test is necessary, Autodesk uses discounted cash flow models which include assumptions regarding projected cash flows. Variances in these assumptions could have a significant impact on our 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. As changes in business conditions and our assumptions occur, Autodesk may be required to record impairment charges. 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.

10. Deferred Compensation

At April 30, 2013, Autodesk had marketable securities totaling $824.1 million, of which $38.4 million related to investments in debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability was $38.4 million at April 30, 2013, of which $4.1 million was classified as current and $34.3 million was classified as non-current liabilities. The value of debt and equity securities held in the rabbi trust at January 31, 2013 was $35.3 million. The total related deferred compensation liability at January 31, 2013 was $35.3 million, of which $3.9 million was classified as current and $31.4 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.

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

Computer equipment, software, furniture, leasehold improvements and the related accumulated depreciation were as follows:
 
 
April 30, 2013
 
January 31, 2013
Computer software, at cost
$
96.2

 
$
95.1

Computer hardware, at cost
156.2

 
152.3

Leasehold improvements, land and buildings, at cost
169.3

 
152.4

Furniture and equipment, at cost
48.2

 
46.0

 
469.9

 
445.8

Less: Accumulated depreciation
(340.9
)
 
(330.9
)
Computer software, hardware, leasehold improvements, furniture
and equipment, net
$
129.0

 
$
114.9


12. Borrowing Arrangements

In December 2012, Autodesk issued $400.0 million aggregate principal amount of 1.95% senior notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% senior notes due December 15, 2022, (collectively, the "Senior Notes"). Autodesk received net proceeds of $739.3 million from issuance of the Senior Notes, net of a discount of $4.5 million and issuance costs of $6.1 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the Senior Notes using the effective interest method. The proceeds of the Senior Notes are available for general corporate purposes. Autodesk may redeem the Senior Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Autodesk may be required to repurchase the Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes contain restrictive covenants that limit our ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of our assets, subject to significant qualifications and exceptions. Based on quoted market prices, the fair value of the Senior Notes was approximately $759.1 million as of April 30, 2013.

20




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 Citibank, N.A., an affiliate of Citibank, which is one of the lead lenders and an agent. At April 30, 2013, Autodesk had no outstanding borrowings on this line of credit. This facility expires in May 2016. See Note 19, "Subsequent Events," for additional information about our credit facility.

13. Restructuring

During the third quarter of fiscal 2013, the Board of Directors of the Company approved a world-wide restructuring plan in line with the Company's strategy, including its continuing shift to cloud and mobile computing. The plan included a reduction of approximately 500 positions and the consolidation of eight leased facilities with a total cost of up to $52.0 million ("Fiscal 2013 Plan"). During the three months ended April 30, 2013, Autodesk recorded restructuring charges of $0.4 million. Of this amount, $0.3 million was recorded for one-time termination benefits and other costs and $0.1 million was recorded for facilities-related costs. The one-time termination benefits have been substantially paid as of January 31, 2013. Autodesk expects to pay the facility related liabilities through the fourth quarter of fiscal 2019.

The following table sets forth the restructuring activities during the three months ended April 30, 2013.

 
Balance at January 31, 2013
 
Additions
 
Payments
 
Adjustments(1)
 
Balances at
April 30, 2013
Fiscal 2013 Plan
 
 
 
 
 
 
 
 
 
Employee termination costs
$
4.5

 
$
0.4

 
$
(4.6
)
 
$
(0.1
)
 
$
0.2

Lease termination and asset costs
2.8

 

 
(0.6
)
 
0.1

 
2.3

Total
$
7.3

 
$
0.4

 
$
(5.2
)
 
$

 
$
2.5

Current portion(2)
$
5.8

 
 
 
 
 
 
 
$
1.2

Non-current portion(2)
1.5

 
 
 
 
 
 
 
1.3

Total
$
7.3

 
 
 
 
 
 
 
$
2.5

____________________
(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.

14. Commitments and Contingencies

Guarantees and Indemnifications

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

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

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

21



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.

15. Common Stock Repurchase Program

Autodesk has a stock repurchase program that is used to offset dilution from the issuance of stock under the Company’s employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders, which has the effect of returning excess cash generated from the Company’s business to stockholders. During the three months ended April 30, 2013, Autodesk repurchased and retired 3.2 million shares at an average repurchase price of $40.18 per share. Common stock and additional paid-in capital and retained earnings were reduced by $61.5 million and $67.7 million, respectively, during the three months ended April 30, 2013.

