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| MENT > SEC Filings for MENT > Form 10-K on 15-Mar-2013 | All Recent SEC Filings |
15-Mar-2013
Annual Report
Unless otherwise indicated, numerical references are in millions, except for
percentages and per share data.
Overview
The following discussion should be read in conjunction with the consolidated
financial statements and notes included elsewhere in this Form 10-K. Certain of
the statements below contain forward-looking statements. These statements are
predictions based upon our current expectations about future trends and events.
Actual results could vary materially as a result of certain factors, including
but not limited to, those expressed in these statements. In particular, we refer
you to the risks discussed in Part I, Item 1A. "Risk Factors" and in our other
Securities and Exchange Commission filings, which identify important risks and
uncertainties that could cause our actual results to differ materially from
those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the
forward-looking statements contained in this Form 10-K. All subsequent written
or spoken forward-looking statements attributable to our company or persons
acting on our behalf are expressly qualified in their entirety by these
cautionary statements. The forward-looking statements included in this Form 10-K
are made only as of the date of this Form 10-K. We do not intend, and undertake
no obligation, to update these forward-looking statements.
The Company
We are a supplier of electronic design automation (EDA) tools - advanced
computer software and emulation hardware systems used to automate the design,
analysis, and testing of complex electro-mechanical systems, electronic
hardware, and embedded systems software in electronic systems and components. We
market our products and services worldwide, primarily to large companies in the
communications, computer, consumer electronics, semiconductor, networking,
multimedia, military and aerospace, and transportation industries. Through the
diversification of our customer base among these various customer markets, we
attempt to reduce our exposure to fluctuations within each market. We sell and
license our products through our direct sales force and a channel of
distributors and sales representatives. In addition to our corporate offices in
Wilsonville, Oregon, we have sales, support, software development, and
professional service offices worldwide.
We focus on products and design platforms where we have or believe we can attain
leading market share. Part of this approach includes developing new applications
and exploring new markets where EDA companies have not generally participated.
We believe this strategy leads to a more diversified product and customer mix
and can help reduce the volatility of our business and our risk as a creditor,
while increasing our potential for growth.
We derive system and software revenues primarily from the sale of term software
license contracts, which are typically three to four years in length. We
generally recognize revenue for these arrangements upon product delivery at the
beginning of the license term. Larger enterprise-wide customer contracts, which
can represent 50% or more of our system and software revenue, drive the majority
of our period-to-period revenue variances. We identify term licenses where
collectibility is not probable and recognize revenue on those licenses when cash
is received. Ratable license revenues also include short-term term licenses as
well as other term licenses where we provide the customer with rights to
unspecified or unreleased future products. For these reasons, the timing of
large contract renewals, customer circumstances, and license terms are the
primary drivers of revenue changes from period to period, with revenue changes
also being driven by new contracts and increases in the capacity of existing
contracts, to a lesser extent.
The EDA industry is competitive and is characterized by very strong leadership
positions in specific segments of the EDA market. These strong leadership
positions can be maintained for significant periods of time as the software can
be difficult to master and customers are disinclined to make changes once their
employees, as well as others in the industry, have developed familiarity with a
particular software product. For these reasons, much of our profitability arises
from areas in which we are the leader. We will continue our strategy of
developing high quality tools with number one market share potential, rather
than being a broad-line supplier with undifferentiated product offerings. This
strategy allows us to focus investment in areas where customer needs are
greatest and where we have the opportunity to build significant market share.
Our products and services are dependent to a large degree on new design projects
initiated by customers in the integrated circuit (IC) and electronics system
industries. These industries can be cyclical and are subject to constant and
rapid technological change, rapid product obsolescence, price erosion, evolving
standards, short product life cycles, and wide fluctuations in product supply
and demand. Furthermore, extended economic downturns can result in reduced
funding for development due to downsizing and other business restructurings.
These pressures are offset by the need for the development and introduction of
next generation products once an economic recovery occurs.