At April 30, 2013, 29.0 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. During the three months ended April 30, 2013, Autodesk repurchased its common stock through open market purchases. The number of shares acquired and the timing of the purchases are based on several factors, including general market and economic conditions, the number of employee stock option exercises and stock issuances, the trading price of Autodesk common stock, cash on hand and available in the United States, cash requirements for acquisitions, and Company defined trading windows.

16. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of taxes, consisted of the following at April 30, 2013 and January 31, 2013:
 
 
April 30, 2013
 
January 31, 2013
Net gain on derivative instruments
$
12.7

 
$
2.8

Net unrealized gain on available-for-sale securities
4.8

 
4.6

Unfunded portion of pension plans
(14.7
)
 
(14.7
)
Foreign currency translation adjustments
(4.8
)
 
1.6

Accumulated other comprehensive loss
$
(2.0
)
 
$
(5.7
)

Reclassifications from Accumulated other comprehensive loss to Net income for the three months ended April 30, 2013 were not significant. 


22



17. 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 number of shares of common stock outstanding for the period and potentially dilutive common shares, including the effect of stock options and restricted stock units under the treasury stock method. The following table sets forth the computation of the numerators and denominators used in the basic and diluted net income per share amounts:

 
Three Months Ended April 30,
 
2013
 
2012
Numerator:
 
 
 
Net income
$
55.6

 
$
78.9

Denominator:
 
 
 
Denominator for basic net income per share—weighted average shares
223.8

 
228.1

Effect of dilutive securities
5.5

 
6.0

Denominator for dilutive net income per share
229.3

 
234.1

Basic net income per share
$
0.25

 
$
0.35

Diluted net income per share
$
0.24

 
$
0.34


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 April 30, 2013 and 2012, 8.2 million and 9.1 million potentially anti-dilutive shares, respectively, were excluded from the computation of diluted net income per share.

18. 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: 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. Autodesk's 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, including consumer 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 building information modeling (“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 Building Design Suites, Autodesk Revit, AutoCAD Civil 3D and AutoCAD Map 3D.


23



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 Product Design Suites, AutoCAD Mechanical Autodesk Inventor and Autodesk Moldflow products.

M&E consists of two product groups: Animation, including design visualization, and Creative Finishing. Animation products, such as Autodesk Maya, Autodesk 3ds Max, and the Autodesk Entertainment Creation Suites, provide tools for digital sculpting, modeling, animation, effects, rendering and compositing, for design visualization, visual effects and games production. M&E products are also included in a number of PSEB, AEC, and MFG focused suites. 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 Annual Report on Form 10-K for the fiscal year ended January 31, 2013. 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 9, “Goodwill.”

Information concerning the operations of Autodesk’s reportable segments is as follows:
 
 
Three Months Ended April 30,
 
2013
 
2012
Net revenue:
 
 
 
Platform Solutions and Emerging Business (1)
$
212.7

 
$
226.8

Architecture, Engineering and Construction (1)
172.1

 
165.7

Manufacturing
139.1

 
145.6

Media and Entertainment
46.5

 
50.5

 
$
570.4

 
$
588.6

Gross profit:
 
 
 
Platform Solutions and Emerging Business (1)
$
195.2

 
$
213.6

Architecture, Engineering and Construction (1)
155.5

 
151.2

Manufacturing
127.5

 
134.3

Media and Entertainment
37.0

 
41.8

Unallocated (2)
(12.3
)
 
(11.1
)
 
$
502.9

 
$
529.8

 _______________
(1)
The fiscal 2013 quarterly segment revenue amounts have been updated to conform with the current period's presentation.
(2)
Unallocated amounts primarily relate to corporate expenses and other costs and expenses that are managed outside the reportable segments, including stock-based compensation expense.


24



Information regarding Autodesk’s operations by geographic area is as follows:
 
 
Three Months Ended April 30,
 
2013
 
2012
Net revenue:
 
 
 
Americas
 
 
 
U.S.
$
166.4

 
$
166.0

Other Americas
35.8

 
41.6

Total Americas
202.2

 
207.6

Europe, Middle East and Africa
216.2

 
224.4

Asia Pacific
 
 
 
Japan
76.8

 
76.3

Other Asia Pacific
75.2

 
80.3

Total Asia Pacific
152.0

 
156.6

Total net revenue
$
570.4

 
$
588.6


19. Subsequent Events

On May 23, 2013, Autodesk amended and restated the credit agreement that provides for the $400.0 million unsecured revolving credit facility described in Note 12, “Borrowing Arrangements.” The amended and restated credit agreement extends the facility's maturity date from May 2016 to May 2018 and reduces facility fees and interest.


25



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

The discussion in our MD&A and elsewhere in this Form 10-Q 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, including those discussed in “Strategy” below, anticipated future net revenue, future operating margin and other future financial results (by product type and geography) and operating expenses, the effectiveness of our internal reorganization and restructuring efforts, the effectiveness of efforts to reduce our operating expenses, expected market trends, including the growth of cloud, mobile and social computing, the effect of unemployment and availability of credit, the effects of weak global economic conditions, our backlog, expected trends in certain financial metrics, the impact of acquisitions and investment activities, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our abilities to successfully expand adoption of our products, our ability to gain market acceptance of new businesses and sales initiatives, our ability to successfully increase sales of product suites as part of our overall sales strategy, and the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, and the resulting effect on our financial results. 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, except as required by law.

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, professionals and non-professionals alike—the people who create the world's 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 innovative, and engaging design 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 within 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 our products and extend them for a variety of specialized applications.


26



We offer extensive educational programs supporting our software and services that include providing educational licenses for our software to all students and teachers for little or no fees. For example, during the three months ended April 30, 2013, we initiated a new program offering minimal cost software licenses to educational institutions in emerging economies. Through our partners, we also offer curricula and faculty development opportunities to educational institutions worldwide.  Through these programs we intend to further Science, Technology, Engineering and Math (STEM) education initiatives. With an extensive global community of students who are experienced with our software and poised to become the next generation of professional users - our goal is to reduce the cost of training and education of new talent for our customers.

We continually strive to increase 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, cloud and social-based services, 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 other mobile devices providing our advanced visualization technologies to consumers—a whole new category of Autodesk customer.

Autodesk was founded during the platform transition from mainframes and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry thirty years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, social, and mobile computing. To address this shift, our major business initiatives include our desire to accelerate the business' move to the cloud, transform our customers' experience, increase industry focus to meet customer demands, and develop more effective marketing.

Our growth strategy is predicated upon leading the transition in the industries we serve into the cloud in three ways:

Grow. We believe opportunity remains in our PC-based software business, and we intend to continue to grow this business. In particular we are offering product suites with improved interoperability and usability to enhance our customers' productivity. We are continuing to drive maintenance and new licensing models to better match the business needs of our customers. We will continue to emphasize developing direct relationships with large, global customers and pursuing opportunities in emerging economies.

Transform. At the same time we grow our desktop software business, we are migrating many of our products to the cloud. This entails development of new cloud computing infrastructure and redesigning our applications to leverage the cloud. We are also developing new capabilities that are enabled by the cloud such as collaborative Product Lifecycle Management ("PLM") and online simulation. Our goal is to lead our industry in transitioning to the cloud.

Expand. We believe that the combination of cloud, social and mobile computing affords us the opportunity to expand our business into new markets. For example, we have added new customers through our consumer products. We intend to continue to develop our business to both add new customers and find new capabilities to incorporate in our core business.

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 months ended April 30, 2013, revenue from suites increased 8% as compared to the same period in the prior fiscal year. As a percentage of revenue, suites consisted of 31% of our net revenue in the three months ended April 30, 2013 as compared to 28% of our net revenue in the three months ended April 30, 2012.

Expanding our geographic coverage is another key element of our growth strategy. Much of the growth in the world’s construction and manufacturing is happening in emerging economies. Further, emerging economies face many of the challenges that our design technology can help address, for example infrastructure build-out. Although revenue from emerging economies decreased 8% during the three months ended April 30, 2013 as compared to the same period of the prior fiscal year, we believe that emerging economies continue to present long-term growth opportunities for us. Revenue from emerging countries represented 13% of net revenue for the three months ended April 30, 2013, as compared to 14% of net revenue for the three months ended April 30, 2012. 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

27



competition, intellectual property protection, poorly developed business infrastructure, scarcity of talent, software piracy and different purchase patterns as compared to the developed world.

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 continue to acquire products, technology and businesses as compelling opportunities become available.

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; 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, 2013. In addition, we highlighted those policies that involve a higher degree of judgment and complexity with further discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in such 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.

Income Taxes. We currently have $190.3 million of net deferred tax assets, primarily a result of tax credits, net operating losses, capital losses, and timing differences for reserves, accrued liabilities, stock options and restricted stock units, fixed assets, deferred revenue, 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 U.S. 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. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged by jurisdictional tax authorities and that such challenges may have a significant impact on our effective tax rate.