Known Trends and Uncertainties Impacting Future Results of Operations
Our revenue has historically fluctuated quarterly and has generally been the
highest in the fourth quarter of our fiscal year due to our customers' corporate
calendar year-end spending trends and the timing of contract renewals.
Ten accounts make up approximately 50% of our receivables, including both short
and long-term balances. We have not experienced and do not presently expect to
experience collection issues with these customers. Net of reserves, we have no
receivables greater than 60 days past due, and continue to experience no
difficulty in factoring our high quality receivables.
Bad debt expense recorded for the year ended January 31, 2013 was not material.
However, we do have exposures within our receivables portfolio to customers with
weak credit ratings. These receivable balances do not represent a material
portion of our portfolio but could have a material adverse effect on earnings in
any given quarter, should significant additional allowances for doubtful
accounts be necessary.
Bookings during fiscal 2013 decreased by approximately 20% compared to fiscal
2012 primarily due to the timing of term license contract renewals. Bookings are
the value of executed orders during a period for which revenue has been or will
be recognized within six months for software products and within twelve months
for emulation hardware systems, professional services, and training. Ten
customers for fiscal 2013 accounted for approximately 35% of total bookings
compared to 45% for fiscal 2012. The number of new customers for fiscal 2013,
excluding PADS (our ready to use printed circuit board design tools) decreased
approximately 5% from the levels experienced during fiscal 2012.
Product Development
During the year ended January 31, 2013, we continued to execute our strategy of
focusing on technical challenges encountered by customers, as well as building
upon our well-established product families. We believe that customers, faced
with leading-edge design challenges in creating new products, generally choose
the best EDA products in each category to build their design environment.
Through both internal development and strategic acquisitions, we have focused on
areas where we believe we can build a leading market position or extend an
existing leading market position.
We believe that the development and commercialization of EDA software tools is
generally a three to five year process with limited customer adoption and sales
in the first years of tool availability. Once tools are adopted, however, their
life spans tend to be long. During the year ended January 31, 2013, we
introduced new products and upgrades to existing products and did not have any
significant products reaching the end of their useful economic life.
Critical Accounting Policies
We base our discussion and analysis of our financial condition and results of
operations upon our consolidated financial statements which have been prepared
in accordance with United States (U.S.) generally accepted accounting principles
(GAAP). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
and contingencies as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate our
estimates on an on-going basis. We base our estimates on historical experience,
current facts, and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the recording
of revenue, costs, and expenses that are not readily apparent from other
sources. As future events and their effects cannot be determined with precision,
actual results could differ from those estimates.
We believe that the accounting for revenue recognition, valuation of trade
accounts receivable, valuation of deferred tax assets, income tax reserves,
business combinations, goodwill, intangible assets, long-lived assets, special
charges, stock-based compensation, and noncontrolling interest with redemption
feature are the critical accounting estimates and judgments used in the
preparation of our consolidated financial statements. For further information on
our significant accounting policies, see Note 2. "Summary of Significant
Accounting Policies" in Part II, Item 8. "Financial Statements and Supplementary
Data."
Revenue Recognition
We report revenue in two categories based on how the revenue is generated:
(i) system and software and (ii) service and support.
System and software revenues - We derive system and software revenues from the
sale of licenses of software products, emulation hardware systems, and finance
fee revenues from our long-term installment receivables resulting from product
sales. We primarily license our products using two different license types:
1.Term licenses - We use this license type primarily for software sales. This
license type provides the customer with the right to use a fixed list of
software products for a specified time period, typically three to four years,
with payments spread over the license term, and does not provide the customer
with the right to use the products after the end of the term. Term license
arrangements may allow the customer to share products between multiple locations
and remix product usage from the fixed list of products at regular intervals
during the license term. We generally recognize product revenue from term
license arrangements upon product delivery and start of the license term. In a
term license agreement where we provide the customer with rights to unspecified
or unreleased future products, we recognize revenue ratably over the license
term.
2.Perpetual licenses - We use this license type for software and emulation
hardware system sales. This license type provides the customer with the right to
use the product in perpetuity and typically does not provide for extended
payment terms. We generally recognize product revenue from perpetual license
arrangements upon product delivery assuming all other criteria for revenue
recognition have been met.
We include finance fee revenues from the accretion of the discount on long-term
installment receivables in system and software revenues.
Service and support revenues - We derive service and support revenues from
software and hardware post-contract maintenance or support services and
professional services, which include consulting, training, and other services.
We recognize revenues ratably over the support services term. We record
professional service revenues as the services are provided to the customer.
We determine whether product revenue recognition is appropriate based upon the
evaluation of whether the following four criteria have been met:
1.Persuasive evidence of an arrangement exists - Generally, we use either a
customer signed contract or qualified customer purchase order as evidence of an
arrangement for both term and perpetual licenses. For professional service
engagements, we generally use a signed professional services agreement and a
statement of work to evidence an arrangement. Sales through our distributors are
evidenced by an agreement governing the relationship, together with binding
purchase orders from the distributor on a transaction-by-transaction basis.
2.Delivery has occurred - We generally deliver software and the corresponding
access keys to customers electronically. Electronic delivery occurs when we
provide the customer access to the software. We may also deliver the software on
a compact disc. With respect to emulation hardware systems, we transfer title to
the customer upon shipment. Our software license and emulation hardware system
agreements generally do not contain conditions for acceptance.
3.Fee is fixed or determinable - We assess whether a fee is fixed or
determinable at the outset of the arrangement, primarily based on the payment
terms associated with the transaction. We have established a history of
collecting under the original contract with installment terms without providing
concessions on payments, products, or services. Additionally, for installment
contracts, we determine that the fee is fixed or determinable if the arrangement
has a payment schedule that is within the term of the licenses and the payments
are collected in equal or nearly equal installments, when evaluated on a
cumulative basis. If the fee is not deemed to be fixed or determinable, we
recognize revenue as payments become due and payable.
Significant judgment is involved in assessing whether a fee is fixed or
determinable. We must also make these judgments when assessing whether a
contract amendment to a term arrangement (primarily in the context of a license
extension or renewal) constitutes a concession. Our experience has been that we
are able to determine whether a fee is fixed or determinable for term licenses.
If we no longer were to have a history of collecting under the original contract
without providing concessions on term licenses, revenue from term licenses would
be required to be recognized when payments under the installment contract become
due and payable. Such a change could have a material impact on our results of
operations.
4.Collectibility is probable - To recognize revenue, we must judge
collectibility of the arrangement fees on a customer-by-customer basis pursuant
to our credit review process. We typically sell to customers with whom there is
a history of successful collection. We evaluate the financial position and a
customer's ability to pay whenever an existing customer purchases new products,
renews an existing arrangement, or requests an increase in credit terms. For
certain industries for which our products are not considered core to the
industry or the industry is generally considered troubled, we impose higher
credit standards. If we determine that collectibility is not probable based upon
our credit review process or the customer's payment history, we recognize
revenue as payments are received.
Multiple element arrangements involving software licenses - For multiple element
arrangements involving software and other software-related deliverables,
vendor-specific objective evidence of fair value (VSOE) must exist to allocate
the total fee among all delivered and non-essential undelivered elements of the
arrangement. If undelivered elements of the arrangement are essential to the
functionality of the product, we defer revenue until the essential elements are
delivered. If VSOE does not exist for one or more non-essential undelivered
elements, we defer revenue until such evidence exists for the undelivered
elements,
or until all elements are delivered, whichever is earlier. If VSOE of all
non-essential undelivered elements exist but VSOE does not exist for one or more
delivered elements, we recognize revenue using the residual method. Under the
residual method, we defer revenue related to the undelivered elements based upon
VSOE and we recognize the remaining portion of the arrangement fee as revenue
for the delivered elements, assuming all other criteria for revenue recognition
are met. If we can no longer establish VSOE for non-essential undelivered
elements of multiple element arrangements, we defer revenue until all elements
are delivered or VSOE is established for the undelivered elements, whichever is
earlier.