Overview of the Three Months Ended April 30, 2013
 
(in millions)
Three Months Ended April 30, 2013
 
As a % of Net
Revenue
 
Three Months Ended April 30, 2012
 
As a % of Net
Revenue
Net Revenue
$
570.4

 
100
%
 
$
588.6

 
100
%
Cost of revenue
67.5

 
12
%
 
58.8

 
10
%
Gross Profit
502.9

 
88
%
 
529.8

 
90
%
Operating expenses
421.5

 
74
%
 
435.8

 
74
%
Income from Operations
$
81.4

 
14
%
 
$
94.0

 
16
%
 
Our results in the three months ended April 30, 2013, as compared to the same period in the prior fiscal year, reflect the current uneven global economic environment, which has impacted our business on almost every front. During the three months

28



ended April 30, 2013, as compared to same period in the prior fiscal year, net revenue decreased 3%, gross profit decreased 5% and income from operations decreased 13%. Contributing to the year over year decreases in revenue during the three months ended April 30, 2013 were decreases in license and other revenue partially offset by increases in subscription revenue. We experienced decreases in revenue for many of our major products, reportable segments and geographic areas during the three months ended April 30, 2013 as compared to the same period in the prior fiscal year. The reasons for these decreases are discussed below under the heading "Results from Operations."

Revenue from flagship products was 55% of total net revenue during the three months ended April 30, 2013, a decrease of 9% as compared to the same period in the prior fiscal year. Revenue from suites was 31% of total net revenue for the three months ended April 30, 2013, an increase of 8% as compared to the same period in the prior fiscal year. Revenue from new and adjacent products was flat as compared to the same period in the prior fiscal year at 14% of total net revenue during the three months ended April 30, 2013. We anticipate that, as our new and existing customers migrate from our stand-alone products, 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.

While net revenue decreased $18.2 million or 3% for the three months ended April 30, 2013, as compared to the same period in the prior fiscal year, our operating expenses also decreased by $14.3 million or 3% for the three months ended April 30, 2013. The decrease in operating expenses was primarily related to lower employee related costs and marketing related costs during the three months ended April 30, 2013. Similarly, income from operations decreased 13% in the three months ended April 30, 2013, as compared to the same period in the prior fiscal year, and our total operating margin decreased from 16% for the three months ended April 30, 2012 to 14% for the three months ended April 30, 2013 due primarily to lower revenue related to foreign currency exchange headwinds and increased costs of goods sold during the three months ended April 30, 2013.

We generate a significant amount of our revenue in the U.S., Japan, Germany, the United Kingdom and France. Our revenue was negatively impacted from foreign exchange rate changes during the three months ended April 30, 2013, as compared to the same period in the prior fiscal year. Had applicable exchange rates from the three months ended April 30, 2012 been in effect during the three months ended April 30, 2013 and had we excluded foreign exchange hedge gains and losses from the three months ended April 30, 2013, (“on a constant currency basis”), net revenue would have been flat compared to the prior fiscal year. During the three months ended April 30, 2013, total spend, defined as cost of revenue plus operating expenses, decreased 1% as reported and remained flat on a constant currency basis compared to the same periods in the prior fiscal year. 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 25% and 22% of our consolidated net revenue during the three months ended April 30, 2013 and 2012, respectively. We believe our business is not substantially dependent on Tech Data. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between Tech Data and us 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 2014 are to grow revenue from our current levels consistent with seasonal trends, manage our operating margin, and to invest in product functionality and new product lines, including suites offerings, while controlling our operating expenses. In addition, we will continue to look closely at our cost structure to find ways to improve our operating margin while allowing continued investment in growth and productivity initiatives. We believe net revenue for fiscal 2014 will increase by approximately 3% compared to fiscal 2013. We anticipate fiscal 2014 operating margin will increase by approximately 50 to 100 basis points compared to fiscal 2013. 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 we are unable to successfully achieve our major business initiatives or if global economic conditions deteriorate, we may not achieve our financial goals.





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At April 30, 2013, we had $2,479.9 million in cash and marketable securities. We completed the three months ended April 30, 2013 with a higher deferred revenue balance and a lower accounts receivable balance as compared to the end of the fiscal year ended January 31, 2013. Our deferred revenue balance at April 30, 2013 included $754.9 million of customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts. The term of our maintenance contracts is typically between one and three years. We repurchased 3.2 million shares of our common stock for $129.2 million during the three months ended April 30, 2013. Comparatively, we repurchased 2.5 million shares of our common stock for $99.2 million during the three months ended April 30, 2012.

Results of Operations

Net Revenue

 
Three Months Ended
 
Increase/(Decrease) compared to
prior fiscal year
 
Three Months Ended
(in millions)
April 30, 2013
$    
 
%    
 
April 30, 2012
Net Revenue:
 
 
 
 
 
 
 
License and other
$
323.5