We base our VSOE for certain elements of an arrangement upon the pricing in
comparable transactions when the element is sold separately. We primarily base
our VSOE for term and perpetual support services upon customer renewal history
where the services are sold separately. We also base VSOE for professional
services and installation services for emulation hardware systems upon the price
charged when the services are sold separately.
Multiple element arrangements involving hardware - For multiple element
arrangements involving our emulation hardware systems, we allocate revenue to
each element based on the relative selling price of each deliverable. In order
to meet the separation criteria to allocate revenue to each element we must
determine the standalone selling price of each element using a hierarchy of
evidence. The authoritative guidance requires that, in the absence of VSOE or
third-party evidence (TPE), a company must develop an estimated selling price
(ESP). ESP is defined as the price at which the vendor would transact if the
deliverable was sold by the vendor regularly on a standalone basis. A company
should consider market conditions as well as entity-specific factors when
estimating a selling price.
When VSOE or TPE does not exist, we base our ESP for certain elements in
arrangements on either costs incurred to manufacture a product plus a reasonable
profit margin or standalone sales to similar customers. In determining profit
margins, we consider current market conditions, pricing strategies related to
the class of customer, and the level of penetration we have with the customer.
In other cases, we may have limited sales on a standalone basis to the same or
similar customers and/or guaranteed pricing on future purchases of the same
item.
Valuation of Trade Accounts Receivable
We maintain allowances for doubtful accounts on trade accounts receivable and
term receivables, long-term for estimated losses resulting from the inability of
our customers to make required payments. We regularly evaluate the
collectibility of our trade accounts receivable based on a combination of
factors. When we become aware of a specific customer's inability to meet its
financial obligations, such as in the case of bankruptcy or deterioration in the
customer's operating results, financial position, or credit rating, we record a
specific reserve for bad debt to reduce the related receivable to the amount
believed to be collectible. We also record unspecified reserves for bad debt for
all other customers based on a variety of factors including length of time the
receivables are past due, the financial health of the customers, the current
business environment, and historical experience. Current economic conditions we
have considered include forecasted spending in the semiconductor industry,
consumer spending for electronics, integrated circuit research and development
spending, and volatility in gross domestic product. If these factors change or
circumstances related to specific customers change, we adjust the estimates of
the recoverability of receivables resulting in either additional selling expense
or a reduction in selling expense in the period such determination is made.
Valuation of Deferred Tax Assets
Deferred tax assets are recognized for deductible temporary differences, net
operating loss carryforwards, and credit carryforwards if it is more likely than
not that the tax benefits will be realized. We have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for valuation allowances. We have recorded a valuation allowance to reduce
our deferred tax assets to the amount that is more likely than not to be
realized. In the event we determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, we would
adjust the valuation allowance associated with such deferred tax assets in the
period such determination was made. Also, if we were to determine that we would
not be able to realize all or part of our net deferred tax assets in the future,
we would record a valuation allowance on such net deferred tax assets with an
offset to expense in the period such determination was made.
Income Tax Reserves
We are subject to income taxes in the U.S. and in numerous foreign
jurisdictions, and in the ordinary course of business there are many
transactions and calculations where the ultimate tax determination is uncertain.
While we believe the positions we have taken are appropriate, we have reserves
for taxes to address potential exposures involving tax positions that are being
challenged or that could be challenged by taxing authorities. We record a
benefit on a tax position when we determine that it is more likely than not that
the position is sustainable upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. For tax positions that are more likely than not to be sustained, we
measure the tax position at the largest amount of benefit that has a greater
than 50 percent likelihood of being realized when it
is effectively settled. We review the tax reserves as circumstances warrant and
adjust the reserves as events occur that affect our potential liability for
additional taxes. We follow the applicable Financial Accounting Standards Board
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition with respect to tax positions. We
reflect interest and penalties related to income tax liabilities as income tax
expense.
Business Combinations
When we acquire businesses, we allocate the purchase price, including the fair
value of contingent consideration, to acquired tangible assets and liabilities,
including deferred revenue, and acquired identifiable intangible assets. Any
residual purchase price is recorded as goodwill. The allocation of the purchase
price requires us to make significant estimates in determining the fair value of
contingent consideration as well as acquired assets and assumed liabilities,
especially with respect to intangible assets and goodwill. These estimates are
based on information obtained from management of the acquired companies, our
assessment of this information, and historical experience. These estimates can
include, but are not limited to, the cash flows that an acquired business is
expected to generate in the future, the cash flows that specific assets acquired
with that business are expected to generate in the future, the appropriate
weighted-average cost of capital, and the cost savings expected to be derived
from acquiring an asset. These estimates are inherently uncertain and
unpredictable, and if different estimates were used, the purchase price for the
acquisition could be allocated to the acquired assets and liabilities
differently from the allocation that we have made to the acquired assets and
assumed liabilities. In addition, unanticipated events and circumstances may
occur that may affect the accuracy or validity of such estimates, and if such
events occur, we may be required to adjust the value allocated to acquired
assets or assumed liabilities.
We also make significant judgments and estimates when we assign useful lives to
the definite lived intangible assets identified as part of our acquisitions.
These estimates are inherently uncertain and if we used different estimates, the
useful life over which we amortize intangible assets would be different. In
addition, unanticipated events and circumstances may occur that may impact the
useful life over which we amortize our intangible assets, which would impact our
amortization of intangible assets expense and our results of operations.
Goodwill, Intangible Assets, and Long-Lived Assets
We review long-lived assets, including intangible assets with definite lives,
for impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. We assess the recoverability of
our long-lived assets by determining whether their carrying values are greater
than the forecasted undiscounted net cash flows of the related assets. If we
determine the assets are impaired, we write down the assets to their estimated
fair value. We determine fair value based on forecasted discounted net cash
flows or appraised values, depending upon the nature of the assets. Significant
management judgment is required in the forecasts of future operating results
that are used in the discounted cash flow method of valuation. The estimates we
have used are consistent with the plans and estimates that we use to manage our
business. It is possible, however, that the plans may change and estimates used
may prove to be inaccurate. If our actual results, or the plans and estimates
used in future impairment analyses, are lower than the original estimates used
to assess the recoverability of these assets, we could incur impairment charges.
We test goodwill and intangible assets with indefinite lives for impairment at
least annually and whenever events or changes in circumstances indicate an
impairment may exist. The value of our intangible assets, including goodwill,
could be impacted by future adverse changes such as: (i) any future declines in
our operating results, (ii) a decline in the valuation of technology company
stocks, (iii) a significant slowdown in the worldwide economy or the
semiconductor industry, or (iv) any failure to meet the performance projections
included in our forecasts of future operating results. In the event that we
determine that our goodwill, intangible assets, or other long-lived assets are
impaired, we make an adjustment that results in a charge to earnings for the
write-down in the period that determination is made.
Special Charges
We record restructuring charges within special charges in the consolidated
statements of income in connection with our plans to better align our cost
structure with projected operations in the future. We have recorded
restructuring charges in connection with employee rebalances based on estimates
of the expected costs associated with severance benefits. If the actual cost
incurred exceeds the estimated cost, an addition to special charges will be
recognized. If the actual cost is less than the estimated cost, a benefit to
special charges will be recognized.
We have also recorded restructuring charges in connection with excess leased
facilities to offset future rent, net of estimated sublease income that could be
reasonably obtained. Additionally, we also write-off leasehold improvements on
abandoned office space. We work with external real estate experts in each of the
markets where properties are located to develop assumptions used to determine a
reasonable estimate of the net loss. Our estimates of expected sublease income
could change based on factors that affect our ability to sublease those
facilities such as general economic conditions and the local real estate
market. If the real estate market weakens and we are not able to sublease the properties as expected, an addition to special charges will be recognized in the . . .
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